Understanding the Power of Price Transparency in Healthcare

Executive Summary

In the wake of the implementation of the Affordable Care Act and the concept of a “Healthcare Marketplace,” the cost of healthcare to the end consumer has been under a greater magnifying glass. A recent survey by the American College of Physician Executives served as a demonstrative signal that the public’s demand for actual transparency in the pricing of medical procedures is truly coming of age. The fact that more than 73 percent of the survey respondents endorsed the concept of patients having the ability to price shop for healthcare treatments and procedures serves as proof that a sea change has indeed begun.

As part of the Elliott Davis Decosimo Healthcare White Paper Series, Ken Conner, an Elliott Davis Decosimo Shareholder and the firm’s Healthcare Practice Leader, examines the state of price transparency in various facets of the medical professional. While the move to price transparency is in its infancy and many providers will simply take a wait-and-see approach, the prospect of ignoring price transparency will prove costly, particularly to hospitals. Mr. Conner notes the polling trends and the increasing body of evidence strongly suggest that the move to greater price transparency is not a question “if.” Price transparency is now a question of “when.” In this information age where shopping online has become the norm, “health consumers” have a growing desire to see competitive pricing. The healthcare equivalents to “priceline.com” may soon become commonplace in an ever-changing changing market, and there will be countless other ripple effects as accurate price information for healthcare becomes more readily available to a cost-conscience general public. As Mr. Conner makes clear in this White Paper, price transparency has the potential to reshape the landscape of the medical services marketplace.

Dialing For Price Info: Are Health Providers Ready to Take the Call?

A recent survey by the American College of Physician Executives served as a demonstrative signal that the public’s demand for actual transparency in the pricing of medical procedures is truly coming of age. In this instant-information era where comparative shopping can be done with the click of a mouse, it should come as no surprise that leaders from hospitals, group practices, academic medical centers and even insurance companies participating in the ACPE survey are recognizing how market forces are impacting the increasingly louder call for medical price transparency. The fact that more than 73 percent of the survey respondents endorsed the concept of patients having the ability to price shop for healthcare treatments and procedures serves as further proof that a sea change has indeed begun.

As patients continue to make the transition toward becoming true healthcare consumers shopping in a market that is being redefined by the Affordable Care Act, hospitals and all other health providers will be faced with a new series of questions related to cost. While the large managed care organizations provide platforms for cost comparisons, and employers are looking at their cost and the providers in the network they select, the early versions of a healthcare “priceline.com” do now exist in various forms. However, for the general public, the most direct method of searching for price information quite often involves picking up the phone. The real question for healthcare providers is this: What does a health consumer hear when these “price check” calls? Asked another way, what is the organization’s commitment to customer service?

Does This Sound Familiar? In developing this White Paper, our researchers spoke to an ambulatory surgery center (ASC) client who had prepared information based on specific high-volume cases. Given the handful of people that might field an inquiry, it seemed quite manageable. Hospitals, too, might have a process for handling inquiries, but the challenge for mid-sized to large hospitals is the following: Where does the patient inquiry enter the system and how many more options for tests and procedures exist? Unless a hospital has trained staff from telephone operators to registration to scheduling to departments administering the test, the following conversation is a distinct possibility:

Patient (P): How much will I have to pay for an MRI of my back if I use your facility?

City Medical Center (C): Well, that depends on a lot of things. It’s hard to say.

P: I have a high deductible plan and I want to find the best price.

C: Oh, well, we will need a deposit if you have a high deductible.

P: Ok, I can do that, but first I need to know how much it is going to cost me?

C: We will need to know your insurance.

P: Best Care Insurance.

C: Ok, which network?

P: How would I know that?

C: It should be on your card.

P: Oh, I see. I am in the A network

C: Ok, I will have to check and call you back.

P: You mean you don’t have the information?

C: No, someone else keeps track of that.

The follow-up call from the hospital…

C: I checked and they said it would be about $500, depending on the actual scan.

P: They are doing an MRI of my back.

C: Yes, but what kind of MRI?

P: How many kinds are there?

C: There can be several different kinds.

P: I think my doctor’s office scheduled it. Can’t you check to see what kind he scheduled?

C: No, that would be in the department.

P: Can you check with the department?

C: I am pretty sure, because of HIPAA, that they won’t tell.

P: Would they tell me? I really need to know how much it is going to cost.

C: They can tell what you are scheduled for — if you can provide proof of who you are. But, they won’t know how much it cost.

P: Is there anyone who can help me?

C: Well, these insurance contracts are pretty complicated, but I am pretty sure that it is about $500 dollars.

