Ray Lefton

Hospital pricing has been in the public and governmental spotlight for the past several years. But realistic, root-cause solutions are hard to come by. 

At a Glance

Illogical pricing has placed hospitals at a competitive disadvantage with nonhospital providers for outpatient services. For some hospitals, discounting coinsurance may improve that scenario.

The illogic in hospital pricing has arisen from two decades of hospital cost shifting to cope with shortfalls in governmental payment and the financial impact of providing care to the uninsured, indigent, and no-pay patient population.

One contributor to hospitals' pricing illogic is Medicare's payment rules. Until August 2003, many hospitals were increasing charges to maximize Medicare outlier payments. Medicare budgeted outlier payments equal to 5.1 percent of total diagnosis-related group (DRG) payments across the country. Loopholes existed that allowed hospitals to realize significant outlier payments by increasing charges each year in excess of their underlying costs.

When it comes to pricing for uninsured patients, most hospitals have developed self-pay fee schedules based on a factor of Medicaid and/or Medicare in conjunction with a separate free care or charity care policy based on eligibility. For example, Princeton HealthCare System complies with state guidelines allowing anyone earning less than 200 percent of the family federal poverty level to qualify for charity care. Also, we have implemented a self-pay discounted fee schedule. All pure self-pay bills are discounted to a percentage of the Medicare allowable rate at time of billing.

These efforts have helped Princeton maintain good citizenship with its community. However, these efforts do not resolve the underlying issue of exorbitant hospital prices.

Some articles have proposed developing a rational chargemaster using relative value units or some standard cost accounting system where a connection exists between underlying cost to provide a given service and price. However, this practice has yet to be proven successful in many organizations. Simply rolling back prices also is not an option. This often means accepting a lower reimbursement from those payers that still pay for some services as a percentage of charges (e.g., commercial insurance, workers' compensation). Similarly, all things being equal, a hospital would have to take a one-year reduction in Medicare outlier payments. With very few exceptions, hospital margins are not sufficiently profitable to absorb such a hit.

Ideally, a hospital could work with payers to negotiate a budget-neutral approach to reduce charges in exchange for a higher payment percentage. However, few hospitals have yet been successful in this effort because this would require all payers to participate (many of the charge-based payers are related to commercial, auto, and workers' compensation-which, for a particular organization, can be dozens).

Illogical Pricing and Competitive Disadvantage

For the time being, charity care and self-pay schedules have prevented further government intervention into hospital prices. However, hospitals' exorbitant prices continue to be a barrier to a strategic imperative for most hospitals: successful competition with nonhospital providers for outpatient services.

As hospital margins are squeezed because costs continue to rise at a faster rate than payment, a hospital must grow volume to remain profitable. Also, many hospitals have negotiated managed care contracts accepting inpatient per diem or case rates lower than their full costs, making up this shortfall by negotiating more lucrative outpatient rates (consisting of fee schedules and charge-based payment).

Princeton HealthCare System has targeted many of the traditional outpatient services for growth. In one sense, these are good opportunities because Princeton is located in an affluent service area. However, with that advantage comes tremendous competition from nonhospital entities-competition that is especially difficult because the current pricing system makes hospital prices higher than those of nonhospital entities.

Hospitals can implement various methods to increase outpatient volume, from improved customer service (easy patient scheduling, registration, and parking; quick turnaround times) to improved physician service (electronic results reporting and timely follow-up). However, even with top-notch service, Princeton-like many hospital systems-finds itself at a disadvantage because its price structure results in patients having higher out-of-pocket costs compared with costs that patients would be charged in a nonhospital setting.

Pricing Disadvantage Explained

Hospitals charge higher out-of-pocket costs for outpatient services because they need to negotiate higher rates to cover less profitable, higher-cost services such as emergency care.

Most managed care contracts for hospital outpatient services pay based on a Medicare ambulatory payment category (APC) methodology, fee schedule, or percentage of charges. With very few exceptions, managed care organizations reimburse nonhospital providers based on a prevailing fee schedule (and rarely based on charges), so no incentive exists to raise charges beyond a reasonable level. Most primary insurances pay a percentage of the approved allowable amounts. For example, if the insurer pays 50 percent of charges and the patient has a 20 percent co-insurance, the patient-pay portion will be 10 percent of charges. If the hospital charge is five times the rate charged by a freestanding center, this will result in a substantial difference in the patient balance due.

View Exhibit 1


In this example, the patient balance due for a service delivered at a hospital is substantially greater than for the same service delivered at a freestanding outpatient facility.

Lost referrals and patient complaints. Most physicians who refer to Princeton HealthCare System are aware of the difference in Princeton's pricing structure compared with that of nonhospital options. Understandably, these physicians sometimes are reluctant to refer patients to the hospital when doing so means saddling their patients with higher out-of-pocket costs.

Also, as high-deductible plans and medical savings accounts become more commonplace, Princeton is seeing more patient complaints attributed to high charges and resulting high out-of-pocket costs.

