OP-ED

A Modest Health Care Economics Experiment to Fight Rising Costs

Healthcare providers, medical institutions, local pharmacies and pharmaceutical companies generally set the price of their products/services well above the payment they expect to receive from all insurers. These healthcare vendors set their fee schedule at 150%, 200% or 1,000% of the maximum payment they expect to receive from their most generous payor.

Here in Massachusetts, when a healthcare product or service is consumed and the patient has health insurance, the vendor submits a bill to the insurance company who specifies the “allowed fee,” which is considerably less than the “billed fee,” and the vendor “writes off” the balance of the  “billed fee” from their books.

For example, I recently had some blood tests done at Quest Diagnostics. Quest Diagnostics sent a bill to my insurance company for $660. The “allowed payment” was $110, so Quest wrote-off $550 and the “allowed payment” of $110 was divided between me and my insurance company.

In my practice, where the fee schedule is created by my hospital, the “billed fee” for a level 3 follow-up office visit is about $230. The actual payment received from various insurance companies range from $62 to $164.

The “cash price” for many medications at a patient’s local pharmacy is also far above the amount the pharmacy expects to receive from any insurance company. For example, the cash price for Viagra is about $60/pill but the agreed reimbursement rate, between the local pharmacy and the insurance company, is about $10/pill. The same is true for many other medicines.

As the healthcare vendors’ fee schedules do not closely mimic the actual “competitive market rates,” patients who have either no health insurance or poor quality health insurance are required to pay outlandish medical bills. In this regard,  “capitalism” has failed to bring down the price of healthcare services.

In August 2012, Massachusetts created the Health Policy Commission, which set a targeted maximum rate of rise of healthcare spending in Massachusetts. The Commission was to cajole healthcare providers into staying within this limit. In 2015 the Bill seemed to have some effect as the rise in healthcare spending dropped from 4.2% (2014) to 3.9% (2015), although it was greater than the targeted rate of rise of 3.65%. Some argued that this data was proof that the law was having its intended effect as the Massachusetts rate of rise of healthcare spending was lower than the national average (4.9%), lower than the prior year and statistically close to the allowed limit.

I believe that the existing exorbitant (and market disconnected) fee schedules in the Massachusetts healthcare market may be one reason why this law has not been as effective as its designers had hoped.  Although there are restrictions which specify how fast the cost of healthcare spending can rise for a medical group/vendor, the fee schedule for specific services/products is so far above the payments received in the prior year that it will take decades before the “billed fee” schedule closely approximates the “allowed payment” fees set by the insurance companies. This huge disparity between the “billed fee” and “allowed payment” will make it more likely that healthcare spending will continue to rise more rapidly than permitted by the Massachusetts Health Policy Commission.

One way to mitigate the rising healthcare spending in Massachusetts might be to prohibit providers of healthcare services/products from setting their fee schedule higher then say 3.65% above the maximum payment they had received from an insurance company in the previous calendar year.

While some will argue that this flies in the face of capitalism, nobody will argue that the cost of healthcare spending is out of control and we must stem the rise in healthcare spending long before it consumes the entire discretionary Federal budget, bankrupts the public and makes our products fiscally noncompetitive around the world. Thus, this restriction on “fee schedules” might be a “healthcare economic experiment” we want to consider trying in a few in states.

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Barry CarolmeltootsPeterAllanHayward Zwerling Recent comment authors
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BobbyGvegas
Member

Elisabeth Rosenthal, MD, Editor in Chief, Kaiser Foundation: __ Complaint: Unaffordable Healthcare In the past quarter century, the American medical system has stopped focusing on health or even science. Instead it attends more or less single-mindedly to its own profits. Everyone knows the healthcare system is in disarray. We’ve grown numb to huge bills. We regard high prices as an inescapable American burden. We accept the drugmakers’ argument that they have to charge twice as much for prescriptions as in any other country because lawmakers in nations like Germany and France don’t pay them enough to recoup their research costs.… Read more »

