Why Is Healthcare Price Transparency So Hard?

Few are making much progress, but a small number of hospital and health system leaders are doing their best to change price opacity.

This article appears in the March 2014 issue of HealthLeaders magazine.

Many hospital and health system CEOs are embracing the triple aim of improving the patient experience, improving the health of populations, and reducing the per capita cost of healthcare, an objective popularized by the Institute for Health Improvement.

Of the three legs of that stool, the one on reducing cost is problematic because one person's (or organization's) cost is another's profit. A major obstacle in reducing the cost of care lurks in price opacity for healthcare services, and some say that rapid consolidation in the industry is not only not helping reduce the cost of care, it's actually doing the opposite.

The reasons for such a lack of transparency are inherent in a payment system that is unlike other industries, which generally have just two parties—a buyer and seller—involved in any transaction. In healthcare, a third party is almost always involved, and despite attempts by the government to make transparent the prices it pays for a variety of healthcare services and products, commercial payers and their partners are still very reluctant to reveal what they pay organizations for their services. In fact, such disclosures are contractually prohibited in most cases—not that most hospitals and health systems have historically minded.

But with pressure for transparency mounting and with higher variance in reimbursements, some hospital executives (mainly those who think they would do well in a price and quality comparison with their competitors) are pushing for greater transparency. Many of these are organizations that have historically been squeezed by commercial plans for reimbursement concessions because they lack market leverage. Their leaders feel that if prices become more transparent, they would compare favorably in a cost contest with their bigger and more market-dominant peers. But are they on a quixotic quest?

The paradox

Getting at the true cost of healthcare and rooting out the waste that resides there is critical to changing healthcare's unsustainable cost trajectory. What hospitals pay—and charge—for medical devices is part of this calculus as well, and those contracts have similar prohibitions on hospital disclosure. One of the chief reasons for the secrecy is that it offers a competitive advantage for insurers and device makers to obscure what they pay or charge any healthcare provider because profit and loss of both the healthcare organization and, of course, the payer, can be affected by negotiations when contracts are up.

Related: 5 Obstacles to Hospital Price Transparency

If a hospital knows what another one is getting, the hospital can leverage that information when its negotiations come due. Many organizations have a general idea of how well they do on commercial reimbursement related to their peers, and the ones that are doing much better than their competitors—for whatever reason—would seem less willing to share that information even if they could.

But small organizations often say that their size, not their cost profile, is what prevents them from getting their due in negotiations with commercial insurers—despite their lower costs and, in some cases, higher quality. Through transparency of prices, they could better make that case.

One who resents this paradox is Steven Sonenreich, president and CEO of Mount Sinai Medical Center in Miami Beach, Fla., and not just because his revenues and margin are at stake through reimbursement that he says is on the low side versus his competitors because of their greater market power. He's also concerned in his role as a large employer in a state where large employers, who can sometimes serve as a lid on premium increases, are scarce.

"We wear one hat as CEOs of mission-driven large healthcare organizations, but under another hat, we're also employers," says the CEO of the 672-licensed-bed organization with more than 3,500 employees, adding that one of the greatest challenges any employer has is managing the expense of health insurance for its own employees.

"I have a little more insight into the management of health insurance premiums as an employer than CEOs who are not in healthcare, but we've all seen the cost of insurance rising at such an alarming rate, and that has also caused the expense to the employer and the employee to rise at a dramatic rate. That's of great concern to me as an employer."

Sonenreich claims that the rising cost of insurance is largely tied to consolidation and the market power of bigger, but not necessarily higher-quality, organizations. He says the lion's share of reimbursement from commercial payers goes to those organizations.

"What's occurred is we have many large hospital systems that are using size to leverage insurance companies for much higher rates," he says. "Many institutions would like you to believe consolidation is to improve operations; it's really to drive pricing leverage."

"Many institutions would like you to believe consolidation is to improve operations; it's really to drive pricing leverage."

He offers anecdotal examples of this. He says for two Mount Sinai employees who were hospitalized at neighboring large system hospitals for emergency care needs, the price Mount Sinai paid was 30%–40% higher than if those people had been able to get to Mount Sinai.

Another example comes from a Mount Sinai physician who performed an unusual emergency "limb-saving" surgery at a large system hospital in the area.

"His very grateful patient came to him after her two-day hospitalization and was appalled that the doctor's compensation for the surgery was less than $1,500 while the hospital's was $99,000," says Sonenreich, who adds that the physician and hospital were able to look at the bill and compare what the surgery would have cost at Mt. Sinai. They were tens of thousands of dollars apart "When you have these large systems using that pricing leverage against the insurance companies and them not being motivated to challenge that for whatever reason, then what you have is a great deal of challenge in a marketplace."

Subsidizing the money losers?

Of course, individual examples such as Sonenreich's do not necessarily prove that consolidation is the cause of such disparities in commercial reimbursement. Many hospitals and health systems claim that such large prices help subsidize services that lose money and would not be available if they were not subsidized.

