Here’s my editorial from today’s issue of Fiercehealthcare:
We’ve been hearing a great deal about price transparency in health care. California has a new law mandating that hospitals release their chargemaster billing data. The Administration’s advisors are demanding that hospitals and doctors reveal pricing, and one health plan (Aetna) has revealed its negotiated rates with physicians in one market (Cincinnati, OH). The theory is that pricing transparency will increase competition and make it easier for consumers to shop around. Proponents point to the reduction in the advertised price of LASIK surgery as an example of what might happen.
Speaking before Congress, Paul Ginsburg sounded several warnings about this trend. First, health care is in no way prepared to deliver pricing information. Several studies have shown that hospitals and physician groups do not know their costs or prices per service, and hence there is wide variation in what, if anything, they can tell consumers. Secondly, most health care is purchased not by consumers directly but by insurers. Ginsburg gave evidence that where contracted rates of insurers are exposed by regulation, prices tend to rise. Thirdly, there’s still little agreement on what we should be pricing. Each service? Each episode? Care per month? All care per year? Finally, apparently in the LASIK market, there’s less transparency than meets the eye, so to speak, and advertised low prices are in some respects come-ons like those cheap air-fares that aren’t really available. Transparency in health care is needed, but we need to think carefully what that really means in practice.
the pricing of healthcare is more than just hospital stays and physician’s charges. most americans purchase healthcare through a third party: a payer, insurer, call them what you want. healthcare costs roll up to a “premium” – what you and your employer pays for you or your family on a monthly basis. part of the premium includes bottom line/profit. profit is greater when the insurer has leverage to drive expenses (i.e. medical costs) down – not all of which is passed on to the employer/patient. why doesn’t “transparency” cover corporate insurer profit?
What would be really good is for someone to compile a list of names when one company (like those outsourced billing and collections companies) changes, but it is the same sleazy clients.
A shady CEO can be ousted as a partner from one company, but then go start his own company later on, and then take the corrupt clients with him, only now the company is under a new CEO and new corporate name, although it is the same shady and slippery people who may have been handling a hospital client that had corrupt goings-on internally in the past before they got busted.
Someone on this blog mentioned the “clubby” atmosphere for the hospital industry, which means that if everyone knows each other, then they must know by looking at each other’s financial reports that some of these clubby insiders are doing all sorts of interesting stuff.
I worked somewhere where a guy mentioned having HFMA membership, and then he says at the meeting that it is a small industry and “everyone knows each other.”
Mmm. Hmm. What else do they know ABOUT each other?
Too much corruption going down in this industry. Surely some of these people know things, but they are just keeping mum about it until someone gets busted.
More transparency is necessary over a lot of things, especially since these hospitals outsource so much stuff to for-profits. Are there incentives going on? Kickbacks? Greasing of palms for political favors?
That’s where the transparency really needs to be. Someone needs think like Justice Brandeis with his famous pronouncement that “sunlight is the best disinfectant.”
Can’t have enough transparency.
Price transparency alone is of little value because you don’t know if the care is any good. Price + Effectiveness transparency can be valuable if it helps:
• Providers see how their performance stacks up against others, so they are more aware where there are opportunities for improvement
• Payers and public programs reward improved cost-effectiveness
• Patients make informed decisions about their care.
While no doubt important, transparency is only a small part of improving American healthcare and considerable challenges exist, for example:
• Knowing prices of healthcare services is of value only if the total cost of caring for a given condition and the effectiveness of that care is also known. Yet patients rarely have such information available to them.
• Physicians typically lack comparative information on the quality of their own care, as well as the care of other providers to whom they refer patients.
• Patients are currently in the weakest position to demand improvement in care quality. Payers, government, accrediting organizations, and professional societies are much better positioned to insist on high performance, yet are often not motivated to doing push it.
• Very sick patients incur most healthcare costs – e.g., patients with heart attacks, strokes, cancer, mental illness, fractures, and injuries – and are often treated under emergency conditions. It isn’t practical to expect them to shop for the best provider in such circumstances.
• After spending substantial time and money diagnosing a complex illness, a patient is unlikely to shop for a different provider.
See Transparency in Health Care: The Time Has Come, which recommends a bunch of policy and practice changes.
Despite these challenges, price transparency is beginning (e.g., see HealthGrades reportsM) and, imo, will continue to grow.
