GOVERNMENT

How Medicare Allowable Costs and Out-of-Network Charge Disparity Matter for Self-Insured Employers

JUN 23

Recent research from Johns Hopkins Bloomberg School of Public Health (JHU) and Washington & Lee University (W&L) points to significantly higher charges from hospitals for treating out-of-network or uninsured patients compared to reimbursement received for comparable treatment provided to Medicare enrollees. For those familiar with the hospital reimbursement landscape, this is not such a shocking revelation, but the significant press attention received on this report suggests the economics of how hospitals get paid is not widely understood.

With no one to negotiate improved terms on their behalf, those without insurance or utilizing out-of-network providers are generally subject to hospitals’ list prices, known as the chargemaster rates. Hospitals seek to keep these list prices high in order to serve as a starting point for negotiations with insurers regarding the appropriate discount based on the volume the hospital expects to receive from a health plan’s members. While hospitals may think about pricing in terms of a discount to the chargemaster prices, the JHU/W&L researchers are looking at hospital pricing in terms of the premium to Medicare allowable costs and finding significant “price gouging”.

The implicit underlying assumption by many of those commenting on this research seems to be that the Medicare price is the “right price”. Hospitals would most certainly disagree that Medicare allowable costs are the right starting point for a discussion on appropriate reimbursement since most hospitals actually lose money treating Medicare patients (-5.4% margin in 2012 for all hospitals treating Medicare patients). The notable exception to this is for-profit hospitals which actually earned 1.5% margin on Medicare patients in 2012.

The JHU/W&L research highlights the challenges that the uninsured or out-of-network patients face when seeking treatment. These patients may have no realistic alternatives, no ability to price compare, and often do not even know that they are receiving out-of-network care even if they are insured. The researchers found these patients are charged 3.4x the Medicare allowable costs for all hospitals and over 10x for the top 50 hospitals with the highest mark-ups. All but one of these “highest mark-up” hospitals are for-profit enterprises (indeed half of these hospitals are owned by CHS and one quarter are owned by HCA). Given the for-profit hospitals’ ability to make money on Medicare and the disproportionate prices they charge the out-of-network or uninsured, it would seem a narrowing of the spread between Medicare allowable charges and those paid by these patients merit additional scrutiny.

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Source: http://www.theatlantic.com/health/archive/2015/06/hospitals-that-charge-1000-more-than-they-should/395099/


With hospital prices rising at 3x the rate of inflation since the 1980s, some constituencies bearing those costs are taking action. Some states like Maryland and West Virginia have imposed price caps on rates hospitals can charge in an effort to slow healthcare cost trends. Others like California and New Jersey have mandated specific discounts for certain uninsured patients. A number of health plans are exploring bundled payments and referenced based pricing arrangements to limit exposure to rising healthcare costs. Self-insured employers are aggressively shifting to high deductible health plans to shift rising costs to employees and ensure that their employees have incentives to keep costs low. In many instances, these employers or their health plans are offering price transparency tools to enable better health decisions factoring in the cost of care. Some companies, like Clear Health CostsMediBid, and PokitDok, offer markets that enable providers to compete with transparent pricing for their services for cost conscious consumers looking to understand costs in advance of treatment or elective surgery. Other companies, like CoPatient, offer patient advocacy services to consumers on a contingency basis for auditing and correcting hospital billing errors and overcharges.

In addition to these methods, one novel employer-driven cost containment approach was recently highlighted in Kaiser Health News. The article highlights self-insured employers limiting exposure to hospital charges by essentially ignoring hospital bills and asserting what they are willing to pay using the same type of Medicare rates that JHU/W&L reference in its research. For example, a company called ELAP Services works directly with employers to dispute hospital charges deemed excessive resulting in dramatically lower payments to hospitals. In a departure from the typical negotiation over charges and appropriate discounts, ELAP analyzes comparable treatments and prices paid based on Medicare claims and uses that as a basis for deciding what appropriate payment should be. By way of example, the article highlights a $600,000 back surgery that ELAP determined was worth $28,900 based on Medicare data. The company’s client wrote a check for that amount and the hospital accepted the lower payment amount. As you would imagine, this approach is not without risk to employers. As part of its business model, ELAP offers to cover cost of litigation and fighting collection agencies on behalf of its employer customers and its workers. Thus far, the firm has largely had success defending clients against hospitals. With 200 employer customers and 115,000 workers covered though, the company is not large enough to elicit the more aggressive response from hospitals that would likely result should their “just say no” model gain more traction in the marketplace. Regardless, this extreme approach and use of other Medicare rate-based pricing models bear monitoring in the future.

Could other similar approaches help bend medical cost trends? Let us know your thoughts.

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Brice Baradel