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Americans spend a staggering amount on healthcare.
In 2019, National health expenditures grew 4.6% to $3.8 trillion and is projected to grow at an annual rate of 5.4 percent and reach $6.2 trillion by 2028. The biggest area of spending is hospital care, physician services and prescription drugs, with the cost of inpatient and outpatient care being the main driver. Lowering pricing and containing costs is critical to the Nation’s health, as well as its fiscal and economic well-being. Periodic surveys by the Kaiser Family Foundation reveal that half of the U.S. population goes without healthcare due to concerns over costs, and one-quarter of those who receive care have financial hardship with paying medical bills.
The cost of healthcare is a tremendous expense for government, employers, families and individuals. This is compounded by the National inflation rate and U.S. healthcare inflation rate, which reflects the year over year change in the healthcare component of the U.S. Consumer Price Index. A surge in inflation could potentially devastate healthcare providers, payers and ultimately patients. Additionally, healthcare is still adapting to the unexpected surge of COVID-19 and its direct impact on testing, vaccinations and hospitalizations that continue to challenge clinical processes, capacity and resources.
Providing all with access to affordable, quality healthcare is one of the greatest economic challenges of our time. There is agreement on the need to address rising healthcare costs and a growing consensus on potential sources of savings. To lower costs, we must first understand the sources of cost, then employ best practices and policies that render more cost savings and value for each healthcare dollar.
Healthcare cost, pricing and spending reflects a change in demographics of a growing U.S. population. Extensive care for aging seniors and those with chronic and medical conditions is a long-term liability of the healthcare system and its resources. Additionally, changes in lifestyle and diet over the past decades have contributed to a rise in obesity, which is linked to heart disease, hypertension, diabetes, musculoskeletal pain, and other comorbidities. These trends have caused a significant increase in healthcare utilization.
Beginning in early 2020, COVID-19 tested the capacity of the U.S. hospital system. Spikes in COVID-19 cases and hospitalizations put intense pressure on hospital staff and resources. The impact of COVID-19 is currently estimated at $125 billion to $200 billion in incremental annual U.S. health system cost.
Healthcare spending can be viewed as a function of price and utilization. Overutilization of healthcare services and resources is typically driven by inadequate incentive to restrain health care demand. Factors that drive overuse include paying health professionals more to do more (fee-for-service), defensive medicine to protect against litigiousness, and insulation from price sensitivity in instances where the consumer is not the payer—the patient receives the healthcare service, but insurance pays the costs. Overutilization yields a higher volume or cost than is appropriate and sustainable and represents between 6% and 8% of all U.S. healthcare spending.
Less understood is that the underutilization of medical services is also a real problem that can similarly result in compromised patient care, higher long-term care costs, and the failure to achieve quality-performance goals. To protect against over-and-underutilization, health systems and hospitals are increasingly turning to analytical tools that compare actual physician orders against databases of evidence-based interventions proven to drive better health outcomes and reduce cost allocations.
Hospital care accounts for 33% of the Nation’s healthcare costs. Between 2007 and 2014, prices for inpatient and outpatient hospital care rose much faster than physician prices, according to a 2019 study in Health Affairs. Mergers and partnerships between hospitals, medical providers and insurers have also been a prominent trend in America’s current healthcare model. The consolidation of hospitals into large regional systems diminish competition, and grant providers the opportunity to increase prices. Mergers also limit provider options for patients.
Many private insurers pay doctors, hospitals, and other medical providers under a fee-for-service system that reimburses for each test, procedure, and visit. This means the more services that are provided, the more fees a provider can bill. Such a system encourages a high volume of redundant testing and overtreatment leading to unnecessary costs.
A vast majority of hospitals do not practice activity-based cost accounting and do not know the direct costs of procedures. Using a fee-for-service schedule, the more procedures ordered, the higher the hospital’s margin. This is not a value-based approach, and fee-for-service does not motivate hospitals and providers to lower costs (or provide the best care).
To correlate pricing with cost structure, some hospital systems encourage their physicians to standardize patient care and costs of procedures to maintain competitive medical expense trends, and to reimburse providers for the value and quality they are delivering to patients.