I do share Tom’s concern that unless it’s done right and within a rational & comprehensive healthcare reform strategy, transparency will not do much good (and may actually do some harm).
I have not said that pricing transparency for hospitals is worthless or counter-productive — I have asked about what it means to be ‘transparent’ and what the likely effects might be if some kind of price transparency were imposed (by force) on a market in which it is not a natural feature. I think your beliefs about the likely effects are shaped by a fundamental misunderstanding of the nature of ogolopistic competition.
Prices rising faster than inflation might well mean that the demand-curve for medical services is shifting outward, and as this is not an illness, no prescription is required. Prices rising faster than inflation could also mean that providers have market power. One may or may not think this is an illness, but I think you do. But this is not universal: so far at least, it is not illegal in the USA to be a monopoly and price your goods and services accordingly.
Some problems of the uninsured are solvable in many ways. I tend to favor the approach outlined by Charles Murray on the editorial page of the WSJ last week. If you want to know why, I recommend his two books In Pursuit of Happiness, and In Our Hands where he talks about a Friedman-esque approach to welfare reform. This matches well in spirit if not in implementation with Louis Kelso’s Binary Economics. I have some questions about the practicality of Kelso’s approach, particularly on the definition of ‘productive assets’, but not with the general thrust of his views of both economics and social justice. I agree with Murray (and many others) that the happiness of man is bound up with his sense of ownership and responsibility. You might have a different anthropology, but this reading will tell you something about mine.
Tom, I think we are talking past each other. I know what oligopolies are. Whether I am in the market for hospital services, banking services cars, groceries or whatever, I don’t care if there are three competitors in a given market or 23. What I care about is how well the market functions. Do I have enough information about price and quality to make an informed choice, and have prices been rising over time faster, slower or in line with general inflation. The market for hospital services does not provide consumers with adequate information about price and quality to make informed choices, in my view, even for outpatient services which lend themselves more easily to pricing transparency than inpatient services as you pointed out.
If you think pricing transparency for hospitals is worthless or counter-productive, what is your prescription for prices rising faster than inflation year in and year out and a rising population of uninsured who drive up costs by going to emergency rooms even for routine care because they know they can’t be turned away?
> Tom, you equate forcing hospitals to embrace pricing
> transparency as “being against the free market.” I
> couldn’t disagree more.
So you think that force is compatible with freedom? Funny kinda freedom. Seem to me you are concerned with your own freedom, but not so concerned with other people’s.
I have never said it is important to preserve the current system. I do say it is important to be clear about what we are doing and why.
> Markets work pretty well when given a chance.
It is clear to me you haven’t got a clue about markets.
Tom, you equate forcing hospitals to embrace pricing transparency as “being against the free market.” I couldn’t disagree more. I am interested in leveling the playing field by giving consumers needed information to make more informed decisions to the extent possible and feasible.
Did you know that prior to 1958, in the car business, there was no such thing as a price sticker. A customer went to a dealer to buy a car and the dealer had all the information while the customer had none. The price paid was whatever the customer and dealer negotiated. In 1958, Congress passed legislation requiring the retail price sticker. Are you suggesting that car dealers don’t operate in a free market and would you like us to go back to the pre-1958 system? Despite initial resistance, many car dealers have become very wealthy indeed by giving customers good service and fair prices.
In the hospital business, I suspect pricing transparency would narrow the variability in price from one hospital to another for procedures they can all do but prices overall will be lower, not higher. The low cost, efficient operator will win. Upfront investments in IT systems to move to electronic records while shrinking or eliminating underutilized departments could reduce costs for the system as a whole. Hospitals that are good at sophisticated procedures like brain surgery, organ transplants, heart bypass, etc. will be able to command a premium for those operations, though many of these will likely be performed at large teaching hospitals.
Even when price shopping is not feasible — patient shows up at the emergency room, and it’s determined that he needs surgery next week. The doctor has privileges at Hospital A, so that is where it will be done. Patient receives the EOB from his insurer and sees both the billed rate and the paid rate. Patient subsequently learns that Hospital B nearby charges significantly less virtually across the board. Patient asks his doctor if he can be treated at Hospital B should he need anything in the future assuming either hospital could provide the required service. Word gets around that Hospital B is cheaper and other patients make similar requests of their doctor. Such a scenario is conceivable with pricing transparency but impossible without it.
