Recent interest in variability of cost for medical procedures is justified and long overdue. In an article in the New York Times on June 2, 2013, “The $2.7 Trillion Medical Bill,” Elizabeth Rosenthal writes from the point of view of a patient who has received a bill for colonoscopy. She then researches costs of the procedure in a number of markets in the U.S., finding a range of pricing from an average of $1,185 to a high of $8,577. There is an implication within this article that “doctors” are charging these prices. The truth is that physicians are often pawns in much larger negotiations among other entities.
While charges for procedures performed in an office setting or practice-owned ambulatory surgical center (ASC) are largely under the control of physicians, many of the highest prices come from hospital owned facilities — an area that is not at all controlled by physicians.
I called the lead negotiator for payor contracts at my institution and asked him about price variability for colonoscopy. It was clear from my conversation that the current arguments about colonoscopy price variation miss some key components. We need to better explore the true drivers of price variation.Professional fees paid to physicians for Medicare services are set by the Centers for Medicare and Medicaid Services (CMS) or commercial payers and prices in dollars are multiples of the Resource Based Relative Value Units (RVU’s) defined by the AMA-sponsored Relative Value Update Committee (RUC). After all is said and done, professional fees for a specific procedure fall within a fairly narrow range — in the case of colonoscopy, about $220.
The larger range of technical fee payments for procedures actually drive most cost variation in addition to other factors, such as use of an anesthesia professional during colonoscopy or the number of biopsy specimens sent for diagnosis.
Within any large health-care system that contracts as a unit there might be a three- fold difference in technical (facility) fees even at the same location of colonoscopy, dependent on specific payor contracts. The reason is as follows:
- One payor might negotiate a single standard rate for all ambulatory surgical procedures from colonoscopy to complex outpatient spine surgery. So relatively simple procedures (colonoscopy) become expensive because this is a blended rate that has to account for an enormous range of complexity. Payors sometimes do not have the ability to do line-item negotiations.
- Other payors still pay on % of charge since they have not changed their software in decades. Since all providers and health systems have to inflate their master charge sheet (so that brokers can negotiate a discount), a procedure like the colonoscopy has price inflation.
- Other payors negotiate a hospital rate based on ASC rates (with increase for hospital outpatient department, HOPD). But if ASC rates are high in the region, then HOPD rates also will be high.
- Finally, professional fees (my fees) are negotiated by hospital systems that employ specialists and, in many situations health systems that are “must haves” negotiate professional fees that are especially high.
My point is, it’s wrong to assume the high prices are entirely due to physicians.
When physicians control costs and charges, we tend to compete on price and develop more of a free-market competition, compared to areas where hospitals and health systems dominate and there are few office or ASC choices.
The price compression in Minnesota is an interesting case study. In the early 2000’s Minnesota health benefit companies began to publish prices for various procedures. Concurrently, there were public education campaigns to alert people to price variation. Public pressure, as a result of price transparency, forced high-cost facilities to reduce their prices in order to maintain market share. There was significant pressure on several of the large health systems to reduce their hospital-based charges for outpatient procedures (like colonoscopy) so they could remain competitive with low ASC rates. It was enough of an incentive (especially with the consolidated purchaser and payor market in Minnesota) to force the colonoscopy technical fees to be separated from the large (30,000 different types of service) contracts that payors negotiated with health systems.
Price transparency and a market that might enhance competition based on cost and quality — as opposed to negotiating power — would go a long way to solve the financial crisis we are in. This would not solve all problems but it would recognize one aspect of medical bills that physicians have been trying to emphasize for some time.
John I. Allen, MD, MBA, AGAF, Clinical Chief of Digestive Diseases, Yale University, and President elect, American Gastroenterological Association (AGA) Institute.