Financial Leadership

Message to Providers: Expect More Pricing Scrutiny

January 10, 2017 10:40 am


There is an old adage in the economics world that says, “Cost to one person is income to another.”

That might be an appropriate way to characterize health care today. Many cable TV news pundits on both sides of the partisan divide have stated that the Affordable Care Act (ACA)—or Obamacare—has failed to rein in healthcare costs to the U.S. economy and that healthcare spending will soon make up one-fifth of domestic GDP. So far, most of those pundits have pointed at health insurance plans as the culprits in that healthcare cost growth.

A June 2016 report by Pricewaterhouse Coopers, Medical Cost Trend: Behind the Numbers 2017 , projects that healthcare cost inflation will be at 6.5 percent during 2017, four times the rate of inflation for the overall U.S. economy, which is 1.7 percent. That makes for an attention-getting headline.

But like all good businesses, health insurers must increase revenue to offset increased operating expense—payments to providers. Moreover, about 80 percent of that “cost” is attributable to healthcare provider organizations, with revenue growth for hospitals running at about 5.6 percent and for physicians at an even higher rate rate of 6 percent, according to the U.S. Census Bureau Quarterly Services Survey for the third quarter of 2016.  So far, the pundits keep pointing at insurers, premium hikes, and insurance exchange dropout rates. When the spotlight points to the provider—and I mean when, not if—will we be ready?

The dust has started to settle around the Trump campaign promise to “repeal and replace” the ACA. Recent news articles have cited a $65 billion price tag in bad debts and charity to healthcare providers when the insurance mandate is eliminated and replaced with expansion of health savings accounts (HSA) as proposed by the president-elect. If this plan comes to pass, consumers are likely to be a lot more price conscious as they shop for elective care. They will also be more prone to making a media spectacle of emergency fees that cannot be price shopped but seem like price gouging.

I have been asked by reporters to opine on the high prices of items on emergency service bills, and like all the rest of us, I have used the logic that it’s misleading to try to compare the charge for a bag of IV saline with the list price from a supplier; there are other costs involved such as nursing labor, storage, and uncompensated losses. But even with all of those costs layered on, a $485 charge for a $9 liter of saline on an emergency department bill can be pretty tough to explain to the consumer who has to pay for the item. And it seems that prices like that are becoming more common, not less. I, too, have pushed charges in those non-elective areas where I could get some yield on out-of-network payer cases. Expansion of insurance helped insulate providers from such discussions, because insurers paid the bill and the patient was less price conscious. I think that conversation about our pricing strategies is coming full circle. We should get prepared to explain our business again.

At the same time, as hospital and health system finance leaders, we should be asking ourselves whether our explanations of our costs are justifiable in the court of public opinion when many of our organizations are building new facilities to capture commercial insurance revenues or offering amenities to improve HCAHPS scores. I’m not saying we should not do those things; they are good business strategy. But we should be ready to explain why our services cost what they do—and we need to be specific, because reporters roll their eyes at generalities. At the same time, we also should be reviewing our cost structure to see if we are spending money that does not add value to patient care.

Oddly, the questions we should be asking have much in common with the kinds of questions that were asked in developing the old assembly line: Are we doing things that do not add to our core product? Are we delivering good value in patient care? If not, maybe it is time to look at the healthcare assembly line and make sure that our spending is truly adding to value. After all, in essence, what those pundits are saying is their costs—and therefore our revenues—are getting too high. Whether we agree or not, it’s only a matter of time until they turn the spotlight on us.


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