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John Ruskin, an art critic from the Victorian era, is famous for observing that “There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.” As true now as then, he might have spoken about the Rand Report. The study’s preface says, in summary, that employer health plans enroll about half of the U.S. population and sadly lack information about the prices they pay for health care. The study covers 2013 through 2016 and reports “relative prices” using a formula that divides dollars of self-funded payments by the simulated amounts paid by Medicare’s formulas:

“Amount paid by self-funded plans in Indiana ⁄Simulated amount paid applying Medicare’s price-setting formulas”

What is stated:
– Self-funded employers struggle with high health care costs, having spent $500M over a three-year period.
– Prices vary widely from one hospital market to another and among hospitals in the same market
– Enrollees may be steered away from providers with prices that are unjustified, but, to do so requires unknown details about price, service, and quality of care.
– Discounts are negotiated but lack true meaning because the element of value is often not known.
– Six major hospital systems operate in Indiana (IN Hosp Assoc.) the largest of which is IU Health and the second largest the Ascension System.

What Rand did:
– Data was organized around both the “allowed amount” and standard units of service and computed separately for inpatient and outpatient work.
– Price is the amount paid per unit of service.
– To interpret such questions as “is $10,000 too high or too low,” “relative prices” were calculated using Medicare as a benchmark (see above-stated formula).
– Limitations:
* Claims data was available only from 7% of employer-sponsored employees.
* Prices are not reported for smaller facilities.
* Prices could not be compared among health plans.
* Identifiers for the billing provider do not always represent the facility that provided the service as they do not always have the Medicare Provider Number.

What were the findings:
– For $695 Million of employer claims payments to community hospitals in Indiana, Medicare would have paid $255 Million, a difference of $440 Million.
– The ratio is 2.52.
– The “allowed amount” by employers averaged 1) inpatient $23,400 per stay and 2) outpatient $1,300 per service.
– Large hospital systems generally are paid higher prices. Parkview was singled out for having high prices.
– Small hospital systems with no nearby competitors did not necessarily negotiate higher prices.
– In the graph accompanying this post entitled “Relative Prices…,” Deaconess Health is on the far left, CHS Lutheran is sixth from left and Parkview is on the far right.
– Prices varied most for Outpatient Services; the overall average paid by employer plans was 3.58 times the Medicare rate.
– No such National rate is available for comparison.
– In-patient rates were less variable, as shown on the chart entitled “Hospital-Level…”: Lutheran 6th from left and Parkview far right. Trends in care show a greater rise during 2016 for Parkview than for Lutheran.

What does this mean?:
– According to one interpretation, Medicare severely underpays hospitals, and that forces hospitals to shift costs to privately insured patients.
– Alternatively, some feel that hospitals use their negotiating leverage to extract unreasonable prices from health plans, and those increasing prices then allow hospitals’ costs to increase making Medicare prices look low by comparison.
– The Rand Study states that “In the case of the Parkview Health system, there may be justifications for the unusually high prices, such as offering specialized services or a reputation for higher-quality care.” However, it also states that margins there were above those needed to “stay afloat.”

What Rand recommends for employer action:
– Encourage competition by not restricting networks.
– Move volume away from higher-priced providers.
– Negotiate greater discounts, taking the risk that hospitals will react merely by discounting from higher price schedules.
– Specify contracts based on Medicare prices.

The Research Report can be found here.

More tomorrow from NICHE’s perspective.