A Fiduciary Responsibility

The release of the Rand research report “Prices Paid to Hospitals by Private Health Plans Are High Relative to Medicare and Vary Widely” by Chapin White and Christopher Whaley represents a major step forward in enabling value-based purchasing.  MAJOR! For the very first time it allows employers to assess the reasonableness of the prices they pay against an empirically-based benchmark.

While Colorado overall wasn’t at quite the very top of the 25 states studied, (we were 6th highest), many of our hospitals are among the priciest in the entire country.  With hospital prices ranging up to nearly 800% of Medicare, the report documents the enormous opportunity – as well a serious fiduciary responsibility – to purchase care, not simply pay for it.

As insightful as the Rand report is into hospitals’ pricing strategies, the response of the AHA (American Hospital Association) is at least as insightful as the report – even if unintentionally so.   Focusing on just a few of the AHA’s key statements and examining the narrative explains why employers should not expect hospitals to learn from the report and why they themselves must act.

AHA Statement:  “The study examined hospital prices for a limited number of employers and health plans covering 25 states in 2017.”   The sample size reflected “just 2 percent of the 181 million Americans with employer-sponsored insurance nationally.”

The Reality:   Regrettably, the US has no national all-payer claims database (which the AHA might have promoted rather than “curse the darkness”). So, Rand built their own data warehouse from a coalition of the willing – and intend to expand it.  Meanwhile, we’re fortunate that Colorado was forward thinking and proactive in setting up a useful, accessible APCD.   Unquestionably for Colorado, a reasonable majority of claims are represented and we can absolutely make use of the results.

AHA Statement:  “In 2017, hospitals received payment of only 87 cents for every dollar spent caring for Medicare patients.”

The Reality:   MedPAC, which carefully analyzes and annually reports to Congress on the adequacy of payments to hospitals, has consistently documented that, hospitals make money on the direct costs of care for Medicare beneficiaries (who are far more acute than most employees).  While it’s true that most hospitals do lose money on fully allocated allowed costs, efficient hospitals lost only 2% (not 13%) in 2017 – establishing a benchmark toward which all hospitals should commit to working instead of playing victims (of their own inefficiency).

AHA Statement:  “Further, Medicare payment rates, which reimburse below the cost of care, should not be held as a standard benchmark for hospital prices.”

The Reality:  MedPAC has shown that high volume, high-quality hospitals have expenses low enough to break even on Medicare.  Moreover, other studies have shown how some hospitals control cost.  Nationally, so-called “non-profit” hospitals have adjusted per inpatient day that is 32% above their for-profit counterparts.  And Colorado’s tax-exempt hospitals generate expenses that are 25% higher than THOSE hospitals.

Here’s the bottom line:  No one suggests that employers pay Medicare rates.  However, Medicare’s carefully calculated and adjusted payment methodology provides a context for determining what’s reasonable by using Medicare as a benchmark.  That methodology allows three very clear conclusions that employers themselves must come to terms with.  First, MedPAC studies have shown that hospitals losing more than 2% do so because “high commercial payments [which employers have been underwriting] remove incentives to implement cost controls.”  Second, even if hospitals lose 13% percent on Medicare, employers are paying prices that are 5 to 8 times higher than Medicare are simply unjustified.   With the Rand report, employers now know this.  And perhaps most importantly, Colorado employers have both an enormous opportunity and a critical fiduciary responsibility to employees and taxpayers or owners/shareholders to do a better job purchasing care.

The AHA’s statements make it clear that we cannot look to the sellers to even recognize, let alone address, this problem.  The responsibility lies with employers.

Download our white paper on “Determining the Reasonableness of Hospital Pricing” here.