Why do you think it is so important to preserve the current system which only benefits hospitals at the expense of patients? Are you a hospital CEO or CFO? Are you afraid of competition? Do you think patients are totally incapable of acting in their own best interest? Are we supposed to just accept hospital charges rising faster than general inflation forever without complaining even if it drives taxes up and prices more and more people and employers out of the private insurance market? Markets work pretty well when given a chance. Let’s give it a chance here.
> If the hospital industry will not embrace pricing
> transparency, I think it should be forced to for
> a number of reasons.
So long as we are clear you are against “the free market”. Let’s do go on.
I publish my charge master because you are holding a gun to my head. Simultaneously, because I am the biggest player in my market, I publish a guarantee “We will not be undersold!” What I am telling my competitor(s) is “Do not even THINK about trying to increase your census by lowering your prices: I’ll lower mine to match; your census will not change but your top-line will shrink. When you are tired of the pain, we can both raise our prices again.”
Everyone else publishes his charge master too, probably with the same guarantee. Since in almost every market medical (especially hospital) services is an oligopolistic industry, we will settle into quantity competition. A new equilibrium will form, and although there probably will be less variability, the overall prices may well end up higher.
What have you accomplished?
My comment on “requiring” a floor for pricing to uninsured was a hypothetical statement on what-if political scenarios.
This is not a political endorsement and not likely to benefit my business in any way. But this is the kind of questions the public will ask next.
Take it easy!
If the hospital industry will not embrace pricing transparency, I think it should be forced to for a number of reasons. First, healthcare now consumes about 16% of GDP in the U.S., the highest percentage in the world by a considerable margin, and hospitals are a significant piece of this. If pricing transparency can contribute to either lower prices overall and/or resources being allocated more efficiently, that is a good thing from an economic point of view, in my opinion.
Second, between Medicare and Medicaid, federal taxpayers already pay for approximately 45%-50% of all healthcare delivered in the U.S. I don’t think it is unreasonable for taxpayers to be able to find out what Medicare pays for a certain service, test or procedure in a given zip code by either DRG, CPT-4 or ICD-9 code as a benchmark for assessing the reasonableness of the bills non-Medicare and Medicaid patients receive, especially if they are uninsured and expected to pay out of their own pocket.
Third, unlike cars, people do not buy hospital (or any other medical) services because they want to but because they have to. This is a critical difference. The more pricing information they can have access to before services are performed, the better.
If certain hospitals must treat a disproportionate number of charity cases or uninsured patients or they perform a teaching function, they should be compensated for those excess costs via state and/or federal subsidy. If they charge very high prices because they are poorly run or they have very low occupancy in a market with too many beds, they should downsize or close.
The key point here is that resources are finite. Everyone knows there is plenty of inefficiency throughout the medical system. To the extent that pricing transparency can squeeze some of that inefficency out sooner rather than later, we should do so and free up those resources for more productive use.
> It can probably be done fairly easily across the board
> if the industry embraced pricing transparency instead
> of fighting it.
I do not disagree. But the “something” might not be very useful. Do not underestimate the difference in complexity of inpatient vs. outpatient services.
But 1) Why would the providers want to do this in this kind of market, and 2) should they be forced to? If you say “yes, they should be forced to” I have already asked you how this can be justified in the name of a “free market”. It seems to me you want to avoid this question, and simply repeat assertions about ease of implementation, and utility.
Regarding the difference in prescription prices between what an insured patient and a self-pay patient pay, which I estimated at 15%, comes from Walgreens and CVS, the two largest retail pharmacy chains. Gross margins on their overall pharmacy business, of which over 90% is paid for by third parties, are estimated by knowledgeable outsiders at 20% as compared to 35% for scrip sales to self-pay customers. This could vary somewhat on specific drugs and the industry does earn a considerably higher margin on generics despite a much lower absolute price, in part, because the embedded dispensing fee is a much higher percentage of the total price than it is on branded drugs.
Regarding hospital pricing, I have no interest in knowing their internal costs. The key issue, to me, is the huge differential between what they accept as full payment from Medicare, Medicaid and private insurers and what they bill (and expect to receive) from uninsured, self-pay patients. On perverse benefit from artificially high full list prices is that allows insurance company negotiators to look good to their bosses if they can negotiate what appears to be a very large discount from list.
