Scott SchwabNearly one year after Steven Brill’s seminal article in Time magazine, “Bitter Pill: Why Medical Bills Are Killing Us,” the aftershocks are still being felt across the industry. Many other prominent media outlets followed up with related articles, and regulators are amplifying their efforts to force price transparency upon all healthcare providers by releasing claims data and requiring providers to post rates online for common procedures. The implication is clear: The call for pricing transparency is here to stay. So the question remains: what should we do about it? 

Jim KingWhether it is reference pricing in California or a hospital pricing database in New York, legislators from coast to coast are testing approaches to see what works in the healthcare industry. It is to a provider’s benefit to make the first move to avoid being told what to do. Here are some strategies to explore.

Reduce prices. For decades, the gap between billed charges and payment rates has widened to the point where most hospitals collect less than half of what they charge. The logical response is to reduce prices to what payers have agreed to pay. But this approach can be difficult to execute because negotiated rates are often linked to billed charges.

A prominent children’s hospital recently reduced all its prices by 30 percent. The hospital plans to offset the $10 million drop in expected payment by renegotiating with health plans to adjust their discount rate.

Post prices. The medical tourism industry is on the rise, and many international hospitals post prices online for common procedures. Their rates are all-inclusive and, even after factoring in travel costs, a fraction of the stateside cost. U.S. providers can respond by advertising their own package prices. But they need to take into account their costs, existing contracts, and other risks associated with setting this price. Even though U.S. hospitals probably cannot compete on price alone, they can at least provide patients with a transparent alternative.

A few U.S.-based surgical centers now post all-inclusive procedure prices online. The fine print often states that the quoted rates are only for patients whose insurance will not be billed.

Estimate prices. In virtually all other industries, consumers can easily window-shop and compare prices before making a purchasing decision. In health care, price estimations are difficult for many reasons, including comorbidity, physician influence, and contracted rates. But those reasons can no longer be used as an excuse for avoiding the question. Claims data can be leveraged to easily estimate a range for most common procedures.

Several hospital systems provide price estimation tools on their websites. Traditional usage has been low, but many expect interest to increase as a greater financial burden is placed on patients through rising deductibles.

Negotiate prices. Complex negotiations between providers and payers have created many of the issues around price transparency. A potential countermeasure is to cut out the middleman and negotiate directly with employers, which are in a better position to influence patients. By focusing on core competencies, a provider can negotiate a profitable, but below-market, rate with employers on those procedures where the quality metrics are strong to drive volume.

Many of the largest U.S. employers have entered into agreements with some of the most renowned hospitals and health systems for complex medical procedures. These arrangements have led to better outcomes, lower costs and good publicity.

By taking the first step, providers can place a stake in the ground around which future discussions can be held. The alternative is to wait and see what is required in the future and hope for the best. But hope is not a strategy. Pricing transparency is coming. It is up to us to determine what shape it takes. 

Scott Schwab is a senior manager in Ernst & Young LLP’s Health Care Advisory Services practice. 

James King is a partner in Ernst & Young LLP’s Health Care Advisory Services practice. 

The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.

Publication Date: Thursday, February 20, 2014