The Truven Health Blog

The latest healthcare topics from a trusted, proven, and unbiased source.


Reference Pricing Can Incent Price Moderation

Monday, June 9, 2014
Tom Weatherup imageA recent article in discussed the idea of meaningful competition. “Ensuring meaningful competition” through increased transparency is a key component to re-engineering the U.S. healthcare system and resolving the issues of high costs and high utilization.

When large employee group health plans, like CalPERS, are able to access and analyze claims data, they can see (often for the first time) the wide variation in pricing that currently exists. Many of our large employer customers are shocked at the extremely wide range of all-in prices for the same service, such as colonoscopy or knee replacement, within a confined geographic area.  

Of course, in the current environment consumers tend to be price insensitive, due to the design of health benefits, and they can’t access marketplace pricing even if they were interested. Given the lack of price information, the CalPERS initiative of setting a reference price (for the allowed amount covered by the plan) for a subset of specific procedures is a reasonable approach to communicate what is considered “average” for a given service within the marketplace. An interesting, and perhaps unexpected, result of the CalPERS reference pricing initiative is that many high-priced providers have lowered their price to the reference price or near it. In retrospect, this is a reasonable response by providers when discovering that their price was inconsistent with the marketplace – especially in an environment where consumers now care about provider prices.

Tom Weatherup
Vice President, Client Service

Reference Pricing: Carrot or Stick?

Tuesday, June 3, 2014
Matt Collins imageAs a recent article pointed out that the Obama administration is supporting the continued practice of reference-based pricing, but that decision is being met with mixed reactions. Some say it’s an innovative healthcare cost-control strategy; others worry about the burden on patients.

Either way, it’s really only a matter of time before more employers and health plans begin to strategically implement the concept to reduce costs — because it works. Recent research studies show the use of reference pricing, where plans place a cap on what they will pay for a specific procedure, saves money for both organizations and patients alike.

The key for employers and health plans going forward, though, will be to decide whether to use reference pricing as an incentive or punishment — the proverbial carrot or stick.

Using it as a motivational tool, businesses can leverage the opportunity to inform consumers of reference prices — and then reward them for staying below that price. Rewards could take the form of gift cards for accruing X amount of dollars below the reference price, or even straightforward cash-back rewards equaling the difference between the reference price and the lower dollar amount charged by the provider.

And we already know that encouraging consumers with rewards is a great way to take overall engagement to a whole new level.

Of course, cost penalties that hit their personal pocketbooks can get the attention of consumers, too. Organizations could simply choose to present consumers with reference prices, thus making them accountable for the difference between the actual amount of the procedure over the reference price.

No matter which path an employer or health plan chooses, finding ways to boost cost transparency, like offering treatment cost calculators and other personalized tools, will be important as reference-based pricing gains ground.

Matt Collins
Director, Product Management

The Effect of the Charge Master on Price Transparency

Thursday, May 29, 2014
According to a recent article in , as part of a new rule proposed by the Centers for Medicare and Medicaid Services (CMS), hospitals will be required to release a standard list of prices for their medical services. This rule is part of the Affordable Care Act, and can also be fulfilled if hospitals allow the public access to the data after an inquiry. As consumers and other entities who play a part in the delivery and payment of healthcare services try to better understand how much healthcare costs, price transparency is increasingly important.

To an extent, hospital prices are arbitrary because they don’t expect to be paid what they charge. Each hospital has a separate payment rate from each payer which tends to be discounted to half or less than the charged amount, or more with government payers, where reimbursement is independent of charges. The hospital receives a legislated amount for a particular service regardless of charge. For each private or commercial insurer (including self-insured employers or their third-party administrator), hospitals must independently negotiate rates, which sometimes include fixed-case rates as with Medicare or Medicaid. At other times, hospitals negotiate a discounted fee for services (e.g. charges discounted 50%), usually with differing discounts for broad types of care (e.g. inpatient, outpatient, emergency and sometimes separate rates for routine care and ancillary services).  However, hospitals with high charges relative to costs or to charges of other hospitals must often agree to a larger discount. So the range of actual payments for services and supplies tends to be much smaller than the charged amounts.

Price Transparency changes graph image

Source: Truven Health ActionOI®

Hospitals often have the leverage in these negotiations. Some hospitals have a unique position in a market, so the insurer has little choice but to include them in its network. On the other hand, most insurers only account for a small portion of a hospital’s revenues, even when the insurer has a large share of the private coverage. So a hospital can benefit from having relatively high charges when insurers with fewer covered lives cannot force them to accept a large discount rate. Thus the smaller insurers must often be price takers. This is an area in which greater transparency could reduce the variability of charges and payments.

The way hospitals set charges differs from hospital to hospital. Each hospital maintains a charge master, a list of nominal prices for services and supplies charged by each unit. Charge master files are difficult to compare across hospitals. The charge master is usually maintained by a committee which assigns charges for new items and periodically reviews charges for existing items. Usually the committee is supported by groups within each major patient care department in the organization that recommend charges. Often charges are set by attempting to mark up estimated costs by a particular factor (1.5x, 2x, etc.). The markup usually differs across hospital service lines, such that services like diagnostics (e.g. imaging, EKG, EEG) and routine supplies tend to have higher markups than routine patient care and clinic visits. Hospitals often have minimum charges (e.g. the legendary $5 aspirin), but also tend to mark up high-price items, such as implantable devices and certain drugs,  by less than lower cost items (e.g. a 50% markup on implantable devices vs. a 250% markup on routine supplies). Since discount rates have been increasing, hospitals have incentive to proactively raise their mark-up factor (“front-run the deductions”). Instead of marking up from costs, some hospitals attempt mark up from expected payments, since they know what proportion will be deducted.