Responding to the ‘Health Consumer’ Call For Action on Pricing Information

In the wake of the implementation of the Affordable Care Act and the concept of a “Healthcare Marketplace,” the cost of healthcare to the end consumer has been under a greater magnifying glass and there has been growing media coverage on the state of price transparency in medicine. Market forces — driven by greater consumer awareness, increasing presence of high deductible insurance plans and, in some cases, local competition – have made this issue more than a top story in Time Magazine, the Washington Post, National Public Radio and many other media outlets. It has become an increased concern in the medical community as evidenced by the recent release of a report by the Healthcare Financial Management Association (HFMA) on price transparency, providing definition and direction to providers in moving toward more transparent pricing.

While the move to price transparency is in its infancy and many providers will simply take a wait-and-see approach, the prospect of ignoring price transparency will prove costly, particularly to hospitals. The polling trends and the expanding body of evidence strongly suggest that the move to greater price transparency is not a question “if.” Price transparency is now a question of “when”…as in the following questions: When does word get out that one imaging center has a better price on MRIs, or that a surgery center has a lower price on screening colonoscopies? When, or more specifically, how quickly do the managed care companies adopt a strategy of using reference pricing on high volume tests and procedures? When does a company roll out an effective equivalent to Priceline.com or Hotels.com for medical testing?

The overall marketplace for healthcare is evolving at such a rapid pace that it would be easy to suggest that now is the answer to all three of our previous “when” questions. It’s true that these seismic changes are not occurring in every market and, in the eyes of most, they are not happening on a sophisticated level. But an evolution on what has become a defining issue for the medical community and its consumers is moving forward.

Consider the fact that imaging centers and ambulatory surgery centers (ASCs) from the beginning have been more or less forced to accept lower prices for their services by Medicare and managed care companies alike. They have only recently begun to truly leverage the price difference in marketing to referral sources. Reference pricing has already begun in California. The California Public Employee Retirement System (Calpers) reported a savings on $5.5 million from using Reference Pricing for knee and hip replacement.

Comparison Shopping For Medical Service Becoming A Reality

As noted in the opening, healthcare is beginning to see the rise of web-based pricing services. Companies like Castlight.com are making the data more usable by employees and employers. In fact, Castlight.com — which works primarily with larger, self-insured companies and has developed a robust price comparison system for 60 U.S. markets — recently became a public company with an IPO on the New York Stock Exchange.

The subject of price is beginning to gain traction as a marketing tool for medical service providers. An imaging center located in the Southeast recently launched a television ad campaign that noted competitive pricing and same-day results among its key points. Meanwhile, it is important to point out that hospitals themselves are offering to provide price confirmation and estimates. A Google search for “hospital price request forms” will reveal hundreds of hospitals that have set up platforms to provide cost estimates for services.

In February, National Public Radio profiled the efforts in Colorado to develop an all payer claims database for the purpose allowing prospective health customers to shop for services. The NPR story noted that the Colorado system has been built through private grants over a series of years. Colorado has started to compare both price and the quality of service. And while it has made significant progress, Colorado is still not able to provide a clear picture of pricing – partially due to the fact 20 percent of all billings in the state are processed through Medicare pricing is not available at the claims level.

While efforts for price transparency are taking hold across the country, it is obvious that the medical industry still has much work to do on this issue. In the near term, the areas of competition, price availability and reference pricing are three key components that rise to top in the examination of price transparency. The comparison of prices will only grow more sophisticated. And with each generation, price will become a bigger driver. Providers will have to figure out how to position themselves on both price and quality, so that patients can make informed choices.

Question for the Provider: How Will You Handle the Issue of Pricing Information?

As noted at the outset, the question for the medical services providers is not what is happening at a marco level that the media wants to cite, but how does a provider address the question at the patient level where the price is influenced not simply by getting the right procedure (a challenge in itself). This question also involves the insurance plan and the correct network within a given insurance company. Here is another key question: What is happening today in your facility with pricing information and price transparency?

Every hospital, ASC, imaging center and physician’s office has or should have access to patient insurance coverage including payment amount, deductible and coinsurance. As providers continue to become more proficient with pre-service collections, there are a variety of software services and vendors ready to help at this stage of the revenue cycle.

The real challenge with price transparency is when the patient has time to make the inquiry of a variety of providers. The patient might start with their insurance plan price comparison service. In researching this White Paper, we found some plans more useful than others, but, in reality, they still graded out no better than a C+ from an educated member of the healthcare industry. From our observations, it is important to note the comparisons are dependent on the patient being able to select the right test(s), and to understand the potential for additional amounts due under certain circumstances. It is not clear in many cases, how the data was developed based on the ranges given. Finally, in our brief review, there was no distinction as to when the price included the professional fee in the case of global billing — particularly in the case of an imaging center providing an MRI, or a hospital billing on the facility component only. Nevertheless, a pricing comparison is one of the options available to patients and one that is easily checked by providers trying to discern where they stand in the marketplace.

