Editor's Note:
Harry Wessel, a staff writer for the Orlando Sentinel, reported recently on a lawsuit being brought by State Farm against Florida Hospital over the issue of hospital rates versus costs. Posted on the newspaper's Web site, March 12, 2007, Wessel's story reports on a case that is making its way through Florida's legal system. The story revolves around the disparity in the cost of a pair of CT scans for one Frank Krupa, a former insurance claims adjuster, and the other for his daughter-in-law.
The scan of the abdominal area for Krupa, at a reported $4,445, was approximately one-third the cost of his daughter-in law's scan of her upper torso at $6,863. Wessel reports that the daughter-in-law's insurance company paid the full cost while Krupa's received a negotiated discount. Among State Farm's complaints, reports Wessel, is that Florida Hospital "set their charges for medical services at highly inflated rates that bear no connection to the actual cost of providing the services."
In an effort to shed light on pricing disparity, Wessel interviews other local healthcare executives from the provider community and employer groups, as well as the spokesperson for State Farm – all of whom weigh in on the hospital pricing.
Avoiding The Pricing Trap: An Analysis of the Orlando Sentinel's Article On Florida Hospital Rates
By Billy K. Richburg, M.S., FHFMA
With "eyes wide open," let's consider the comments made about hospital pricing in the Wessel article, and how providers can respond to the issues raised. Let's begin with this rhetorical question posed by Chris Neal of State Farm Insurance Company in response to the topic of hospital charges.
"Why would hospitals charge people with the same injury different amounts depending on whether they have insurance or who their insurance is from?"
Clearly, this remark is intended to inflame the consumers to whom the article was directed. Mr. Neal probably knows that hospitals charge the same to everyone, not because of any altruistic obligation, but because Medicare law requires it. He also probably knows that patient bills can vary – even for the same diagnosis – due to age, other health conditions, and so forth.
Charges have very little to do with what hospitals get paid, and we can be sure State Farm is among the first in line to negotiate the deepest discounts they can get. Yet, it is noteworthy that insurance premiums continue to inflate at rates substantially higher than hospital charges.
Ralph Glatfelter, senior vice president for the Florida Hospital Association, who is also quoted in the story, correctly notes that much of the present hospital pricing situation evolved as a "byproduct of 40 years of federal policy on Medicare."
Let's go back in time. After World War II, healthcare enjoyed a renaissance, of sorts, first with the Hill-Burton program ("a hospital in every town"), and then, in the 1960's, with Medicare and Medicaid. At the same time, managed care was emerging as a significant factor, beginning with the advent of Kaiser-Permanente in 1946. But, it was Medicare that really set the tone for future pricing.
Because Medicare claims were paid on the basis of "retrospectively established costs" (What did it cost us LAST year?), hospitals benefited by implementing detailed charging, an uncommon concept until the mid-1960's. Consider Respiratory Therapy (RT): Until Medicare, the function didn't exist, because RT services were provided as part of nursing. But Medicare didn't reimburse hospitals for services provided by nurses – other than nursing care – and hospital managers soon learned that a separate department, with its own charges, could secure additional reimbursement, because it represented additional, easily documented costs.
While there have been a few attempts to "package price" routine supplies and drugs (typically through a variable room rate), this has never been a popular approach. As a result, we have pricing that "is appropriate overall, but seldom makes sense at the line item level," as stated in the story by Keith Eggert, vice president, revenue management, at Orlando Regional Healthcare.
Can anything be done to address this pricing situation that providers essentially inherited from a previous generation of managers? Of course, and it's a relatively simply three-step process.
Step 1: Know Your Costs
Becky Cherney, who heads the Florida Health Care Coalition (an employer group), was quoted in the story saying, "Healthcare cost accounting is an oxymoron."
What a shame to be quoted with such an unenlightened observation. Cost accounting in hospitals presently exists at three levels, none of which are particularly new.