In the case of physicians and other providers whose list prices are also substantially higher than what they accept as full payment from third party payers, the added issue here relates to patients with high deductible insurance where the deductible has not yet been reached. Presumably, when they are paying their full bill until they hit the deductible, patients want to be assured that they are paying at the contract rate and not the full list price. Why should it be necessary to run the claim through the insurer’s claims handling organization to make sure that this happens?
Finally, I think it is interesting that procedures that are generally not covered by insurance, like cosmetic surgery, have plenty of pricing transparency and total package pricing. The same is true for expensive dental procedures like root canal and oral surgery. It can probably be done fairly easily across the board if the industry embraced pricing transparency instead of fighting it.
> It sounds as though some view healthcare as somehow
> different and unable to operate within normal market
That would be “hippocrates”, not me. He gives himself away entirely away when he says “get our legislators to require that hospitals…” What I think he really means is that he is unable to operate in a market any more complicated than the market for cars, so he wants to impose still more regulations on the healthcare industry and call them “market oriented”.
What I will say to you is that price transparency is a characteristic of some markets, but by no means all. I think you (and hippocrates) want to interfere by threat of force in the market for healthcare in order to to coerce this particular characteristic into existence when it probably isn’t a natural feature of this market at this time in history.
> Why can’t prices be easily accessible via
> a user friendly website?
They can be. You should start a business that combines data from a multitude of sources to estimate the cost structures of the big players in each city, and the prices paid by the major payors in those cities for medical services? You can get close. People can give you a credit card number, and you can sell `em a report. How easy is that? I have already shown you how to get started. Have at it, dudes! Or do you think nobody would pay you?
I note that neither of you have addressed yourselves to any of the questions I have raised.
So funny that you use General Motors as example.
This is a poster child of a corporation that lost its way because of bloat, inability to manage itself and being too slow to compete. For years, instead of reforming itself the company kept pouring money into failing projects and doing excuses.
Auto market is way more transparent than healthcare, so GM gets punished and rightly so. Meanwhile, consumers buy cars that really work.
It sounds as though some view healthcare as somehow different and unable to operate within normal market forces (including pricing transparency) that apply to every other business. I don’t agree.
While Medicare may be so big and important that hospitals feel they cannot push back against the prices that Medicare determines that it will pay, hospitals, especially as they consolidate into larger networks that often dominate a given geographic region, should be able to negotiate an overall relationship with large private insurance companies and other payers that allow the hospital to earn a satisfactory return assuming they are efficiently run and have reasonably high average occupancy. Of course, it would be helpful if they had a far better understanding as to what their costs are than they do now. Pricing transparency should, over time, narrow the price spread among providers in a given area. If I were an uninsured self-pay patient prepared to pay my bill in full shortly after receiving service without the hospital or other provider having to file a claim, wait for payment and argue about what is and isn’t covered, I think, if anything, I should get a small discount from the insurance company rate to reflect faster payment and lower administrative cost and hassle.
All outpatient procedures need to be scheduled in advance. Why can’t prices be easily accessible via a user friendly website?
Even the situation where someone comes to the emergency room and is admitted with a problem whose cause cannot be pinpointed without further testing and evaluation, it would be helpful to know that Hospital A charges an average of $2,000 per day for care, Hospital B charges $3,000 and Hospital C charges $4,000 all for essentially the same service. How long do you think the $4,000 charge could be sustained if all hospitals’ charges were posted and easily accessible?
Opacity is not total: one COULD discover approximately what Medicare pays for essentially anything. For an example, look here. Choose Billed Charges = $0, LOS = “Length of Stay” = 10, DRG = 106 “Coronary Bypass w/ PTCA”, Discharge Status = 1 “Home”. Think of this as “Emergency bypass surgery where they did an angioplasty to stabilize you first”. You will see that for TRICARE (military) hospitals, Medicare will pay $32,500, all up, for this bypass surgery over a wide range of LOS and billed charges. Billed Charges do not matter (much) to the government. Play with “Billed Charges” until you start seeing outlier payments kick in. Play with LOS to see how that affects reimbursement. Medicare pays differently to different hospitals, and you could in principle find the parameters to this model for any hospital, or at least a good estimate. Is it a “price list”? No. Is it impossible to find out what the government pays, even ?
