Hospital pricing policies need to be defensible

HOSPITAL PRICING POLICIES often leave patients confused and exasperated. That shouldn’t be surprising in light of the mercurial nature of payer reimbursement rates, constantly evolving payment policies and the vast number of procedures a hospital performs.

“There are, on average, 10,000 items a hospital charges for – it’s a complicated system that has gotten skewed over time,” said Kate Banks, president of customer revenue strategy and improvement for Alpharetta, Ga.-based MedAssets. “So it is necessary to explain why their pricing is justifiable and defensible.”

Industry analysts say pricing justification is gaining importance as consumers become more involved in paying for their own healthcare. With the number of health savings accounts growing, along with programs that place a greater share of financial obligation on consumers like Medicare Part D, hospitals are being called upon more frequently to explain and defend their pricing methodologies.

“The new consumerism is what’s driving the discussion,” said Jamie Cleverley, principal at Columbus, Ohio-based Cleverley and Associates. “There is more price sensitivity today. For instance, HSA enrollment has tripled in the Columbus area. As a result, people want some rationale why services are priced the way they are.”

While Medicare uses DRGs for inpatient charges and APCs for outpatient services, managed care plans employ a variety of fee formulas, and HSAs add a whole new dimension to the billing landscape. All of these factors have forced hospitals to create a pricing schematic that covers cost with a sufficient cushion. The trouble is it involves itemizing long lists of support services without assigning an aggregate price to a specific procedure, Banks said.

“When patients come into a hospital, they get lots of charges for the services used during their stay,” she said. “So if a patient has an appendectomy, there isn’t a charge for the procedure itself, but for OR time and all the ancillary services that go into it. Each service has a charge. But the payer may or may not reimburse based on those charges and pay an amount not related to the individual services. This system has led to a less-than-optimal relationship between charges and payments.”

Cleverly concurs. “One thing that has been difficult to understand is the relative charge in toto for the hospital,” he said. “Among all those procedures, is there a facility-level metric to see how the hospital performs on charges?”

That prompted Cleverly in 2003 to develop a metric called the hospital charge index, which evaluates the hospital’s relative charge position for both inpatient and outpatient services. It takes a relative measure of inpatient and outpatient charge comparisons, contrasts with the U.S. median and aggregates the numbers to get the total hospital charge index value.

Perhaps the most delicate aspect of price justification is explaining to consumers how pricing is designed to compensate for inadequate payments from managed care plans.

“Managed care plans have led to prices being set to get the most benefit out of people who actually pay these charges,” Banks explained. “It is common for a managed care plan to pay a percentage of the charges so that if a managed care patient receives a $50,000 pacemaker and the plan only pays half, the hospital has to charge $100,000 for the pacemaker. This is a system that has been evolving for 20-plus years.”

 “There is no way to flip a switch and have price defensibility,” adds Wayne Little, director of ambulatory care for consulting services at Dallas-based 3M Healthcare Consulting.