Managed care programs are designed to provide comprehensive and affordable healthcare requiring fewer services, leading to lower costs. Many hospitals and providers are contracted through managed care programs, such as a Preferred Provider Organization (PPO) insurance group, that reduce costs based on a schedule of pre-negotiated rates and fees for covered services within the PPO network.
Another cost savings strategy is capitation. This payment model is typically contracted with hospitals and primary care physicians through a health maintenance organization (HMO) insurance group. Costs are contained by placing a limited and fixed “per patient” amount of reimbursement payed by the HMO to the hospital and its network of providers for a specific scope of patient care. This aims to reduce unnecessary tests and procedures, and discourage excessive billing or more costly procedures.
A lot of costs go into administering healthcare insurance. The U.S. spends about 8% of its healthcare dollar on administrative costs, compared to 1% to 3% in the 10 other countries (JAMA). The complexity of the U.S. healthcare system can lead to administrative waste in the insurance and provider payment systems. Providers face a huge array of usage and billing requirements from multiple payers, which makes it necessary to hire costly administrative support for billing and reimbursements.
High drug prices are the single biggest area of overspending in the U.S. Having little regulation, the U.S. spends an average of $1,443 per person. Private insurers can negotiate drug prices with manufacturers. However, Medicare, which pays for a hefty percentage of the national drug costs, is not permitted to negotiate prices with manufacturers.
Healthcare Financing and Delivery
A useful way to examine healthcare costs is understanding how healthcare is financed. In the U.S., everyone can obtain health insurance regardless of age or health status. Healthcare reform laws have expanded access to insurance coverage for millions of Americans. From Medicare and Medicaid to the Affordable Care Act (ACA), government-sponsored programs have done little to mitigate rising healthcare costs. The Affordable Care Act focused more on ensuring access to healthcare but has increased demand and utilization of medical services.
Lack of Transparency
Patients do not have the same information as healthcare providers. Complexities make it difficult to know the actual costs. Such data is critical to make informed decisions regarding treatment options, site of care and choice of provider.
Price transparency could lower the cost of care by promoting objectively fair medical billing. Thankfully, a consortium of U.S. government agencies issued final rules on transparency in coverage aimed at reducing consumer confusion about out-of-pocket expenses and medical billing, as well as cost-sharing responsibilities for covered services.
The Centers for Medicare & Medicaid Services (CMS) also issued guidance. Under the final rules on transparency, hospitals are required to make pricing information available in machine-readable format, as well as provide a list of 300 shoppable services that a patient can schedule in advance. This information could provide self-insured members and dependents with real-time access to pricing and options in advance of receiving healthcare service. However, only about 5.6% of hospitals are in compliance with the rule.
No Surprises Act
Surprise billing is another source of excessive healthcare costs. These unexpected and often high-dollar costs are the difference between what a provider charges and the covered amount under the self-funded plan. It is often a surprise because the participant receives a bill after they have paid their regular point-of-purchase cost sharing – deductibles, copayments and coinsurance. The balance is a surprise because the charges exceed the participant’s expectations regarding out-of-pocket costs and because they become part of the participant’s financial liability.
Currently, more than 30 states have passed and implemented state-level protection against surprise balance bills for fully insured plans. However, states do not have regulatory authority over self-insured plans, which provide healthcare coverage to nearly 70% of employed Americans. These are regulated at the federal level under the Employee Retirement Income Security Act (ERISA) and various provisions in other federal laws like Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act (ACA).
The Consolidated Appropriations Act, 2021, signed into law at the end of 2020, includes several new compliance requirements for employer-sponsored group health plans. One is the No Surprises Act (NSA) – designed to protect plan participants from surprise medical bills from out-of-network (OON) providers. The Departments of Health and Human Services (HHS), Department of Labor (DOL) and Department of Treasury (the Departments), and the Office of Personnel Management (OPM) were tasked with issuing regulations and guidance to implement provisions.
Beginning January 1, 2022, all health care providers must make information on patients’ rights regarding balance billing publicly available. Among the provisions, the NSA protects patients from receiving surprise medical bills resulting from gaps in coverage for emergency services and certain services provided by out-of-network clinicians at in-network facilities. The Act also targets both emergency and non-emergency situations where patients are balance billed for out-of-network services, providers, or locations.