> To go back to retail pharmacies, even self-pay patients
> only pay about 15% more on average for prescription
> drugs than the pharmacist receives from an insured
> patient’s insurer plus the consumer’s copayment.
Where do you get this? It sure isn’t true for generics!
> I still don’t think an uninsured patient should be
> charged more than 15%-20% above what Medicare pays.
Lots of people don’t, but I always ask them on what principle they object, and on what principle they consider 20% above Medicare to be reasonable. What if Medicare pays poorly? Should hospitals and doctors accept poor payments at all? If you say “Medicare should pay reasonably” then I will ask how you will judge reasonableness. These are tough, tough problems, and I am glad that people not in healthcare will take some trouble to learn, but there is an awful lot to learn.
> Now let’s continue these calculations with all other
> hospital services
First off, you have not seen a calculation, only an illustration.
Second, most hospitals can’t get to the level of detail I have illustrated. In a very real sense, hospitals do not know what their ‘product costs’ are. They know what their total payroll is, they know what their electric bills are, they know how much they spend on supplies, drugs, and the rest, but they do not know very well what “healthcare” costs.
> so everyone knows who they are subsidizing and why.
Why should you be allowed to know a hospital’s internal cost structure? Do you ask General Motors whom you are subsidizing when you buy an SUV versus a small car? I object even to the idea of “subsidy” in this context. You are giving value for value received. Note that in the ‘good old Marcus Welby days’ first-class price discimination was ubiquitous in healthcare.
This said, it is not too difficult to make educated guesses about a hospital’s cost structure, and insurance companies are beginning to do it. If you want to do this very difficult work, nobody will stop you. People who do this are called “Industry Analysts”. This kind of thing is done in many industries to estimate a range in which a negotiation can take place. There is no reason to exempt the hospital industry.
> With this data we will then get our legislators to
> require that hospitals charge uninsured only the
> lowest rate negotiated by payors.
On what principle of justice or equity will you do this? Will you simultaneously declare that vigorous collection efforts at this level of billing are entirely reasonable and just? Do you consider Medicare/Medicaid to be “payors that negotiate”? They don’t negotiate: shall I be obliged to accept what Medicaid pays? What will you do when hospitals try even harder to avoid uninsured patients?
This is a great start. Now let’s continue these calculations with all other hospital services, so everyone knows who they are subsidizing and why.
With this data we will then get our legislators to require that hospitals charge uninsured only the lowest rate negotiated by payors.
Re: Post by Tom Leith March 27,2006
I found your response to my post informative and helpful, especially since I am not in the healthcare business.
With respect to a hospital’s pricing of prescription drugs, I know they will be much more expensive per pill than a retail pharmacy because of the factors you mentioned. However, it would be helpful to be able to compare the price of a given drug (and all other services) from one hospital to another.
Your pricing example with respect to bypass surgery (up to triple, up to 10 days stay, $25,000) would also be enormously helpful relative to the total lack of information that now exists. It would not only be useful to compare pricing (and quality) from one hospital to another but also to compare the pricing to Medicare rates for the same set of services.
I think it is indefensible to charge an uninsured patient, even if wealthy, several times as much (or more) as the hospital routinely accepts as full payment from Medicare, Medicaid, and private insurers even though those third party payers probably make to minimum volume guarantees to the hospital to qualify for their discounts. Even if they did, I still don’t think an uninsured patient should be charged more than 15%-20% above what Medicare pays.
To go back to retail pharmacies, even self-pay patients only pay about 15% more on average for prescription drugs than the pharmacist receives from an insured patient’s insurer plus the consumer’s copayment.
Anything that allows some measure of price comparability between and among hospitals, even if imperfect, is a lot better than the total opaqueness that exists today.
> I do not think it should be very difficult
> for hospitals to learn to price their products
> Prescription drugs could be priced easily enough
> as all retail pharmacies do routinely.
It isn’t so easy as you suppose. What is the ‘product’ of a hospital? For the government, a ‘product’ is ‘a course of treatment’. Maybe you would like to see a price list:
Bypass Surgery, up to triple,
up to ten days’ stay: $25,000
And so-forth. There would be about 500 of these. That would be it! Are you happy? Is this ‘transparent’?
Since you used the example of a retail pharmacy, it seems you have a desire for something a little more granular.
