Radiologists follow FedEx with flat-rate prices. Is this the future of health care?

Imagine if FedEx and UPS used a price system like hospitals and doctors.

You would ask how much it would cost to mail a package, and they would tell you that information is impossible to determine until they know how large the package is, where it’s going, and whether the delivery workers run into any unforeseen traffic or flight delays along the way.

FedEx and UPS would say, “Just give us the package and we’ll send you the bill after we deliver it.”

Even if angry customers said for years that this was unacceptable, the delivery companies would shrug and say, “I’m sorry, that’s just the way it is. The level of complexity in the U.S. transportation system—not to mention the impact of weather (we’re even dealing with climate change these days!)—makes things just too difficult to predict. It’s not like we’re selling widgets here.”

But somewhere in history of shipping services, a towering genius hit upon the solution: flat-rate pricing. In 1680, a London merchant started a service that delivered letters anywhere in London for the standard rate of one penny. The Royal Post of England introduced uniform rates—one penny to send a letter between any two points in England—in 1840.

So this is hardly a new concept.

So now tthe U.S. Postal Service, and FedEx and UPS after them, look at the average time and resources it takes to deliver letters and packages, and then they put a price on that. They stratify those prices for larger and heavier packages.

It’s not as if all packages cost exactly the same amount to deliver. Rather, delivery services set a standard price that covered the range of costs incurred for various packages. Some packages probably are money-losers, but those losses are offset by other money-making packages.

This system has worked phenomenally well for FedEx and UPS. (The USPS is another story; but if you had the 435-member U.S. Congress acting as your board of directors, do you think you could run any kind of successful enterprise?)

Shipping customers benefit from a simple—and most importantly, predictable—pricing scheme.

Finally, this concept is catching on among health care providers. There are more than 4,400 direct-care physician practices now, many of which use some sort of flat-rate pricing or pricing menu for at least some of their services.

Some employer clinics, such as Indianapolis-based Expedite Health, are using a similar concept.

And most Indianapolis-area hopsital systems are offering upfront prices on joint replacement surgeries.

But I was especially intrigued by a new flat-rate pricing scheme introduced this year by Northwest Radiology Network.

The Indianapolis-based practice of 50 radiologists shrunk the bevy of imaging procedures to just 12 categories, which you can read here.

Northwest Radiology didn’t make any distinction based on what part of the body it was scanning, just what kind of scanner used (X-ray, CT, MRI, ultrasound), whether it required contrast fluid and whether it required a set of two images.

It then assigned a price to each one, somewhere in the midpoint of the prices it would normally be for the different body parts it would scan. The flat-rate prices are also in the mid-point of the prices Northwest Radiology has negotiated with health insurers.

X-rays cost no more than $50, ultrasounds no more than $150, CT scans no more than $600 and MRIs no more than $800.

The price is a ceiling, meaning if a patient’s insurance plan actually would have paid more, Northwest Radiology promises to bill no more than it’s flat-rate price. If a patient’s insurance plan had negotiated a lower price with Northwest Radiology, then the patient will only be charged that lower price, even though it’s lower than the flat-rate price.

“As a consumer of health care, not just a provider, I would love to know the cost of care before going in. This was, at least right now, the best solution that we were able to come up with,” said Dr. Kent Hansen, CEO of Northwest Radiology. He said Northwest Radiology had grown frustrated trying to figure out prices upfront for the growing number of patients with high-deductible plans.

The flat-rate pricing plan proved attractive to Anderson resident Cindy Williams. When a nurse practitioner listened to the blood flowing through her carotid artery in her neck, she thought she heard a sign of blockage and so recommended an ultrasound of both sides of Williams’ neck.

So she called Community Hospital Anderson, where she had usually gone when she needed an imaging or lab test. It was able to quote her a price. But it was $800 to $900. And that didn’t include the fee for the radiologist to read the image.

“I almost didn’t have the test done, because I didn’t want to spend $1,000 that I didn’t have,” said Williams, 58, who has a $2,500 deductible on her health plan with Anthem Blue Cross and Blue shield, which is partially paid for as part of her retirement benefits from the state of Indiana. “How many other people don’t get things done, because they can’t afford it, and then possibly lose their lives because of it?”

But Williams called Anthem, which is always glad to refer its patients to low-cost imaging facilities (read: non-hospital facilities). Williams called at least seven places and Northwest Radiology’s guaranteed price of $150 was by far the cheapest.

She traveled to Northwest Radiology’s facility near the St. Vincent Indianapolis Hospital campus, had the procedure and found out her artery was fine.

Northwest Radiology is hoping it attracts higher numbers of patients, like Williams, because of its flat-rate pricing. The practice saw a slight uptick in patients at that facility and its second location, on 106th Street in Carmel, during the first quarter, but Hansen isn’t yet sure it’s because of the pricing plan.

Northwest Radiology is not offering flat-rate pricing for imaging exams it does for Indianapolis-area hospitals, which represents 90 percent or more of
its business.

So the plan right now is a small experiment to see if Northwest Radiology can use flat-rate pricing to attract more customers without losing money in the process.

“There is some financial risk to be able to do this,” Hansen said. Since some of its scans are lower than the amount of reimbursement it would normally have received from insurers, Northwest Radiology could lose money if larger chunks of patients choose flat-rate pricing on those procedures than the chunk that chooses the profitable scans.

When Hansen pitched the idea to the board of directors and the other physicians at Northwest Radiology, they loved it, but they immediately asked, “What does this do to us financially?”

Even so, Northwest Radiology plunged ahead because they think, in an age where patients are spending increasing amounts of their own money for health care, they had to have a better system than what they had used before.

“Flat-rice pricing probably is the future,” Hansen said. “I think people want it.”