Insurers Shrink Hospital Pricing Gap

Blue Cross Blue Shield chief Andrew Dreyfus

There’s a big difference between what high cost and low cost hospitals are paid in Massachusetts even though the quality of care, according to several reports, is often the same.

An ultrasound might cost $2500 at one hospital, for example, and $1000 at another.

But there are several proposals on the table that would start to close the price gulf.  Now the state’s largest insurers say they are taking steps as well as they negotiate hospital contracts.

Blue Cross Blue Shield CEO Andrew Dreyfus says, while all hospitals are agreeing to lower increases than they have in the past, “we’ve been giving slightly higher increases to the lower paid hospitals, and lower increases, in some cases actual decreases to higher paid hospitals. So it will begin to narrow the gap.”

Harvard Pilgrim Health Care says it is taking a similar approach in current contract negotiations.  At Tufts Health Plan, CEO Jim Roosevelt says, reducing payment disparities based on “market power” is one of the insurer’s contract goals.

“We take steps to overcome these disparities and control health care costs by applying rate decreases or rates of increase well below inflation for providers that are above the market average,” says Roosevelt, “while negotiating incrementally higher rates of reimbursement for providers who are reimbursed below our network average.”

So what does this adjustment look like?  If the average hospital increase is roughly 2% this year, then lower priced hospitals would be getting 2-3% and the more expensive hospitals would be getting 1-2%.

The just-announced Children’s Hospital contract with Blue Cross is one example of how this is playing out (0-2-2, or in that range for a three-year deal).  The pattern doesn’t quite hold for Partners HealthCare, which I believe is (3-2-2, can anyone confirm?). Tufts Medical Center, a hospital with traditionally lower rates, struggled with Blue Cross over a (3-3-3) deal.

This is, as Dreyfus says, a beginning. If you look at the effect on the payment gap, these small adjustments won’t have much impact even though 1% on a multi-million dollar contract is a lot of money.  Here’s one example of how the lower and higher rate increases would play out over time.  We look at the payments to a high and low cost hospital for a pelvic ultrasound.

(chart prepared by Madeline DeShazo)

Granted, price is not the only factor in rising health care costs.  The other important issue is how much care we get.  Dreyfus argues that as doctors and hospitals focus more on giving patients just the care they need, the number of tests and procedures will decline, and price won’t be so important.

Finally, I wonder if the insurer’s efforts to close the gap between higher and lower paid hospitals is one more attempt to show legislators that the market is working without their intervention.  Just wondering.

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  • Peter Rousmaniere

    You really want to reduce price disparity? Really? Then start involving the patient, as Calpers is doing in California. Go to the description on it at:  http://healthcaretransparencynow.com/

    Peter Rousmaniere

  • Peter Rousmaniere

    You really want to reduce price disparity? Really? Then start involving the patient, as Calpers is doing in California. Go to the description on it at:  http://healthcaretransparencynow.com/

    Peter Rousmaniere

  • Paul Levy

    As always, great work by Martha.  Here are some more observations:

    http://www.runningahospital.blogspot.com/2012/01/zenos-paradox-of-hospital-prices.html

  • Reasonable?

    Martha,

    In the story with Paul Levy it was pointed out that there is not just differences in the year rate adjustments, but also at the base rate.  It seems like the base rate has been left out of this particular discussion.

    Also, the fact that the billable amount for an ultrasound at $2500 or $1000 is absurd itself.  There are all sorts of “overheads” bundled in that number.  Please tell me that that is not a real example…

    • Martha Bebinger

      Hi Reasonable?

      I hope you are well.

      I use the graph and the example of ultrasound prices to show how this adjustment will not have a significant effect on the gap.  In this case, the ultrasound price is a proxy for widely different base rates. 

