Opening Up: How Pricing Transparency Will Change Hospital Benchmarking

Hospitals must adapt their benchmarking strategies as the healthcare industry becomes increasingly cost transparent.

Years before healthcare reform and publicized hospital charges stirred up demand for more clarity surrounding the cost of care, Omaha, Neb.-based Alegent Creighton Health's CEO made a bold statement at a management forum: He said his nonprofit health system would be price transparent by the end of that year.

That vow spurred to system to develop an online tool to truly individualize the cost of a procedure to a patient and their health insurance, says Tim Meier, former campus CFO and operations leader for revenue cycle operations at Alegent and current associate vice president at Conifer Health Solutions.

checkAlegent launched its cost transparency project, My Cost, in January 2007. "At the time, there were no tools out there to achieve any sort of cost transparency in any shape or form the way we believed patients wanted it," Mr. Meier says.

It took the health system about nine months to build the transparency tool. As a result of those efforts, patients can go online and get out-of-pocket cost information specific to their health plan benefits.

"Patients love it," Mr. Meier says of patient reactions. "Most people are so thankful and appreciative to get some idea of what it's going to cost them."

More than six years after Alegent launched My Cost, healthcare price transparency is becoming an increasingly pressing issue for hospitals and health systems. In March, journalist Steven Brill got Americans talking about pricing with his TIME cover story, "Bitter Pill: Why Medical Bills Are Killing Us," which investigated hospital billing practices. Then, in May, CMS released hospital chargemaster data to the public for the 100 most common Medicare inpatient diagnostic related groups. In June, the agency also published data from calendar year 2011 on hospital-specific charges for the 30 most common ambulatory payment classifications, or APCs, for hospitals paid under the Medicare outpatient prospective payment basis.

State policymakers are also driving the trend toward healthcare cost transparency. In August, North Carolina Gov. Pat McCrory signed legislation into law requiring hospitals in the state to post prices on 140 of their most common procedures.

At the same time, employers are increasingly shifting more healthcare cost responsibility onto consumers through high-deductible health plans. As an increasing number of people enroll in these plans and pay for a larger portion of their healthcare costs out of pocket, the call for clarity concerning prices will only get louder, says Leah Binder, CEO of The Leapfrog Group, a nonprofit organization that promotes advancement in healthcare safety, quality and affordability. Inevitably, she says hospitals and health systems must consider this trend when it comes to setting benchmarks.

"Consumers will demand these prices," Ms. Binder says. "It may seem like a big hurdle to get over right now, but consumers are going to push you over it. It's coming. There's no question."

Behind the trend: Increasing consumer attention to prices
In 2013, 20 percent of covered workers were enrolled in HDHPs with savings options such as a health reimbursement account or health savings account, up from 13 percent in 2010, according to the Kaiser Family Foundation 2013 Health Benefits survey. The flood of high-deductible health plans and consumers spending more of their own money on healthcare services is the main force propelling the demand for cost transparency, Ms. Binder says.

"We have a whole new generation of consumers who are truly shopping for health services," she says. "It's very different from the days when they were paying a co-pay."

Joe Fifer, president and CEO of the Healthcare Financial Management Association, says healthcare consumers are becoming more observant about healthcare financing and pricing as they spend more and more of their own dollars on their care.

"It's not a secret that we're in an environment where there's a larger and larger percentage of the healthcare dollar being funded out-of-pocket by consumers," he says. HFMA recently formed a task force that will focus on healthcare transparency in recognition of the growing trend.

Bruce Pyenson — a principal and consulting actuary at actuarial services and products provider Milliman — agrees that the shift toward healthcare cost openness will invariably occur. However, he says at the moment there's more talk about transparency than reality.

"It's going to be very slow to emerge, partly because many [health insurer] contracts require negotiated prices to be kept confidential," he says. Hospitals may also be reluctant to expose the ratesthey receive from health insurance companies because that may lead other health insurers to negotiate for lower reimbursement once they see what others pay out, he says.

Mr. Fifer also says the transition while take some time. "We've got a long way to go in terms of even creating the mechanisms to get there and the understanding in the community in terms of what the prices mean," he says. "We're turning around two generations' worth of a role for prices."

However, Ms. Binder says the rapid rise in the number of people enrolled in HDHPs means the price transparency transformation won't be slow. "We have this tsunami moving in," she says. "I've yet to talk to a purchaser who's not planning on moving to HDHPs in the next year."

Best benchmarking practices: What hospitals should focus on as prices become public
When setting competitive and internal benchmarks, Ms. Binder advises hospitals and health systems not to get distracted by costs and to keep their eyes on the real prize: quality. "When someone faces a hospital stay, when they're facing their surgery or their child's surgery, they want to know that the surgeon is skilled and the hospital is safe," she says. "That's the most important thing."