But should commercial customers be expected to contribute to that subsidy? It's an open question, but the fact that such subsidies are not accounted for in the balance sheet means the truth about how much the subsidy system may be needed is elusive, lost in the complexity of reimbursement and the opacity demanded by contract.

One CEO who does not have the problem of subsidizing money-losers is caught in a conundrum. Jane Keller, RN, is CEO of Indiana Orthopaedic Hospital and OrthoIndy, the physician group practice that owns the 37-bed specialty hospital in Indianapolis.

"It's always amazed me how with any other service I know what I'm going to pay for it prior to purchasing. In healthcare it's not as black and white," she says. "A lot of variables go into it, but I really feel like we could do a better job of being transparent with our pricing up front."

Yet there are significant barriers, even for a specialty hospital. Neither she nor her board is interested in being a first-mover in sharing what they're paid by insurers.

"We've spent a lot of time talking about that," Keller says. "We would be willing to share, but we don't want to be the only one out there, so we've held off."

But it's not even that simple, she says; because of insurance contracts she doesn't really have a choice, as the insurers do not want other hospitals to know what each is paid. And while she says she can't quantify it, she knows her hospital's contracts are not as strong as the full-service hospitals.

"I don't really see much leadership from payers on this," Keller says. "We continually show them we are a good value for their constituents, but they're a little cautious about going down that road because we are single-specialty and they don't want to harm their relationships with some of the other full-service hospitals in the area by directing patients to one facility or the other."

She says that as more and more healthcare dollars get pushed onto the consumer to pay, movement on this front might come more quickly.

"We have health savings accounts and a high deductible in our current healthcare plan," Keller says. "More of our employees are aware of the value that's coming out of their pocket before their health insurance kicks in."

Blame insurers, lax employers?

There are differing opinions about price transparency. Some believe that due to the complexity of contracts, cross-subsidization, and the nature of business negotiation, the links aren't always clear and, indeed, that it would be impossible to make them clear.

"What's holding it back is the fact that it's hard to be transparent when there are so many different reimbursement methodologies," says Peter S. Fine, the president and CEO of Banner Health in Phoenix, who says the very purpose of Banner is to be a vehicle to reduce healthcare overhead. It operates or owns 24 hospitals in seven states.

"You can produce charges, but there are so many different contracts and relationships, it's hard to say, 'Here's the price you should pay for something.' In a different environment, where there weren't so many different contractual relationships, it might be possible."

Fine argues that because everything is driven by a contract that results from an organization-to-organization negotiation, price transparency is nearly impossible to achieve and not worth much even if it is.

"So much more of this is driven by the insurer than the healthcare organization," he says. "The kind of transparency you're looking for doesn't typically happen in our world because of decades of development of relationships with the employers through whoever they've chosen to be their insurer or through various relationships through federal programs; you have vast differences on what people or insurers or the government pays or doesn't pay."

Another approach

Instead of pushing for price transparency, Fine argues the biggest achievements that can be made in reducing the cost of healthcare—or at least the growth in costs—are not only through consolidation and elimination of overhead, but also through focusing on healthcare costs after about age 58.

"We don't have a healthcare system problem, but we have a problem in how we treat people at their highest level of usage," he says.

He says by focusing on the highest utilizers of the most expensive care, healthcare leaders and policymakers can "tune out the static" and have a better chance of solving the problem, and he adds that the Patient Protection and Affordable Care Act does little to nothing to address this.

"We tend to look at an insurmountable problem like fixing the healthcare system," he says. "I wonder how healthcare costs would be viewed as a problem to be fixed if we just focused on that population."

Banner is one of the hospitals in CMS' Pioneer program, the most aggressive and risky form of Medicare ACO, and despite a large exodus after the first year, Banner stayed. Fine says Banner approached the 50,000 lives in its Pioneer ACO by focusing on the 5% of those patients who were the highest consumers of healthcare services.

"We were one of the organizations who did pretty well," says Fine. "It could be dumb luck or focusing on the 5% who are the greatest drivers of cost. We could also reduce costs if we forced every Medicare enrollee to have a healthcare power of attorney and a living will and they had to produce these documents upon enrolling."

While Fine's suggestions could, indeed, go a long way toward reducing healthcare cost inflation, they have little to do with limiting market dominance or with allowing employers and consumers to better compare cost and quality among a group of organizations. And as Sonenreich notes, size does matter and is a factor in driving costs higher.

"We looked at state-level data of large systems in our marketplace. The reimbursement and pricing they were able to receive from insurance companies was at times 45% higher than all other hospitals in the marketplace. So all consolidation did was drive up price and cost," Sonenreich says. "Such systems are profiteering through pricing instead of efficiency."

He says employers must drive change.

"The difficulty in our marketplace is we're not in an area of large employers," Sonenreich says. "We have a lot of small and medium-sized ones. It takes the clout of very large employers to do this and create motivation from insurers to participate in this three-legged stool. From an economic standpoint, transparency in pricing for employers, employees, and insurers is at the crosshairs of affordability in healthcare."