Barry Carol
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Barry Carol

It’s a well-known fact that healthcare costs in Massachusetts are consistently the highest or second highest in the country. There are two main reasons for this. First, a disproportionate percentage of routine medical care is delivered in expensive academic medical centers or hospital systems, especially in Southeastern MA (Boston region). Second, the Partners Health System has enormous market power with insurers because of their huge market share and their two famous and highly regarded flagship hospitals – Massachusetts General and Brigham and Women’s. I keep hearing that they are typically paid 30%-40% more than their competitors for similar services, tests… Read more »

Peter
Member
Peter

Insurance companies obviously know something about appropriate bills and fair rates of return. Why isn’t the $660 Quest bill considered gouging when they seem happy with the $110. I’ve run into this for Quest as well. A quoted $885 cash lab fee was dropped to $85 when doing it through the doc’s office account.

Let’s standardize bills to the lowest insurance reimbursement rate for everyone. Somebody knows what’s being charged across the board.

BobbyGvegas
Member

In the wake of my 2015 prostate cancer tx I now get a quarterly PSA. I always have to sign this paper saying that I may be on the hook for the $189 list price for the single parameter assay. LabCorp always ends up taking the $18 remittance they get, formerly from BC/BS, now from Medicare. Prior to my tx I had an endo-rectal coil MRI px done. They billed about 3 grand. They got paid about $890, IIRC. Back in the early 1990’s during my first QIO tenure (of 3), as a hospitalization outcomes analyst, the HCFA (now CMS)… Read more »

Niran Al-Agba
Member

This is one of those things in healthcare that is not exactly rocket science. We just charge a cash paying patient less than the average “insurance allowable”. Cash payers save money and we save time and cost by not billing insurance. Win-win.

Hayward Zwerling
Member

However this practice, at least Massachusetts, is illegal. You are not allowed to charge patients a different fee schedule for the same level of service. Of course you could “down” coded the visit for the self-paying patient but technically that’s medical fraud. If the insurers became aware of the “lower” fee schedule you use for the “self-pay” patients They could unilaterally cut back your payments stating that your actual fee schedule is the one you use for your self-pay patients. In addition, this solution doesn’t solve the problem for uninsured patients who have to purchase medications from a pharmacy or… Read more »

Allan
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Allan

How does controlling the physician fee for treating the patient prevent bankruptcy of the country? Assuming the physician costs are less than 20% of the total bill and their overhead is somewhere in the vicinity of 50% before taxes and repayment of debts you are left with less than 10% to fool around with. How much of that 10% can you chop off of Niran’s bill before she ups and leaves? Why are you so willing to attack the people actually saving lives? Though I believe some select fees may be outrageous are they anymore outrageous than some of the… Read more »

Hayward Zwerling
Member

My proposal is intended to slow the rate of increase of healthcare spending. Here in Massachusetts we have a law, which I discussed in the blog, that aims to limit the rate of rise of healthcare spending to the rate of growth of the Massachusetts economy. This is not unreasonable. While the law has worked in some regard, I think the irrational and exorbitant fee schedule used by physicians, pharmaceutical companies, pharmacies and hospitals has made this law less effective than it would’ve been if the healthcare vendor fee schedule was more in line with reality of healthcare vendor payments.… Read more »

Allan
Member
Allan

We all recognize these problems, but how does cutting Niran’s fee and others like her help? That is the basic problem, that and the lack of a transparent competitive market.

Hayward Zwerling
Member

I am not cutting his fees. Please read the post. I am reducing the fee schedule which is set FAR above the fees the healthcare vendors, Physician’s, local pharmacies, hospitals, labs expect to receive from the insurance companies.