The way pricing transparency will play into hospital competition is complicated, given factors such as different hospitals' contracts with various health insurers, Ms. Binder says. She describes pricing as a "wild west" for hospitals, given the "basic insanity" of hospital chargemasters, with price levels not necessarily correlated with quality of care. "Really high-quality providers could be charging much less than low-quality providers," she says. "Health transparency has to be combined with quality transparency, or else it won't work."

Mr. Pyenson of Milliman says there are several factors that should be top-of-mind for hospitals and health systems given the push toward transparency along with other factors such as healthcare reform. "They need to have current benchmark analytics, and they need to be appropriately risk-adjusted," he says. "They need to understand what the ultimate cost to the payer is."

In line with reform efforts and the new world of transparency, as well as accountable care organizations, hospitals need to approach benchmarking from a population health perspective rather than on a per-admit basis, he says.

"An individual's cost to a plan spans inpatient treatment and physicians and drugs and other services," he says. "Hospitals have historically looked at patients that come through their doors and the revenue they bring in and haven't been too much concerned with what happens to the patient after they leave."

However, insurers know that more money is spent outside the hospital than in the hospital, so converting to a population basis is a more valuable way for a hospital to understand its value and what it might mean relative to other health systems, he says.

Mr. Fifer says providers gain an edge simply by adapting an attitude of openness toward price transparency as an acceptable development, if not a positive one. Increased openness about prices will enhance competitive benchmarking and competition in general, he says.

"Transparency creates a marketplace environment like we have in every other industry in our country," he says. "The price transparency movement helps create a more competitive environment because things don't happen behind the curtain anymore."

He says hospitals should focus on setting rational prices, meaning prices that reflect a combination of what the marketplace will bear and the provider's cost structure. "It's no different from retail," he says.

Not an apples to apples comparison: The complexity of healthcare prices
The North Carolina Hospital Association supports the recently passed price transparency law, says Don Dalton, vice president of public relations for the NCHA. Hospitals in the state are preparing to post pricing information and already have a history of transparency, he says. The NCHA has had a list of the prices for the top 25 diagnosis-related groups at each hospital for years.

Still, he says although the price of care will factor into people's choice of care providers, ultimately it won't be the only or even main data point they consider.

"While we may be moving into an area where people are more interested in pricing and what their insurance pays and what they would be expected to pay, historically people have selected their hospital based on where their physician practice is or based on where their insurance company has a networking agreement," he says. "No single point of data is probably sufficient for an individual to make a judgment on.

Even if consumers do want to shop around based primarily on pricing, Mr. Meier says comparing the cost of treatment at different hospitals can be like "comparing apples and oranges" because of their different arrangements and contracts with health insurers.

For instance, one hospital's chargemaster, or price list, may state a significantly higher price for an MRI than the chargemaster at another facility. However, if the first hospital has a better contract with a patient's health insurer, that person could end up paying less out of pocket for the procedure than at the second hospital with the seemingly lower charge.

The out-of-pocket amount — not the amount listed on the chargemaster or the price for payers — is what matters most for patients, Mr. Meier says. "Getting to the individualized benefits is actually the best way to go," he says. "That's what we felt the patient wanted to know — not that the charge was going to be $2,500, but that the out-of-pocket was going to be $500."

Looking at the fees hospitals receive from private insurers especially can make it hard to compare, given complicating factors such as "carve outs" for particular services and the role of retrospective denials from insurers, says Mr. Pyenson of Milliman. "Those are complexities that may not appear in simple listings of prices," he says.

Just calling for hospitals to post their chargemasters doesn't really help consumers, says Mr. Fifer of HFMA. He describes the pricing system as "byzantine," saying the prices hospitals list sometimes don't really relate to what people actually pay out-of-pocket. "It's just overly simplistic," he says. "They don't really get to what's top-of-mind for the consumer.

Because of the intricate, interconnected relationship hospital prices have with Medicare costs, private payer contracts and other reimbursement factors, hospitals can't achieve transparency without help, Mr. Fifer says. "It's not like they can just wave a wand and change their prices overnight," he says. "It's going to take everybody in the industry to get to a rational pricing environment."

Overall, industry experts agree pricing transparency will only become more important for healthcare providers as patients begin to spend more of their own money on care, and hospitals will need to embrace a different competitive landscape without losing sight of the ultimate goal: providing high-quality care.

"Hospitals should lean toward transparency," Ms. Binder says. "It's one of the most difficult things to do, especially if you're unhappy with your performance in some area, but lean toward giving more information publicly, and you'll come out ahead in the end."

More Articles on Cost Transparency:
Indiana Hospitals: "We Fully Embrace Price Transparency"
RWJF Releases Report on Price Transparency in Healthcare 
HealthPartners in Minnesota Offers Price Calculator 

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