It doesn’t have to be this way. In Maryland, the all-payer hospital payment system establishes, through negotiation, a fixed schedule of payments to all hospitals by all payers. Since each hospital will be paid the same amount for the same services and supplies, regardless of nominal charge, there is no incentive for hospitals to charge an amount appreciably different from what it expects to be paid. By applying these same transparency principles nationwide via the Affordable Care Act, the culture of undisclosed costs and mark ups could be a thing of the past.

David Koepke
Lead Scientist, Center for Healthcare Analytics

Price Transparency for Medicare Services and Procedures Can Help Avoid Wasteful Spending

Tuesday, April 8, 2014
Mike Taylor imageI welcome the that it is publicly releasing extensive data detailing how much Medicare part B pays physicians for more than 6000 services and procedures. I don’t share the American Medical Association’s position that this data release will be harmful. Medicare part B pays in excess of $77 billion annually for physician services, and the public should be able to see how those dollars are spent.

Truven Health research proves there is tremendous variation in price for hospital services and procedures, and I fully expect these new data will show the same level of price variation. I expect to see considerable variation in price for physician services (office visits, consultations, etc.), but I suspect the real story will be in the prices charged for procedures rather than just the physician services.
  • How much price variation is present for frequently performed services like EKGs and blood tests? I recently received a bill for a “Metabolic Panel Comprehensive.” The test costs pennies to run—and the bill was $145! In total, my lab bill was $1035.
  • Many physicians have invested in office testing equipment and can charge a wide range of prices for these tests. Bone densitometry equipment a good example: it’s marketed with a definite business plan. Doctors are told how many tests they need to do every month to pay for the equipment and guarantee a certain profit level.
Over the past months, several Truven Health articles and studies have highlighted the huge variation in prices for colonoscopies, a recommended screening test, ranging from several hundred dollars to thousands. The public has a right to see these prices before agreeing to the tests. That is the goal of the Truven Health Treatment Cost Calculator. Patients using this tool can see the actual charge for a given test in his or her community, compare costs and then make an informed decision. Our fee-for-service payment system drives wasteful spending on medical procedures, and full transparency is one way to better understand what is driving these high costs.

Michael L. Taylor, MD, FACP
Chief Medical Officer

No Going Back to the $20 Office Visit

Thursday, January 2, 2014
Mike Taylor imageWhen I started my private medical practice, I priced an office visit at $20, because that was the prevailing rate in my town. I really had no idea of my cost structure, patient volume, or even practice viability. As we grew to a five physician practice, we updated our charges annually without any projections of the effect of the price increase. My patients had no interest in the cost of healthcare, and often requested unnecessary tests, knowing insurance would cover the cost. The hospital where I admitted patients had a sign in the emergency department listing the prices of various tests. That was price transparency in the early 1980s – very little transparency, very little understanding, and even less interest.

Fast forward to 2014 – the cost of healthcare is approaching 19% of GDP in the U.S., and we are all aware that per capita healthcare costs in the U.S. are more than twice the average of OECD countries. Payers have tried for years to control healthcare spending:

  • Employers started by including deductibles and co-pays in benefit plans. They tried HMOs, utilization review to limit services, disease and case management to control high-cost claimants, and wellness programs to decrease the need for services.
  • High-deductible health plans started several years ago, shifting more of the cost to consumers, and now payers are looking to exchanges to cap their portion of the healthcare spend.
  • Efforts by the Centers for Medicare & Medicaid Services (CMS) to control costs led to the sustainable growth rate (SGR) concept and to DRG-based payment in the inpatient environment. Now CMS is looking at bundled payments in both inpatient and outpatient settings.
  • Medicaid managed care plans are growing, and evidence suggests they may be cost effective for the Medicaid population.

Today, many plans require consumers to pay 25-30% of the cost so it’s not surprising that they are becoming very interested in healthcare costs. Consumers want to know the cost of suggested tests and treatments, and are starting to ask questions about the need for services.

Uwe Reinhardt, a well known and respected health economist, has noted the need for price transparency, and I would point out that transparency is becoming important not just for consumers, but also for hospitals and payers. Employers are not willing to continue writing “blank checks” without knowing what they are getting for the money. They view health benefits as an investment in workers, and want information about the price, but more importantly, about the value of their investment. Some employers are studying the idea of narrow networks to improve value, and hospitals are watching this move carefully as they begin to compete on value. The changes brought by the Affordable Care Act are accelerating the trend toward value.

At Truven Health, we have long recognized the need for, and support the notion of, price transparency. To serve this need, we have developed tools to help consumers. Our Informed Enrollment tool gathers a patient’s most recent year’s actual claims, inputs the elements of available benefit plans, and helps estimate the patient cost of each plan. The Truven Health Treatment Cost Calculator loads actual price data from the Truven Health MarketScan® database, and allows the user to compare prices based on actual data, not estimates. As an example, if I wanted to see the price of an MRI in my city, I could go to the Treatment Cost Calculator to learn the cost, location, and, when available, the relative quality of each option. I can even get directions. Both these tools use the patient’s real data, not estimates or models.

As the U.S. migrates from a fee-for-service environment to a value-based approach, health system and hospital costs and quality are being publicly measured and compared. As patients, we should be able to see the prices. As employers, we need to understand the cost. Price transparency is here to stay, and this is driving change for doctors, hospitals, the government, and all of us. There is no going back to the $20 office visit.

Michael L. Taylor, MD, FACP
Chief Medical Officer