Allan
Member
Allan

“setting their fee schedule higher then say 3.65% above the maximum payment they had received from an insurance company in the previous calendar year.” What makes you think last years reimbursement satisfies the needs of Niran’s practice? Not all doctors are paid the same. They might be paying her less than other practices, but you are still limiting her rate (not his rate). I think these formulas are dangerous. Decades ago Medicare did something similar and that incented physicians dealing with Medicare to raise their list prices substantially. Gaming systems invariably occur with so many rules and the good honest… Read more »

Hayward Zwerling
Member

in order for Massachusetts’ healthcare vendors to keep the rate of rise of healthcare spending within the guidelines proposed by the Commission, the rate of rise of the healthcare vendor’s fees must be restricted. In doing so, this will have benefits to everyone who needs healthcare services, for the reasons discussed above. As a practicing physician I think your concern about the ability of physicians to earn a living is thoughtful, but I can assure most of the public would be very happy to have a physician’s income. In my opinion every physician (and hospital and pharmaceutical company and pharmacy… Read more »

Allan
Member
Allan

It is not a matter of whether most of the public would be happy with the physician’s income, rather it is a matter as to whether or not physicians like Niran remain in practice. We have detroyed the healthcare sector in America with too much government invovlement in the marketplace. This type of action has been occurring since WW2. We need a viable marketplace and where government needs to act it should act with the least possible effect upon the marketplace. Price controls don’t meet that criteria and cause all sorts of unintended consequences. I understand what you are trying… Read more »

Hayward Zwerling
Member

I guess we will have to agree to disagree. The last 5-6 decades have proven that the “free market” does not work to control healthcare costs: over the decades we have tried innumerable permutations of the free market from patients paying with chickens, barter, through various forms of health insurance companies, HMOs, ACOs, etc. Nothing has worked to control cost. Many countries around the world have a centrally controlled healthcare systems which, although not perfect, provides care less expensively and at a higher quality than the US healthcare system. Our Veterans Healthcare system is also centrally regulated and it too… Read more »

Allan
Member
Allan

“The last 5-6 decades have proven that the “free market” does not work to control healthcare costs:” Hayward, that statement is why we disagree. There has been no free market in the last 5-6 decades. How can a free market exist with third party payer which leaves the real buyer out of the equation? The tax preference is going to the employer, not the employee and that has had a terrible effect on the healthcare sector. Provide the tax deduction directly to the individual and then much of the free market will return. Alternatively, get rid of the tax deduction… Read more »

Peter
Member
Peter

“We have detroyed the healthcare sector in America with too much government invovlement in the marketplace.”

Really? A 3 trillion dollar industry supporting thousands of people and families and it’s been destroyed by government.

BobbyGvegas
Member

Yeah, that was rich.

Allan
Member
Allan

I guess you, Peter, belong to the class of people that existed before the development of economics. You probably still believe in “the broken windows theory”. Read Bastiat who has been dead for over 150 years.

Peter
Member
Peter

“You probably still believe in “the broken windows theory”.”

Interesting, then you must recognize all the “broken windows” industry has created for health care to thrive so well. Carcinogens, pollution, as well as high fat, hight sugar, high calorie processed food which all create a large customer base for health providers.

If anything then you would agree there is not enough government control to stop all these windows corporate America is breaking.

Allan
Member
Allan

Perhpas you better review what the broken windows theory is. I know Bastiat died a long time ago, but that parable is still worth understanding.

Niran Al-Agba
Member

Allan, thanks for coming to my defense….. they always think I am male… I haven’t figured out why? 🙂 Apparently, my writing isn’t feminine enough. Who knew there was such a thing?

Hayward Zwerling
Member

Sorry for the gender error.

Niran Al-Agba
Member

Allan, you are absolutely right. What Dr. Zwerling is missing is the fact that price control will ultimately decrease reimbursement across the board. Most industries are opposed to price control done in this way as are most physicians. It will not work.

Peter
Member
Peter

“What Dr. Zwerling is missing is the fact that price control will ultimately decrease reimbursement across the board.”

Isn’t that the definition of costs cutting. If you don’t want to reduce reimbursements to hospitals, drug companies, device makers, labs, and docs (maybe not PCPs) then how will we reduce costs?