Attempted solutions. As mentioned earlier, hospitals have successfully discounted prices for uninsured patients. But few solutions exist for insured patients. Some hospital managers deal with pricing complaints on a case-by-case basis. However, a consistent, defensible, and legal approach to pricing is far preferable.

Princeton offers installment plans and is establishing a relationship with a bank to develop discounted no-recourse loans at a very low interest rate. However, these patient payment options do not address the root cause of the problem.

A Possible Solution: Discounting Coinsurance

To compete more effectively with nonhospital providers, hospitals need to find a legitimate way to reduce a patient's out-of-pocket costs until a longer-term restructuring of the hospital pricing system becomes feasible.

The question naturally arises: May a hospital waive or discount some types of patient copayments?

When Medicare introduced APCs many years ago, the system included a provision under which hospitals could waive hospital copayments if requested, approved in advance by the Centers for Medicare and Medicaid Services (CMS), and implemented uniformly. Because copayments are designed to guard against the overutilization of services, CMS generally has not approved waiving outpatient copayments. Most managed care insurance contracts are silent in terms of how hospitals must approach coinsurances.

It is important to understand that reducing a patient's out-of-pocket costs must focus only on coinsurance as distinct from deductibles (which should never be discounted) and copayments, which are a fixed amount per encounter. Coinsurance is typically a percentage of the allowable amount (after any deductibles are met).

One strategy to mitigate patients' high coinsurance payments is to provide a uniform discount. This is separate from the pure self-pay discounted fee schedule. Under this scenario, the provider would bill the insurance at full charges. Should an unpaid patient paid balance exist, the patient account representative would review the account for any coinsurances due (excluding deductibles) and apply a fixed percentage discount to the coinsurance amount.

One Scenario

Consider a hospital wanting to increase its laboratory volumes and compete more effectively against larger national contracted providers. A hospital could accomplish this goal by growing hospital-based referrals or through developing a laboratory outreach initiative.

For the noncapitated business, nearly all the national providers have negotiated fee schedules. If the hospital contract pays as a percentage of charges, the physician may be reluctant to refer the laboratory work to the hospital because the patient may end up with a large copayment.

Medicare beneficiaries under Part B, after meeting a $131 annual deductible for all outpatient services, have no laboratory copayments or coinsurance due. As such, there are no Medicare restrictions about applying discounting to any unpaid outpatient laboratory coinsurance amounts due. For other services where a Medicare coinsurance amount exists (all other services such as radiology and cardiology), applying a percentage discount to the unpaid coinsurance amount such that it never becomes less than the Medicare coinsurance amount would be a reasonable approach.

Operational and Regulatory Questions

Unfortunately, most of today's hospital billing systems cannot automate the process of applying coinsurance discounts. To do so, the system would need an automated secondary billing functionality, allowing it to distinguish between the hundreds of different patient liability reason codes. The system also would need to be able to perform multiple contractual write-off adjustments. Lacking this functionality, the process is manual and tedious. However, additional patient volume and revenue may well outweigh the labor cost of this process.

Hospitals interested in implementing this process should consult with legal counsel about possible regulatory barriers. Discounting the patient portion after receiving the insurance payment may be seen as pushing the regulatory envelope. However, consider the concept of discounting coinsurance in light of the debate that took place over the appropriateness of self-pay discounts, prior to the Office of Inspector General and CMS taking a position on the issue in 2003 and such discounts becoming common.

CMS is concerned with the consistency and uniformity of approaches across all payers; however, different approaches can be taken for different services. Accordingly, coinsurance can be discounted, provided the discounts are implemented uniformly across all payers for a specific service. As noted, greater flexibility exists with respect to laboratory services because no coinsurances exist under the Medicare program, whereas, for other services, one has to be sensitive not to discount below Medicare coinsurance amounts.

Moreover, CMS is very concerned that any approach taken does not result in an increased cost to Medicare due to overutilization. Discounting coinsurance from nongovernmental payers would not affect the level of utilization. Rather, it would be designed to remove high hospital prices as a competitive disadvantage in attracting nongovernmental patients to the hospital.

Action Versus Inaction

With the growing movement of consumer-directed health care and patients paying a larger portion of the healthcare bill, hospitals' irrational chargemasters have created a distinct disadvantage compared with pricing of nonhospital providers. Reducing prices, renegotiating contracts, or evaluating different discounting methods are some of the limited options available, especially as standard outpatient services are seen more like a commodity. Any approach has different reimbursement, risk, and operational challenges and effects. Nonetheless, doing nothing may result in the hospital continuing to lose outpatient market share. For many hospitals, that could mean a slide into negative margins and possibly the loss of a vital resource for the community.

Ray Lefton, DDS, FHFMA, CPA, is vice president of finance, Princeton HealthCare System, Princeton, N.J., and a member of HFMA's Philadelphia Chapter (rlefton@princetonhcs.org). 

Publication Date: Monday, October 01, 2007

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