Exploring the complexities around healthcare costs and the role of technology in transforming services.
As an informed consumer of health care services, working in the industry as a consultant, executive, and sales leader for much of my career, I have witnessed firsthand the technological advances that have been made and respect the dedicated work of the clinicians who use them. Advancements in technology, dedicated and skilled doctors, and caring hard-working nurses help improve and save lives - period.
I have spent enough time in the industry to have participated in the evolution from paper charts and paper claims to the electronic claim and the electronic medical record (or health record). I have been through ‘meaningful use’ and experienced the focus on improving provider and clinical workflow-enabled through information technology (IT). Subsequently, it is unfortunate to observe neighboring health systems spend millions, and even billions, on IT advancements while many providers still do manual data entry, have paper forms on clipboards in patient lobbies, and there remains an overall lack of interoperability of an individual’s integrated cross-system, cross-geography medical record.
Today, we are seeing more investment and effort to further digitally transform. Provider and payer organizations are expressing interest in becoming more patient/member-centric. With technology at its core, the belief is that further digital transformation will help empower employees, optimize operations, and engage patients and members. However, while health systems and payer organizations continue to individually spend millions to digitally transform the patient/member experience through mobile applications, portals, virtual care, and other technology-enabled initiatives, they are neglecting to address a fundamental issue: patient trust.
As the topic of transparency in healthcare gains momentum, consumers are beginning to follow suit and demand change.
Intricacies and Trends in Pricing Transparency
As consumers become more aware of cost and quality of their care, the subject of healthcare trust and pricing is trending more and more. In fact, a 2019 Executive Order requires price and quality transparency from the healthcare system. Executing the mandate is a complex venture, and the Centers for Medicare and Medicaid Services (CMS) believes most group health plans will begin posting pricing information in July 2022 for researchers and application developers to use. Further requirements are expected to follow.
Pricing transparency is challenging because of the intricacies of what hospitals and providers refer to as a ‘chargemaster.’ The chargemaster is usually a part of the revenue cycle system and stores all the billable services and items to the patient or their health insurance provider. Pricing for a service can vary based on years of layering negotiated rates with insurance carriers. Recent reports have shown the national disparity between gross charges for hospital procedures has an average of 297% difference between low and high gross charge. In addition, patients are most concerned about the amount they have to pay and not so much the amount that is charged to their insurance company. There are several other variables leading to what the consumer pays for healthcare, making full pricing transparency a complex and daunting task.
The Need for Market-Driven Pricing
Adding to the intricacies of providing market-driven pricing and transparency is the lack of insight into the actual cost of the services and procedures performed. Unlike a manufacturing company, for example, that identifies all aspects of material and labor cost going into a product via a bill-of-materials, almost no hospitals and physician practices operate in this way. Instead, hospitals have used the cost-to-charge ratio as an alternative to true activity-based cost accounting, so there is no documentation of actual cost by service. Hospitals know their total cost in aggregate over a period of time, and they also know their total billed charges in aggregate.
As an example, if a hospital system has $500M in total aggregated costs and $1B in total aggregated billed charges, their cost-to-charge ratio is 50%. If the hospital bills an insurance company $3,000 for a procedure and then applies the 50% ratio, they conclude their cost for the procedure is $1,500. The amount of billed charge for the procedure was determined by the hospital to maximize reimbursement from the insurance plan, it was not derived from true cost or a market-competitive price.
One report raised an alarming level of awareness between the disparities of what hospitals in a highly populated urban area charged for a procedure and the amount they were actually reimbursed. One procedure, for example, had a 115% difference between the highest gross charge and the lowest charge. The difference between the highest allowable amount from insurance for that procedure and the lowest was 126%. The report concluded that this discrepancy meant that “two patients could undergo the same… procedure in the same area, with one paying $1,390 and the other paying $615.”
Would the average consumer ever accept this amount of disparity in purchasing anything outside of health care services? Unlikely unless they knew precisely what made up the variance in both quality and reliability and were able to make a choice such as choosing between a Ferrari, a Ford, or a Kia. In healthcare, we don’t always have that choice. As the topic of transparency in healthcare gains momentum, consumers are beginning to follow suit and demand change. Healthcare systems and providers will be pressed to tackle this significant transformation in order to comply with shifting public perception.
Summary
Would market-based healthcare enable true pricing transparency? Market-driven and competitive pricing would need to converge with actual procedure-based costing to get to a market-based industry model. As consumers are beginning to understand pricing disparities, are healthcare systems considering transformation to an actual cost-based model? While this model would force them to become more efficient, the journey to enabling it is complex and contains political barriers. Retail healthcare is beginning to adopt pricing transparency, but they don’t cover the full spectrum of healthcare needs. Industry consolidation with both payers and providers continues, further complicating the journey.
Are health systems that have undertaken a cost accounting initiative becoming more efficient? Will they attract and retain more patients? What will motivate health systems to drive their pricing based on market competitiveness and actual gross margin contribution, and align gross margin to be market competitive? Where in the life cycle of healthcare delivery should there be focus on patient engagement? A thorough understanding and consideration of these factors will be key for the future of the industry.
