A Consideration of Hospital Pricing & Payment A Discussion with the CHASE Board Robert Smith, Executive Director Colorado Business Group on Health August 28 th , 2018
About CBGH An employer-led, multi-purchaser 501c3 committed to value-based health care through collaboration on: • Quality and price transparency. • Reference-based pricing/contracting. • Alternative payment methods (e.g., pay for value vs pay for volume ). • Common provider performance measures. • Value-based benefit designs that incentivize consumer engagement. CBGH works with national and regional health leaders and employer coalitions. 2
A Tale of Two Industries PK-12 Education Health Care Due to the negative factor, St. Vrain Health care costs for SVVS went from $13m has seen cuts in per pupil revenue to almost $23m in 10 years – 77% . totaling nearly $200,000,000 . Colorado is 50 th in country in average From 2010- 2015 Aetna’s earnings rose 628% ; teacher salaries. (Colorado School United’s went up 814% ; Cigna’s up 1112% Finance Project) (Insurance Week) One non- profit system’s Q1 ‘17 profits CO recently slipped to 41 st in early doubled since 2014 alone; Some hospital childhood spending margins as high as 40+% >50% of Colorado schools operate on a Despite occupancy rates below 65%, CO has four-day week. built 10 large new hospitals (Baumgarten) Colorado is 40 th in overall per pupil CO hospitals realized 10 th yr of record high spending (less than every contiguous net incomes on record low occupancy rates. state (49 th adjusted for income) 3
CCAHC Report to the Colorado General Assembly Colorado health spending… Up more than four times the level of two decades ago. Just since 2000, that spending is up 122.7 percent — 3.7 times the rate of inflation in the state. 4 4
But it’s not just public education… “Twenty years of wage stagnation on the middle class has been 95% caused by exploding healthcare costs .” - WSJ 5
Healthcare BlueBook’s PRICE VARIANCE REPORT MARKET | DENVER 2017 Procedure Low Price High Price Variance Abdominal Ultrasound $115 $1,029 895% Carpal Tunnel Surgery $1,634 $5,806 355% Chest CT (no contrast) $248 $2,492 1005% Cholecystectomy (laparoscopic) $6,368 $19,530 307% Colonoscopy (screening) $1,296 $4,052 313% Ear Tube Placement (Tympanostomy) $1,737 $12,765 735% Hysteroscopy (with biopsy) $3,705 $9,316 251% Knee Arthroscopy $2,796 $23,462 839% Shoulder MRI (no contrast) $450 $4,999 1111% Sleep Study $899 $4,341 483% Average Variance 837% EQUIVALENT VARIANCE IN A GALLON OF GAS $2.20 $18.41 837% What gas would cost per gallon with the same price variance * All healthcare procedure costs are derived from claims amounts after network discounts were applied 6
It’s not the physician , it’s the facility … PRICE VARIABILITY FOR COLONOSCOPY (NO BIOPSY) 7
MedPAC’s 2018 Report to Congress regarding the adequacy of Medicare payments. About MedPAC Adequacy Indicators Include : Beneficiary access to care, changes in the quality of care, hospitals’ access to capital, and the relationship of Medicare’s payments to hospitals’ costs for both average and relatively efficient hospitals (for Medicare patients). Adequacy Conclusions: • Payments 8% higher than variable costs of Medicare patients. • In 2016, hospital’s aggregate Medicar e margin was -9.6 percent. - 11.0% for non-profit hospitals - 2.4 for profit hospitals • Overall margins were approximately zero for efficient providers. 8
Statewide Results: Commercial Market Percent of Medicare Fee Schedule Comparison/Trend 2012 2016 Increase Service Type Avg % Medicare* Avg % Medicare* 2012-2016 Inpatient Services 290% 250% 16% (Top 12 By (Range 242%-386%**) Volume/Price) Outpatient Services 520% 440% 19% (Top 10 By (Range 324%-694%**) Volume/Price) * Average % Medicare reflects an average of the individual service category averages analyzed for IP and OP . ** Range reflects lowest average % Medicare rate and highest average % Medicare rate across the individual services analyzed. 9
Other Relevant Conclusions from the 2018 MedPAC Report Hospitals’ all -payer operating margins reached a record high in • 2015; slightly lower in 2016 but still near 30 year high. All-payer margins remain strong because “ the growth of • private-payer rates continues to rise faster than costs .” “When providers receive high payment rates from insurers, they • face no particular need to keep their costs low, and so, all other things being equal, Medicare margins are low because [hospital] costs are high.” 10
Then why are hospitals… Losing Money on Medicare??? “Strong market power leads hospitals to reap higher revenues from private payers. This in turn leads these hospitals to have weaker cost controls. The weaker cost controls lead to higher costs per unit of service. As a result, hospitals have a narrower margin on their Medicare business.” Jeffrey Stensland, PhD Principal Policy Analyst MedPAC 11
Negative Margins…Cont’d “When nonprofit hospitals have more resources, they tend to spend those resources because nonprofit hospitals do not have shareholders to distribute profits to. The nonprofit hospital’s expenditures could be on… • Service-line expansions such as a new cardiac surgery wing; • Acquiring physician practices; • Patient amenities, such as larger rooms; • Other capital expenditures that help the hospital maintain and expand its market share of private- payer patients.” 12
Questions the Data Seem to Raise 1. Given Medicare’s payment adjustments, if you’re a hospital losing money are Medicare – particularly if the losses exceed 9% - why? 2. Now that Colorado Medicaid pays at Medicare levels, is cost shifting to community employers – e.g., school districts, small business, and others who are not “cost based reimbursed”… Reasonable? fair? Responsible? 3. Even if your margin is at the average of - 9%, why wouldn’t 100% of Medicare plus 9% for your loss plus a 10% margin – e.g., 119% or even 128? - be adequate? Why is it 290% and 520%? 4. Does fee-for-service payment re-engineering some services and discontinuing others? In other words, is quality waste currently a source of revenue? 13
Questions for Discussion 1. How might employers promote payment reform in a manner that supported hospitals seeking to improve quality and reduce costs? Or, put another way... 2. How might payments work to provide hospitals with a margin based on their performance/efficiency versus just their pricing? Episodes of care/bundles? • Pay for performance contracts? • Other? • 3. Now that hospitals have consolidated into systems, would it make sense for both the employer and the hospital to collaborate in designating centers of excellence that could have higher volumes, better outcomes, lower costs, and better margins? 4. Would direct contracting/group purchasing make sense? 14
Thank You Robert J. Smith, MBA Excecutive Director, CBGH Robert.Smith@CBGHealth.org
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