Providers will be prohibited from balance-billing members for items and services received in four situations: out-of-network emergency care at an out-of-network facility; care at an in-network emergency facility from an out-of-network provider; non-emergency care at an in-network facility from an out-of-network provider without the patient’s informed consent; and air ambulance services. The law imposes new requirements that impact payers in two significant areas — transparency provisions and OON claims processing and payment. Additionally, the Act establishes a dispute resolution process that eliminates the patient from the dispute. The process is intended to quickly resolve payment disputes between health plans and providers and ultimately push health plans and providers to avoid the process and resolve payment disputes among themselves. The current rules will push payments towards the median contracted rate – the insurer’s median in-network rate for similar services in a geographic region.
The Congressional Budget Office estimates the NSA will result in direct savings for consumers by reducing commercial insurance premiums by 0.5% to 1% while lowering payments to some providers.
Growing Adoption of Self-Insured Health Plans
While the NSA is supposed to help control costs, there is some concern it will push premium costs higher for employers because in-network rates will rise.
Roughly 49% of the U.S. population receives insurance through their employer. High insurance premiums, high deductibles, copays, and other out-of-pocket expenses are what drive employer sponsored benefit cost inflation and add to individual costs. The average increase in individual health insurance has been about 4.5% per year for the past five years. Higher insurance premiums are only part of the picture. Americans are paying more out-of-pocket than ever before.
Self-insured health plans continue to grow among small and mid-size employers. In fact, according to a 2020 Kaiser Family Foundation Survey of Employer Health Benefits, 67% of employed, insured workers are covered under a self-funded plan. All industry professionals expect the trend towards self-insurance will continue. Employers who chose self-funded coverage are attracted to unique cost management opportunities when compared to the premiums, taxes, profit margins and other requirements typically part of traditional, fully insured plans. A self-funded plan pays claims costs only as incurred and can limit liability through stop-loss insurance.
Reference-Based Pricing: A Self-funded Plan’s MVP (Most Valuable Provision)
Because wide, often dramatic price variations exist across hospitals and providers for standard procedures, many self-funded plans have adopted reference-based pricing (RBP) strategies. RBP strategies generally determine covered charges using a multiple of Medicare pricing. This establishes a common payment ceiling. Plan sponsors and participants benefit from the consistent application across all providers and health networks. However, while RBP can offer value by leveling the playing field, risks remain.
A pain point for plans that adopt RBP strategies is balance billing, sometimes described as “surprise billing.” This is an insidious and costly financial exposure for self-funded plans. Typically, balance and surprise bills occur when patients receive care from out-of-network providers. Balance billing occurs when providers, hospitals and physicians, bill for amounts in excess of the plan’s determination of covered charges.
These unexpected and often high-dollar costs are the difference between what a provider charges and the covered amount under the self-insured health plan. It is often a surprise because the participant receives a bill after they have paid their regular point-of-purchase cost sharing – deductibles, copayments and coinsurance. The balance is a surprise because charges exceed the participant’s expectations regarding out-of-pocket costs and the balance bill amount remains a financial liability.
It important for health plan administrators to understand how to navigate new federal and state rules and regulations. There exists an opportunity to leverage significant cost savings and fully optimize the advantages and value of a health plan. Innovative service providers can support benefit specialists with powerful data intelligence, making for a stronger defense against balance billing and greater success in efforts to recover overpayments. State-of-the art information technology, data-driven software and online data analytic tools can provide a degree of price transparency and provide new insights by harnessing price data electronically – allowing fee comparisons that identity fair and reasonable prices.
Christine Cooper is the CEO of aequum LLC and the Co-Managing Member of Koehler Fitzgerald LLC, a law firm with a national practice. Founded in 2020, aequum serves third-party administrators, medical cost management companies, stop-loss carriers, employer-sponsored health plans and brokers nationwide, defending medical balance bills and delivering savings to employer-sponsored health plans. Find aequum at aequumhealth.com.