Growing Out of Pocket Trends Drive Transparent Pricing Strategy

This week, Health Affairs published a report entitled "National Health Spending in 2005: The Slowdown Continues". While the emphasis was on the decreasing rate of health care spending increases, the more significant portion of the article deals with so-called "out of pocket" expenditures – those amounts paid by patients and their families for insurance premiums, co-payments, deductibles and so forth. Consider a few selected observations from the article, all from 2005 data:

Hospital spending continued to grow, but not because of growth in prices. Rather, the increase was attributed to increases in both inpatient and outpatient utilization.
Employees paid 25.6 percent of private health insurance premiums. While that leaves 74.4 percent for the employers, in fact, most employers seek cost savings by increasing co-payments and deductibles rather than increasing the employee portion of the insurance premiums. Employers benefit from lower insurance costs, while those employees who rarely use their insurance perceive that management is controlling this expense. In fact the expense is merely being redistributed.
The out-of-pocket portion of health care costs was $294.4 billion, or roughly $676 per person. Although hospitals receive the largest portion of total health care payments, the majority of out-of-pocket payments go to drugs, physicians and dentists, in that order.
Six percent of household personal income went to healthcare (insurance premiums, co-pays and deductibles), yet consumer driven health plans and "health spending accounts" had virtually no impact, probably because they were new.

What to Do?

As consumers become more aware of the costs of healthcare, and as they increasingly shoulder more of those costs, providers should preemptively move to embrace and implement "patient friendly billing" and "transparent pricing" to "take the mystery out of the hospital bill."

Here are some specific steps you should take, especially if you have the privilege of being a hospital or physician provider:

First, establish a reliable system to tell patients how much they will owe, even before those services are rendered. If you can't do this, at least be able to tell them by the time they are discharged. Many hospitals have been doing this for years, using "price books" and other manual tools. Now, there are a few software solutions that can provide more accurate estimates in a fraction of the time.

Second, know how much the insurance companies are supposed to pay you, and then hold their feet to the fire to honor those contracts. One of the best ways to help your patients reduce their financial load is to do everything possible to collect what the insurers owe you.

Third, implement a system that takes away the managed care plans' negotiating strength. It's an old cliché that insurance companies know more about our business than do we. End that insanity: hire staff if you must, and – by all means – invest in some software solutions that can do the work of contract modeling. This enables you to run multiple pricing scenarios faster than the payors can respond!

Fourth, set your prices strategically. Increase prices when you must, but avoid any across-the-board adjustments. Do the research, and implement selective rate increases that give you the most net revenue for the least increase in gross charges. There are two key prerequisites to setting prices:

Know what your competitors charge. This information is readily available from any number of vendors.
KNOW YOUR COSTS! If you don't know – within a reasonable tolerance – how much a service costs, it is impossible to establish a wise price for that service. Costing can be very expensive, but it doesn't have to be. Cost-to-charge ratios from your Medicare Cost Report are a good starting point, and when you are ready to increase your sophistication, investigate a good RVU-based system to "fine tune" your understanding of both fixed and variable costs.

Conclusion

When it comes to staying out in front of transparent pricing issues in your organization, follow these four strategies:

Know your costs; spend as much as you can afford, and don't hesitate to invest in a software solution. The returns will be spectacular.
Set your prices based on your costs, your market and your competition.
Be able to model any, and all, of your managed care plans, and be able to revise those models as fast as the payors can come back to you with a new proposal.
Know what each payor owes you, and then go after every penny. The more they pay, the less your patient’s must pay.
Be able to answer those two key questions that every patient asks: "How much is this going to cost, and how much will I have to pay?"

Taking these proactive steps is the best way to avoid surprises from your competition, from Medicare and from your state.

Remember: An "ounce of proactive" always trumps a "pound of catch up".

Source: "National Health Spending In 2005: The Slowdown Continues", by Aaron Catlin, Cathy Cowan, Stephen Heffler, Benjamin Washington, and the National Health Expenditure Accounts Team; Health Affairs 26, no. 1 (2007): 142-153; 10.1377/hlthaff.26.1.142

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.