First Level: Cheap and Easy
The least cost approach to costing your services is to use cost-to-charge ratios; something we all have had since the first Medicare Cost Reports in 1966. Cost-to-charge ratios work fairly well for "macro" purposes:
What is the average cost of DRG 210? How much does APC 0033 cost to provide? But, when applied at the detail level, cost-to-charge ratios can misrepresent the true picture and encourage poor decisions. Still, it is "cheap."
Second Level: Better and More Expensive
Several years ago, Medicare implemented Relative Value Units (RVU) as the core of their Resource Based Relative Value System for physician payments. This system reflected the well-established RVU system promulgated by the College of American Pathologists (CAP) for measuring workload in clinical laboratories.
RVU systems are now emerging as an accepted alternative costing system for hospitals. While they are more difficult to implement than cost-to-charge systems, they are scaleable, in that they work equally well for a "chest, 2-views" or DRG 541. Further, they have the advantage of crossing the barrier separating inpatient from outpatient – a "chest, 2-views" has the same cost, regardless of who receives the service.
Third Level: The Best and Most Expensive
At the top of the costing hierarchy are those systems that cost everything in accordance with industrial models, using "intermediate" and "final" products; direct and allocated costs; automatic updates; recalculations of line-item costs and so forth. These systems may be 40-50 times more costly than RVU systems, but clearly don't provide 50 times the value or utility.
Step 2: Set Defensible Prices
Once again, there are three basic approaches to the problem of setting prices. The easiest approach is to implement "across-the-board" increases, as most providers have. Doing so merely perpetuates the present problem: overall pricing may be appropriate vis-à-vis the overall costs of doing business, but line-item pricing will continue to be indefensible.
At the second level, pricing can be set using "optimization" software. These are the programs – going back nearly 30 years – that look at your volume and revenue reports and increase charges in those areas where charges matter (such as a reference lab), while holding or decreasing rates in areas where charges tend not to matter (such as respiratory care and ICU.) This worked well when most non-government payors paid "full fare," but this isn't particularly useful in today's healthcare environment.
Finally, we have "strategic pricing," which sets prices based on multiple factors, including costs (see above), market forces, competitor pricing, payor mix, patient mix, discount patterns, uninsured and underinsured risk, and so forth. These software solutions offer the best opportunity for setting prices – community by community – that are defensible down to the individual service.
Step 3: Communicate Your Pricing Strategy
With known costs and strategically established prices, all that remains is to make every effort to communicate your new pricing strategy to your customers: patients, payors, your community, and government.
The Centers for Medicare and Medicaid (CMS) are contributing to this effort by posting your charges on its Web site. While this is a new approach, it is not a new concept for CMS. The MEDPAR file (inpatient) and the outpatient claim files have been available for years, offered in the name of "research."
Many states are posting selected prices. One of the first states was Missouri, in the early 1990's. And there is a burgeoning movement by some providers to post charges for their most common procedures.
All of this is good, but these approaches fail to bring pricing to the consumer. We used to argue that consumers are not the customers of healthcare rather "our customers are physicians." While that may have been true ten years ago, today it simply lacks the ring of veracity.
Consumers are better educated; health plans cover less and cost more; and "self-directed" plans are gaining popularity. In short, if you are going to be successful with your new pricing strategy, you must have an efficient and effective way to present actual prices to your patients before services are rendered. Fortunately, there are a few software packages available today that can help you do this.
Conclusion:
Wessel's story on hospital pricing should serve as warning to other providers as communities and the media delve into the complex issue of hospital pricing. Expect more stories such as these. In the new era of transparent pricing, be prepared for similar issue raising questions from your local news gathering organization as reporters and editors probe you about how your organization has arrived at its pricing strategy.
My advice: Providers should determine their costs (even at the "item" level), set prices using strategic imperatives and communicate rational, defensible pricing to their customers even before they become patients.
Bill Richburg, M.S., FHFMA, CMPA, CMCP is the Director of Government Programs and Compliance, and Director of HIPAA Compliance for the IMACS/IHS Division of Accuro Healthcare Solutions, Inc.