Niran Al-Agba
Member

Peter, what Dr. Zwerling is proposing is not going to drop reimbursements to all those areas of medicine, hospitals will still get their extra facility fee and $50 charge for an aspirin or holding your own baby, drug companies, device makers, and others will still charge whatever they want as Medicare is forbidden from negotiating for many health care services. Why is price control acceptable for the physician and lab and not pharma, devices, or hospitals?

meltoots
Member
meltoots

Are you sure about this? Do you have the actual law code? Why would it matter what you charge different patients different fee schedules? Some insurers are MARKEDLY more complex to deal with, like Workers Comp. At my dentist, I pay cash at a big discount and get a discount for paying that day. Why not? Its less work for me to pay cash. They do not have to hassle with insurers etc. Easy. Seems better to CHANGE the law that you can charge self pay patients whatever fee you deem is acceptable. Also, we would charge obviously destitute patients… Read more »

Allan
Member
Allan

Meltoots, there are a lot of crazy laws made by both the states and the feds that are hard to keep up with. If one doesn’t bill the 20% part of Medicare one is open to fraud and abuse charges. Decades ago one physician that wasn’t charging the 20% was caught and his reimbursement from Medicare was reported to have been decreased by 20%. To prevent that from happening one must bill the patient and demonstrate the patient had limited funds before writing off the 20% I also understand that some private insurers have “Most Favored Nation” types of clauses… Read more »

meltoots
Member
meltoots

I get the crazy laws, and the anecdotal cases, but if we make a contract for service with a non-insured patient, that is simple contract law. Period. There are NO laws in any state that I am aware of that prevents simple service contracts (legal medical service, not narco trafficking, prostituion, etc) between a customer (patient) and business (or MD), if the patient is uninsured, hence I do not have a contract with the patients insurance company, since they have none, I can make a simple invoice for service with the patient. The same thing goes on the other end.… Read more »

Allan
Member
Allan

“but if we make a contract for service with a non-insured patient, that is simple contract law.” Not once the government gets involved. If you accept Medicare and a patient is on Medicare try making a deal with that patient that they pay you cash where the contract provides that Medicare isn’t billed a dime. That is a contract for service, but is NOT permitted. That is the problem with government programs. Contract law and other law can be thrown out the window. One can’t sue the government. The government can spend as much money as they want harrassing individuals… Read more »

meltoots
Member
meltoots

Again, I am not talking about Medicare patients, nor medicaid patients nor insured patients that I have a contract with their insurer. I am talking about uninsured patients, like Dr Z is speaking about in this article. He wants to change ALL billing because of these patients. Makes no sense. Just make a simple contract for service with the uninsured patient.

Allan
Member
Allan

If you are talking ONLY about physicians that DO Not ACCEPT ANY INSURANCE what you say is likely correct. However, once you have any contract with an insurer things can change because of what is in your contract. As I mentioned earlier ‘most favored nation’ type clauses exist that state you cannot charge any payer less than the fee they charge. This type of clause is regulated by the states at least for non federal insurers so the laws will vary among the states. The question is whether or not the contract includes the uninsured as an alternate payer and… Read more »

Niran Al-Agba
Member

I am running a business. While I am not allowed to “down code” by insurance contract, I wouldn’t do that anyway. I code the SAME way for every single encounter as per the appropriate level because that is fair and equitable. However, the “self-pay” patient does not have insurance. We use the exactly same “allowable” standard as if they have insurance and there is a write-off. That is ethical. Any business is entitled to discount for someone who pays in cash. Ours is 10%. The hospital does it, retail stores do it, and most small businesses for anyone paying in… Read more »

BobbyGvegas
Member

EVERY stakeholder in health care, with the exception of patients, argues that they are ALL “losing money” and need higher prices, or they will pull out of their service domains. Yet somehow “competitive market forces” will make them all happy earning even LESS as we “bring down the cost of health care” for the benefit of patients (who have ZERO individual market leverage, and are ACTUALLY losing money).

BobbyGvegas
Member

“Stricter chargemaster regulations needed to rein in healthcare costs.”
http://www.modernhealthcare.com/article/20170419/NEWS/170419885