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Here’s a case study that highlights the US hospital pricing problem:

ABC Company was enrolled in a PPO or preferred provider organization. The PPO was going to increase health insurance premiums by 75%.  Health insurance premiums were increasing 3X faster than wages. Premiums had doubled since 2002.  This was not sustainable for ABC Company.

Instead of renewing with the PPO, the company chose to self insure. They signed up with a group administration company that administers self insured plans.

Under the PPO, the company paid $10,000 per dialysis visit. With the group administrator, the company paid $975 per visit.  This lead to dramatic cost savings. With the savings, ABC Company was able to hire a primary care doctor and open a clinic at the work site.

This represents a new trend in paying US healthcare bills. The company negotiates up from the hospital’s costs,  rather than down from the high prices that hospitals set. These arbitrary high prices are called “chargemaster”.

Hospital chains control negotiations with PPOs. Insurers do not argue with the high prices set by the hospital CFOs. Insurers pay the bills and pass along the costs to employers in higher premiums. With some insurance contracts, the more the hospital is paid, the more the insurer makes. Profit is a percentage of total premium.

PPOs negotiate a discount off the hospital’s highest prices. This is the hospital’s chargemaster price. This is a fantasy figure set by the hospital alone.

In contrast, Medicare pays around the break even point to hospitals. Chargemaster prices are at least 300% of Medicare rates.  In some cases, the chargemaster prices are 1000% to 2000% above Medicare rates.  This is FICTION over FACT.

PPOs do not provide transparency. They do not question hospital bills. They just pay the inflated bills.  Remember, they get to reprice and pass the costs along to employers.

Another solution being used is “reference pricing”. A large group like a retirement system grew tired of paying $15,000 to $100,000 for a hip replacement. They told the hospitals that the reference price for a hip replacement was to be $30,000. The retiree could go anywhere but had to pay the balance for the higher cost hip replacement. Reference pricing is becoming popular as a way of limiting hospital costs.

The hospital pricing problem has relevance to Canadian patients who require specialized care in the US.  Either the patient negotiates directly with the hospital or the province negotiates with the hospital for the patient, when the province is paying the bill.

Rupert Case Management Inc.’s Canadian client requires a bone marrow transplant at a large US hospital. The discussions with the head of international billings went like this. Give us a deposit of $500,000 and we will get started or give us $50,000 and we will get some lab tests ordered. It was clear that the head of billings was focused on the chargemaster pricing. Not sure if the province which will be involved with this billing office has established reference pricing for this transplant.

Another option for the province is to hire a specialized medical bill management company to negotiate with the hospital. The bill management companies such as (ELAP Services in Philadelphia or Advanced Medical Pricing Solutions (AMPS) in Atlanta) will pay the hospital’s costs plus a reasonable profit. Everyone important wins in this scenario.

ELAP establishes “allowable claim limits” that recognize the medical provider’s or hospital’s actual cost to deliver the service and allows a fair margin above that cost.

ELAP Services                                              

ELAP seeks to move away from billed charges towards a reimbursement strategy based on transparency and cost-based metrics. ELAP is engaged by employer groups who sponsor self insured health benefit plans for their members. ELAP facilitates direct contracts between employer groups and health care providers.

Stay tuned to this blog and we will publish the outcome of the pricing for the bone marrow transplant and how the client and/or province did by using a specialized medical bill management service.

Reference- NY Times, Sunday Aug 18 2013 Sunday Review pages 8 – 9.

Reference- Join The Club: How Peer Pressure Can Transform The World.  Tina Rosenberg.