Retail pharmacies get usually between $3 & $5 for a dispensing fee, that they collect when they fill up a bottle. The price of the drug itself is well known to the PBMs, and the pharmacies aren’t allowed much of a markup in most cases. With respect to the dispensing fees, things aren’t quite this good — sometimes they get NO dispensing fee for (say) the third and subsequent refills because the PBMs have the clout to twist their arms. But none of this is known by anyone outside the biz. In this case, suppose the doses themselves cost $.60, and the dispensing fee is $3.
So, at a retail pharmacy you see
(if you are a self-pay)
20 Erthromycin $15.00
But at a hospital you might see
1 Erthromycin $3.90
So, a patient says “Boy that evil hospital is really gouging me! My local pharmacy only gets $.75 a pill, but those moneygrubbers want $3.90!!!! That’s more than FIVE times as much! I am getting ripped off! I’m calling my congressman right away. Where’s the local news crew? This is outrageous!”
But look what’s really going on:
1 Erthromycin in a barcoded,
single-dose pack $0.90
1 Dispensing Fee $3.00
1 Nursing Documentation included in room charge
A dispensing fee includes delivery to the hospital, internal warehousing, picking from the hospital pharmacy and delivery to the patient in a form that enables nursing care and documentation. In other words, everything the retail pharmacy does, except in the hospital setting we can’t use bulk packaging, and we can’t count on you to take your doses on schedule. We make sure you do it, and document the fact that you did, and so we have to accomodate those processes.
We could roll all the pharmacy-related services into the line-item for a room-charge. Suppose on average patients in the hospital get 16 doses of “something” per day. (Yes, I am leaving out details, I know. This is an illustration.)
1 Erthromycin $ 0.90
1 Room Charge $348.00 <==== used to be $300
Maybe you would like this better; to hide prices in order to make a bill more understandable — do you agree this is rational? This begs the question: "What is 'transparent'?"
What if one hospital does it as in my first illustration, and the other uses this second scheme? Does this really help? Will the average person figure out that one hospital charges per dose for pharmacy services, and the other rolls it all into the room charge? I don't think they will. What should the hospitals do? I think the hospitals will be driven towards a per-diem price:
1 day in our hospital: $2,000
This is 'rational' and 'transparent', right? Lots of payer contracts are already negotiated this way in order to make prices understandable to the insurance companies(!).
A person in for a three day medical treatment of a urological problem will think he is subsidizing the guy in for bypass surgery, but hey! He knew what it would cost. It was 'transparent'. It seems 'rational'. But is this what you want?
As I said before, lack of transparency is indefensible.
Pushing the industry to make sense of its pricing and consider innovative packaging / bundling approaches can do nothing but good. Of course this must go along with disclosure of quality metrics, so purchasers know what they are buying.
Paul Ginsberg and his fellow travellers (you Matthew included) should get out of the way of this freight train. Simply because Bush Administration supports this does not mean it is a bad idea.
Transparency is a separate issue from deciding who pays for what: Open Medicine vs. Single-Payor Healthcare
I do not think it should be very difficult for hospitals to learn to price their products rationally. Prescription drugs could be priced easily enough as all retail pharmacies do routinely. For virtually everything else (setting physician’s charges aside for the moment) hospitals are essentially selling time — a day in an ICU, cardiac care unit, standard room, etc. Operating rooms could be priced by the hour or half hour based on standard estimates of how much time a given procedure should take. Physcial therapy can be priced per 15 or 30 minute unit of time. MRI’s and CAT scans can be priced based on the amount of time it takes to perform (including setup time) and to read and interpret the results. Actual supplies are a very small percentage of a hospital’s cost structure. Overhead costs such as administration billing, IT, human resources, maintenance, insurance, etc. can be lumped together and allocated to relevant departments as appropriate.
If a non-Medicare patient’s condition can be translated to a Medicare DRG code, the Medicare reimbursement for that set of services could be disclosed as a benchmark to help the patient assess the reasonableness of the bill he or she receives. In my opinion, any charge beyond 15%-20% above Medicare rates is probably unreasonable on its face unless the hospital can make a compelling case to the contrary.
If a hospital has no idea what its costs are, how can it enter into a rational agreement with an insurer? It’s time they implemented basic cost accounting like every other business and priced their product in a rational and defensible manner.