Hospitals, insurers should end hide-and-seek with prices

What will it take the stop the maddening situation with health care prices?

A massive change in attitude, policy and even laws across all state governments and all players in the health care system.

That’s the prescription given by well-known health reform advocates Dr. Bob Kocher and Dr. Ezekiel Emanuel published an interesting opinion piece last month in the Annals of Internal Medicine titled “The Transparency Imperative.” The imperative is a call for the disclosure of all data on price, usage and quality of health care—unless there is a reason in some circumstances not to do so.

This is a controversial idea, because health care providers fear that the public does not understand how health care prices are determined. Few people on the planet do, actually.

That’s because hospitals, doctors and health insurers have been playing a game of hide-and-seek with the public on health care prices–and they've been doing it for at least 30 years.

For decades, hospitals, doctors, health insurers and government programs such as Medicare have spit venom at each other rhetorically, winked at each other in their contract negotiations, and then passed on a bill to the general public that kept rising nearly every year at twice the rate of inflation.

“There is no method to this madness. As we went through the years, we had these cockamamie formulas,” William McGowan, then-chief financial officer of the University of California, Davis, Health System, told the Wall Street Journal in 2004. “We multiplied our costs to set our charges.”

Princeton University health economist Uwe Reinhardt cited McGowan’s comment in a 2006 journal article titled, “The Pricing of U.S. Hospital Services: Chaos Behind a Veil of Secrecy.”

The games hosptials and doctors play with Medicare are fairly straightforward. The federal agency that runs the health plan for seniors publishes fee schedules for the various parts of Medicare.

These fee schedules are indecipherable to a lay person, including myself. But hospitals and doctors employ an army of financial experts and consultants, who comb through the schedules, identify which areas are ripe for profitable services, and then counsel the health care providers to expand in those areas.

For most of the 1990s and 2000s, Medicare paid well for about four main things: heart surgery, neurosurgery, cancer care and orthopedics. The list matches up pretty well with all the health care advertising you see, and the various specialty hospitals that were built around Indianapolis—and the nation—in the past 15 years.

With private insurers and employers, the games are even more elaborate. Employers and their employees have almost always preferred the broadest network of providers and the deepest discounts. And health insurers, especially WellPoint Inc. and its Anthem subsidiaries, have delivered just what their customers asked for.

But there have been two problems. First, employers’ demand for broad networks takes away insurer’s strongest bargaining chip—excluding a health care provider from its network. And few employers ever seemed to ask, Discount off of what?

The discounts were for many years calculated off of a hospital’s chargemaster. So hospitals simply hiked the prices on the chargemaster every year before sitting down at the negotiating table. If they hiked prices by 10 percent and then gave a 5 percent larger discount to an insurer, the hospital still came out ahead.

Insurers got wise to this charade and began inserting in their contracts limits on how much hospitals could hike their chargemaster each year. But hospitals got around those limits. They would hold flat or even cut the prices of services that they rarely performed—while aggressively raising the price on services they performed a lot.

Because the chargemaster was not weighted based on the volume of each kind of procedure, this maneuver kept prices lower on paper, but in actual fact, raised them for the services hospitals were actually doing.

So larger and more sophisticated insurers moved to negotiate contracts based on diagnosis-related groups, or DRGs—a classification system for hospital procedures based on the severity of each patient's symptoms. Each DRG is assigned a dfifferent price.

But there are hundreds of DRGs. Insurers would focus on a few that were costing them a lot of money at a particular hospital—say, heart surgeries at a hospital that performed a lot of them. So the hospital might moderate its price increases on heart surgeries for that one insurer, but the hospital would then raise prices on other procedures that were not in the insurer’s crosshairs.

As hospital systems merged, they could often gain an advantage on pricing. Health insurers negotiate contracts with each individual hospital facility, even when they are all owned by the same entity.

Health insurers often were less aggressive when negotiating with smaller hospitals, so when a larger hospital acquired that small hospital, it would benefit from its higher prices for a few years.

Or if an acquired hospital had a worse contract, the acquiring hospital could bring the acquired hospital under the contracts it had with its other hospitals, thereby gaining an advantage from higher prices.

If you've ever wondered why prices can vary so dramatically from hospital to another, even in the same neighborhood, these are the reasons why.

“There was all kinds of gaming,” said one local health care executive. “It’s all negotiating power positioning, how much negotiating leverage you have.”

Contracts between hospitals and health insurers are in flux right now, with Medicare and private insurers trying to pay hospitals based on patient health outcomes, not merely based on volume of procedures. Also, employers, individuals and insurers are hinting that they are willing to exclude health care providers from their networks.

But Kocher and Emanuel don’t think those changes will be enough. They want three key things to happen to bring the health care games to an end:

1. Require all payers—that’s private health insurers such as WellPoint and government programs such as Medicare—to make their medical claims data publicly available, although stripped of patient-identifying information.

2. Encourage all health care providers—hospitals, doctors and nurses—to use these payer data to give every patient personalized pricing information before he or she receives care.

3. Make total price information available to health care providers who are working in contracts that reward them for reducing health care spending.

They also think health insurers and employers should make use of services like Castlight Health, which I wrote about in January. Kocher is on the board of Castlight.

What do you think about these proposals? Are they feasible? Will they have any real effect on the rapid growth of health care prices?