The Value of Being Prepared With Informative Answers

With all the talk about price transparency, do you know how your hospital, surgery center, imaging center, office, etc. might answer price and cost questions from a patient? Would the previous example we provided be the likely outcome of a price inquiry by phone? Who would the patient need to call? How would the patient get to that person? Does anyone really know even for the most common procedures what the cost is by insurance company or network?

Keeping our previous call example in mind, let’s now envision a scenario where the prospective patient/health customer is being given the help they need for their service inquiry…

New call…

Managed Care Company (M): Mr. Patient, this is your managed care representative, and I see from our precertification department that you are scheduled to have an MRI of the lumbar spine with contrast. Your appointment is next Thursday at City Medical Center.

P: Yes, that is correct.

M: We wanted to let you know that, if you have the scan at City Medical Center, the cost will be $600, which you will be responsible for under your high deductible. However, if you go to Healthy Medical Center, the cost will be only $499.

P: Really, I called City Medical Center and they said it would be about $500.

M: No, I am looking at it on my screen and, with contrast, it is $600. But the scan without contrast is $500.

P: My doctor sent me to City Medical Center.

M: We respect the rights of patients to choose, and since both facilities are in our network, we simply wanted to make you aware of a significant difference in price.

Understanding the Market Value of Price Information

As the healthcare industry moves forward in the information age, it will become critical for providers to know their position in the marketplace and to use their market knowledge in responding to patients’ inquires. Providers should never assume that patients will not question price. For most, they simply don’t know how to pose questions regarding price. TransUnion, a large player in the credit information and credit score market, released a study on patient and healthcare prices.

Of key interest, the TransUnion study found that only 25 percent of the patients surveyed were offered prices estimates ahead of medical services. However, 80 percent of those surveyed believe that price estimates would be helpful in making decisions and managing their healthcare costs. In another section of the TransUnion survey, 54 percent of the respondents noted that they were confused by their billings, while 62 percent of the survey participants expressed that they were surprised by the amount of their out-of-pocket billings. Given those results, it stands as no surprise that the overwhelming majority of the TransUnion survey placed such a high value on accurate price information.

Competition in the Face of Better Pricing Information

Price, quality and accessibility comprise the basic forms of competition in the medical services industry. However, competition also can be seen from a number of other directions, including other hospitals, physician offices with their own equipment and specialty providers, such as imaging centers and ASCs.

Here is the key question for medical service providers: Do you know how your pricing stacks up against all of the competitors, not just the hospitals? Many hospitals have acquired physician practices with testing equipment, and they have brought the ancillary testing under the hospital license and managed care contract. This approach has created a positive impact on the bottom line, and this conversion clearly works in the hospital’s favor until a cheaper option comes along to fill the void.

In the face of competition, hospitals will have to evaluate their managed care contracting strategies. To the extent the hospital has pushed its outpatient service pricing at the expense of the inpatient, emergency room or other services unique to a hospital, it may find itself at a disadvantage in future negotiations. As a result of this pricing strategy, a hospital may find itself having to lower certain outpatient tests (see reference pricing section below). However, it is more likely that the competition will offer price and convenience to the referring physicians

Understanding the Role of Reference Pricing

It is a probable eventuality that managed care companies will see certain high cost or high volume services as commodities that can be carved outs – especially in situations where providers contracted to offer the service on the value of the service and in situations where it is a combination of quality and price. Why would a managed care provider pay more for a given service if it can be acquired less expensively and with the same quality at a competitor?

It has become a reality in the healthcare industry that we are often too quick to rationalize the importance of a hospital-based range of services, particularly those noted on expertise and location. Hospital CFO and managed care leaders are focused on the total contract and its aggregate value. For the past 20 years or more, this approach may have been the best strategy. But, as patients are asked to carry more liability for their healthcare in terms of premium or deductibles patients (a.k.a. the healthcare customer) will seek and even demand better pricing.

Reference pricing exist in several forms. The physician community has seen the impact of the managed care companies directly with all lab testing to specific labs. This move has effectively pulled the revenue stream out of the physician office. In the reference pricing example cited in the opening of this White Paper, CalPers, representing the California Public Employee Retirement System, has developed a model system with an excellent approach. In the case of California and CalPers, more providers raised their quality and/or lowered their price in order to be included in the plan.

