New Report Examines Medical Service Price Variation

October 06, 2014

VTDigger

By Morgan True

A new report prepared for the Green Mountain Care Board confirms wide variations in the price of medical services throughout the state and examines policy approaches to regulate them.

Prices that Vermont’s 14 hospitals and Dartmouth-Hitchcock Medical Center in New Hampshire receive from commercial insurers vary by between 72 percent and 132 percent of the average price received, according to the report.

The study also found wide variance in the payments received by hospitals and non-hospital medical providers as well.

New Health CareThe board is charged with setting “reasonable rates” for health care services. In setting those rates, the board must work toward uniformity, while taking into account “legitimate differences” in provider costs, such as offering services that wouldn’t be available otherwise or operating in an underserved area, according to its statutory mandate.

The board is able to start setting rates for groups or individual health care professionals at any time, though it is not required to set rates for all of them.

In its first two full years, the board has focused on setting rates for commercial health insurance products and setting the rate of growth in hospitals’ patient revenue and charge rates — often called the hospital budget process.

When it comes to rate-setting, “the math is the easy part,” said Katharine London, a principal at the University of Massachusetts Center for Health Law and Economics, and one of the report’s authors.

“The hard part is figuring out what you want to do. So my major recommendation to you is that you develop a set of principles around what you want your rates to look like,” London told the five-member board at a meeting last week.

The report doesn’t examine payments from government programs or the uninsured, as the state’s claims database doesn’t capture payments made by the uninsured and rates for government programs, such as Medicare and Medicaid, are set by the government.

The report found true price negotiation between payers and providers to be “relatively rare” in Vermont.

That’s partly because the state’s largest hospital, Fletcher Allen Health Care in Burlington, is a “dominant player” in Vermont. Fletcher Allen’s market share — one-third to one-half depending on how it’s calculated — and its role as the state’s only tertiary care center, has allowed it to command roughly equal rates from the state’s major insurers.

On the other end of the spectrum, independent physician practices are unable to negotiate over price either, and are largely relegated to being “price-takers,” when it comes to what they’re paid by commercial insurers.

The report highlights a series of disconnects between the amount health care providers charge, what private insurance companies pay and what portion of those payments are passed on to covered individuals.

“Prices, almost by design, are starting to be disconnected from charges, and are starting to respond more to market forces than charges are,” said Steve Kappel, a health economist for the University of Vermont School of Medicine, and another of the report’s authors.

That’s because, increasingly, the prices for medical services negotiated between insurance companies and providers use fee schedules that have little to do with what a hospital charges. Another common payment method is to classify medical encounters into groups based on diagnoses and procedures and make set payments for those groupings.

Providers still maintain “master charge” lists, covering close to one thousand diagnostic codes, and some insurer payments are still based on discounts off those “retail” lists, but still vary based on the service or the insurance product and company that is being billed.

The uninsured are typically given a discount on the charge amount based on their income.

One insurance company paid from $63 to $150 for a 25-minute evaluative office visit, according to a fee schedule based on an individual’s plan type and the region where the service took place, the study shows.

What an individual pays for that office visit would then depend on the cost sharing of that person’s insurance plan. Health plans often have different levels of cost sharing (copays and out-of-pocket costs) based on where the services are delivered.

Consumers can also find themselves paying more depending on who owns the office where the visit happens.

If the evaluative visit happens in an independent physician’s office, there is often a $20 copay. If the practice is purchased by a hospital, the same visit may be classified as hospital outpatient care, and subject to greater cost sharing.

“The price may or may not vary, but patient spending certainly does,” the report states.

That happens because hospitals, and by extension hospital-owned physician practices, are able to bill separately for their overhead.

The practice was initiated by Medicare in acknowledgement of costs hospitals have that independent practices don’t.

For example, Medicare pays hospital-owned practices $129 for an evaluative visit, while other practices receive $69, according to the report. Commercial insurers interviewed for the report acknowledged paying hospitals a separate fee for overhead as well.

Independent doctors have decried this practice as unfair, while hospitals defend it as necessary to offering services, such as emergency departments, that might not be available otherwise.

The report suggests that the Green Mountain Care Board develop uniform service groupings and payments for those groupings that can be adjusted for demographic differences in a provider’s service area and the services they offer.

Standardized service groupings and payments could then be modeled in terms of dollars gained or lost by individual health care providers and payers, as well as by state government and groups of consumers, and can be adjusted as needed.

The resulting payments could be indexed to the rate of growth in the gross state product, or some other economic indicator, to keep the growth in health care spending in line with the wider economy.

The standards could then be implemented over several years to buffer the initial effects and give health care providers time to adjust to new financial requirements.

The board could also encourage and regulate the rates for capped payments covering a set of services to an entire population, often called global payments or global budgeting, using the same baselines.

The authors also recommend that the board continue to invest in improving the accuracy and usability of Vermont Health Claims Uniform Reporting and Evaluation System, which was used to inform the study.

The study and report cost the board $179,000 from its annual budget, which is $8.3 million this fiscal year.