New benefit designs have the potential to help healthcare organizations move toward a more rational pricing system.


In 2006, HFMA published Reconstructing Hospital Pricing Systems: A Call to Action for Hospital Finance Leaders, part of the Association’s PATIENT FRIENDLY BILLING® initiative. In the report, HFMA defined five characteristics of a rational pricing system:

  • Is simple to administer and communicate to various stakeholders, including the public
  • Uses a framework that is rational and defensible in relation to objective benchmarks, such as cost and market price
  • Creates accountability by empowering consumers to make price comparisons
  • Allows for full coverage of financial requirements related to providing care and other community benefits
  • Provides stability and predictability in administrative processes

A recent story in the Los Angeles Times about a reporter’s run-in with the payment side of our healthcare system suggests how far the industry remains from a rational pricing system (Lazarus, D., “First the Cat, Now the Health System Puts the Bite on Me,” Jan. 15, 2013). The reporter required hospitalization after a cat bite became infected. His room was priced at $4,000 a night (more than the nightly cost of a 1,400-square-foot suite at the Beverly Hills Hotel). The generic equivalent of an over-the-counter pain reliever came in at $16 per pill. Inserting a tube in the arm for an intravenous drip at home was priced at $2,352. 

Of course, the total amount paid by the reporter and his insurance company was significantly less than the total price of $52,660 reflected on the bill. Asked about the difference between the amount billed and the amount paid, the CEO of the hospital where the reporter received his care admitted, “It’s funny money. It’s not even there.”

In January, I commented in this column on the growing demand for greater transparency on price and cost data. But the situation encountered by the Los Angeles Times reporter highlights just how opaque prices are under the current system. Charges bear little relationship to the amount due from the insurer and patient. That amount, in turn, depends upon the rate negotiated between the hospital and the insurance plan, which varies from plan to plan. The patient is left confused by billing statements that show prices far in excess of the amount actually paid.

New benefit designs that encourage patients to shop for—and healthcare providers to compete on—the best price for care have the potential to begin moving the industry toward a more rational pricing system. Two examples of such benefit designs are reference pricing (also referred to as value pricing) and centers of excellence. In both cases, large self-funded employers have taken the lead in developing these benefit designs. Both can be seen as outgrowths of the movement toward consumer-driven health care in employer-sponsored insurance, but each brings a unique twist to consumer-driven health care’s reliance on patient cost sharing.

Reference pricing establishes a set maximum, or reference, price for a given procedure. Healthcare organizations that agree to meet or stay below that reference price and meet or exceed quality thresholds are designated as preferred providers. Employees who use these facilities for a procedure typically face nothing more than their standard deductible or copayment in out-of-pocket costs. If an employee chooses a facility with prices above the reference price, however, the employee is responsible for the full difference between the reference price and the price charged, in addition to any standard deductibles or copayments. In areas with wide variations in price, that difference can be substantial.

Centers of excellence have focused to date on a select set of nonemergency procedures in areas such as cardiology and orthopedics. Facilities that have established strong reputations for the quality of their outcomes in these procedures contract—often with large, national self-funded employers—to offer the procedure at a discounted price, on the assumption that the discount will be made up by increased volume. One of the earliest and best-known of these arrangements is between Cleveland Clinic and the national home-improvement retailer, Lowe’s. Last fall, Walmart announced a “centers-of-excellence” program that will provide heart, spine, and transplant surgeries at no out-of-pocket cost to Walmart associates at six designated centers of excellence across the country. Because undergoing a procedure at a center of excellence often requires a patient to travel, these types of programs typically provide an incentive, such as Walmart’s removal of out-of-pocket cost exposure, to encourage selection of the center-of-excellence facility.

On the governmental side, the bundled payment pilot being administered by the Center for Medicare & Medicaid Innovation (CMMI) is also encouraging healthcare organizations to restructure their pricing. Organizations participating in the pilot negotiate a discounted target price for a bundled set of services with CMMI and share in the savings if they do better than the target price. CMMI has not, however, developed financial incentives to encourage Medicare beneficiaries to use pilot participants, which reduces the potential for enhanced volume that reference pricing and center-of-excellence models can offer preferred providers.

To the extent that reference pricing, centers of excellence, and bundled payments ask healthcare organizations to construct reliable, sustainable prices for healthcare services, they represent significant potential for moving toward the characteristics of a rational pricing system described in HFMA’s 2006 report. 

On the provider side, the need to determine a fixed or target price for services will make healthcare organizations more focused on accounting for the full costs of providing those services and more sensitive to market prices—key benchmarks in a rational pricing system. For employers and patients, the financial benefits of using a preferred provider or center of excellence can be clearly communicated and easily understood. Reference pricing, in particular, encourages accountability by giving patients incentives to make price comparisons in selecting providers and to reject providers that cannot provide reliable preservice price estimates. As the healthcare system moves toward population health management, hospitals that can reliably price their services will also be favored for the stability and predictability they offer to entities managing a population’s cost of care.

Continued efforts by employers and government programs to contain rising healthcare costs, combined with trends toward population management in which hospitals will be increasingly perceived as cost centers, will only intensify the pressures on healthcare organizations to compete on price. Reference pricing, centers of excellence, and bundled payments challenge healthcare organizations to restructure their pricing systems—a process that will be both time-consuming and subject to risk. But organizations that are able to meet this challenge will be well situated to compete in a more value-driven healthcare system. 

James H. Landman, JD, PhD, is director, thought leadership initiatives, HFMA, Westchester, Ill. (

Publication Date: Friday, March 01, 2013

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