But we are standing on the tip of the iceberg. Consider all of the high-volume services, many of which have been profit centers for some time. One way for the managed care companies to meet this demand is by setting the price for a given service (i.e. screening colonoscopy), such that it is location neutral. Additionally, if you meet the quality standard, anyone can provide the service for “X” dollars.

Reference Pricing & Implementation of the Affordable Care Act

As various sides argue consumerism, rationing and a variety of inferences from interpretations, there will be more developments with reference pricing. In fact, reference pricing was addressed in the May edition of a Department of Labor Q & A addressing the Affordable Healthcare Act:

Question: “If large group market coverage or self-insured group health plan has a reference-based pricing structure, under which the plan pays a fixed amount for a particular procedure (for example, a knee replacement), which certain providers will accept as payment in full, how does the out-of-pocket limitation apply when an individual uses a provider that does not accept that amount as payment in full?”

Department of Labor Response: “Reference pricing aims to encourage plans to negotiate cost effective treatments with high quality providers at reduced costs. At the same time, the Departments are concerned that such a pricing structure may be a subterfuge for the imposition of otherwise prohibited limitations on coverage, without ensuring access to quality care and an adequate network of providers.

“Accordingly, the Departments invite comment on the application of the out-of-pocket limitation to the use of reference based pricing. The Departments are particularly interested in standards that plans using reference-based pricing structures should be required to meet to ensure that individuals have meaningful access to medically appropriate, quality care. Please send comments by August 1, 2014 to E-OHPSCA-FAQ.ebsa@dol.gov.

“Until guidance is issued and effective, with respect to a large group market plan or self-insured group health plan that utilizes a reference-based pricing program, the Departments will not consider a plan or issuer as failing to comply with the out-of-pocket maximum requirements of PHS Act section 2707(b) because it treats providers that accept the reference amount as the only in-network providers, provided the plan uses a reasonable method to ensure that it provides adequate access to quality providers.

“For non-grandfathered health plans in the individual and small group markets that must provide coverage of the essential health benefit package under section 1302(a) of the Affordable Care Act, additional requirements apply.”

Taking the Next Steps with Price Transparency

The healthcare industry has made significant strides in recent years to offer the healthcare customer greater clarity on the cost of services and the various competitive options available to the consumer. As we noted in our White Paper, Taking Bold Steps With Hospital Pricing, the public is becoming keenly interested in learning more about the true costs of medical care, which has quickly earned a standing as one of most significant “pocketbook” issues of our time. And while the first footprints on the journey toward price transparency in healthcare can be traced, the next steps will be vital in meeting the growing demands of an increasingly discerning marketplace. Six immediate steps should be taken by healthcare providers. They are:

1. At a minimum, establish a priority to become more aware of pricing issues, particularly with high volume services and in identifying the current level of demand. Gather the data that is publicly available on competitor pricing.

2. Gather the data that is publicly available on competitor pricing. Know what your competitors are doing, by talking to physicians, managed care companies, employers, consumer groups and your own patients.

3. Know how your patients are provided with price information from the standpoint of overall access to prices, accuracy (including qualifying conditions) and timeliness. Consider your current managed care contracting strategy and how it plays into the near future.

4. Know what your competitors are doing, by talking to physicians, managed care companies, employers, consumer groups and your own patients.

5. Educate yourself on available tools and trends.

6. Consider your current managed care contracting strategy and how it plays into the near future

Price transparency has the potential to reshape the landscape of the medical services marketplace. Ignoring the future role of price transparency is not a realistic strategy and the ostrich approach will place providers at a competitive disadvantage. However, based on the current trends, it is reasonable to believe that healthcare providers who take the time to gain a greater perspective on the patient’s role (and power) as a healthcare consumer will be better positioned to positively shape the healthcare market of the future.

We Can Help!

The revision of pricing structures and cost models within the healthcare industry is an intricate process. Healthcare providers must address issues of competitiveness, profitability, contract pricing, communications with patients and referral sources and marketing strategies, short term and long term. The first step is to determine your organization’s position on price transparency? What role does price transparency play in applicable contract negotiations? What steps have you taken to prepare your staff to answer pricing questions from patients and prospective patients?

The Elliott Davis Decosimo Healthcare Services Team can assist healthcare providers in finding the answers to an efficient and effective price transparency/costing model strategy. By utilizing our team of experienced professionals, healthcare providers can develop a costing structure with the type of transparency in pricing that can offer your practice or organization a competitive advantage in your market. Let our advisors evaluate your strategic needs on pricing and cost structure.