      This example, of the different prices for a pelvic ultrasound, is real, or at least as real as any patient consumer can get.  It comes from Rachel’s post on shopping for this test.  The link is in the post and again, here: http://commonhealth.wbur.org/2011/08/my-ultrasound-three-tests-three-pricetags/

      Thanks again -

  • Nicholas

    you are being taken in….do the math…the gap between high cost and low cost never closes…

    in year 1 gap is $1500

    in year 5 gap is $1533

    in year 10 gap is $1557

    the gap never closes……and there is no difference in quality…..why pay more for a decade MORE more for the same quality? 

    We have already been paying more for most of the last 20 years……costing all of us billions of dollars…..

    • Martha Bebinger

      Hi Nicholas – thanks for your comment.  Yes, the gap never closes, or at least not in the foreseeable future.  The chart illustrates that point.  What do you think would be the best way to tie cost to quality?

      • Psgreader

        Perhaps the solution to payment discrepancy is provider add on/business operation allowances and flat rate reimbursement for procedures no matter the hospital.  Then the “add-on” charges which are bundled into procedure costs are unbundled from the procedure and negotiated separately as a “business operation” payment to cover administrative overhead, marketing, MH costs, and patient account losses etc.  Especially as more and more consumers are being insured in tiered plans this would allow the consumers (patients/ users of service) a truer picture of the costs of their treatment.

        Think of your gas bills for instance whereby the the cost of the gas is shown separately from the transportation cost. 

        Paula

        • Martha Bebinger

          Interesting Paula.  Who would establish the “flat rate reimbursement?”

          How would you factor in costs associated with teaching and research?

          I keep meaning to look up the list of factors Maryland uses to adjust rates.

          Thanks -

          • Psgreader

            In this case the costs of research/teaching are not a part of the procedure cost – the procedure cost is exam room cost, tech cost, actual department operational overhead share (ie electricity, cleaning etc) as vs hospital overhead, technology/equipment cost share et al.  The procedure cost(s) and the other bundled costs should be separated.  Insurances can then reimburse (and negotiate their reimbursement)separately.  Think of the currently bundled non-procedure costs as a tarif/tax charged by the provider to perform the service.  Perhaps the best way for this to be handled is for for hospitals/providers to present their operating tax to insurers and negotiate an annual “global allowance payment” within which they must operate.  This allowance can be reviewed quarterly in order to allow for “catastrophic events” (such as pandemic flu which would increase the average operating costs) as well as review patient mix (low income/high income – pediatric/geratric etc).

            Regarding teaching vs non-teaching providers this again can be a negotiated operating allowance. 

            Again, let’s reference a gas bill or a telephone bill (or worse) a cable bill individual components of a charge are broken out so in theory the consumer is educated and aware of exactly the cost of what is being provided.

      • Nicholas

        Hi, didn’t the health commission identify a methodology that accounted for things like case, mix, teaching mission and safety net status etc? It was one of the proposed solutions to the cost differential in the massachusetts market caused by market power 

        Tufts Medical Center is a high quality institution that has a case mix similar to or higher than MGH, Brigham, BID etc, yet is paid far less (though it has virtually all the same attributes and cares for more safety net patients) . The initial globe story and the attorney generals report spotlighted this in their stories. 

        Since this is a dis-functional market where consumers are not responsible for payments on their behalf, there needs to be market intervention. Identify a maximum price differential between high and low cost institutions that have similar quality and attributes like case mix, teaching status, safety net status, etc. This will take some research….but it should be done over time,  along with transferring some cost to consumers who can afford it and see if real market pressures can function in health care as is also being done with “teirring”, “limited networks” etc. The problem with relying exclusively on the latter efforts to make the health care market a real market are clear however. A large segment of the population can not afford it and is not paying all or most of its own way, so market dis-function will continue for this group. The most important health decisions are made by those who are sickest, who are often very elderly and least able take the time to research doctors, hospitals etc and rely on “fame” not quality.  The market power of institutions like those in Partners and those with geographic advantages continues. Unless the state intervenes to identify an acceptable level for price differential that accounts for case mix, teaching status, extent of safety net care and all other desirable “adjustment factors”.