Written by Lindsey Dunn
Costing-shifting has long been used by hospitals to recoup losses incurred by treating Medicaid and Medicare patients, but employers — armed with increasingly sophisticated data on employee health costs — are increasingly pressuring hospitals and insurers to end the practice. In the past, insurers have accepted the practice, passing the cost onto their members through premium increases, but recent signals in the marketplace suggest this pricing strategy is coming to an end, says Mary Kate Scott, principal, Scott & Company, and an enterprise solutions expert for Nuuko.
“Only a few years ago, hospitals would price by considering: ‘what do I need to get on a discharge basis per day?'” says Ms. Scott. “They would then evaluate what they get from Medicare and Medicaid and determine the difference needed to reach that target rate. That difference was traditionally passed on to commercial payors and employers.”
Employers demand a direct role in contract negotiations
Today, employers are growing savvier because more are self insuring their employees and families, which gives them access to detailed data on employees’ health status and utilization. They have begun to realize costs for the same procedure can vary dramatically by provider and are increasingly crying foul over the practice of cost-shifting, which is a key contributor to these pricing differences.
“In the past, companies would require a minimum of 5,000 covered lives before considering self insurance, but today, mid-sized employers with 2,000-3,000 covered lives are self insuring and have rich data on their employees’ healthcare costs,” says Ms. Scott.
Fed up with the inability of insurers to bend the cost curve, more and more employers are using their new-found knowledge of their employees healthcare usage to take on negotiations directly with providers.
Cost-shifting is becoming less accepted
In addition to employers, insurers may grow reluctant to accept cost shifting as healthcare reform expands insurance coverage. Patients that may have at one time been uninsured will, beginning in 2014, generate revenue for the hospital, albeit, in many cases, at Medicaid rates.
Additionally, consumers — who are increasingly enrolling in high deductible health plans — are expected to demand more information on hospital pricing. While many of them have access to contracted rates, most publicly available data on hospital pricing compares “list” pricing. This is problematic because contracted rates are expected to receive a discount over list pricing. “When a majority of the patients are receiving, through their insurer, a two-thirds discount on the list price, the list price becomes unrealistic.”
What does this mean for hospitals?
Hospitals can expect an increased demand from employers, insurers and consumers for transparent pricing that reflects the true cost of providing care for a certain procedure. Hospitals can also expect employers to direct employees to low-cost, high-quality hospitals. But employer demands won’t stop there — they’ll additionally push to keep lowering health costs and will seek out innovative arrangements with providers to help produce these savings.
These arrangements may include accountable care or medical home models with cost-sharing relationships between employers and providers as well as other innovative programs, such as payment bundling, aimed at reducing the employer’s healthcare costs. For example, a recent pilot program by Boeing that utilized a medical-home model for the employer’s chronically ill employees realized a 20-percent in the first year.
In order to protect revenue, hospitals will need to be open to these arrangements and work to implement protocols and standards to coordinate care and reduce waste, says Ms. Scott.
How hospitals make money will change, but that doesn’t mean hospitals can’t be financially successful under this new model. In fact, there are opportunities for these high-quality, low-cost hospitals to gain market share and prosper under this new model.
Ms. Scott founded Scott & Company in 2001 after seven years with McKinsey & Company. She is a health and business management consultant who has worked with healthcare stakeholders and leaders for over twenty years.