"You get what you pay for" is a well-known axiom, but it has been a nonexistent concept in the health care industry for decades. Health plans have treated their reimbursement schedules as a trade secret, and the federal government historically prohibited price transparency under the Sherman Act.
The fact that the Centers for Medicare and Medicaid Services (CMS) now compels health plans to post negotiated rates is a sea change. With health plan pricing transparency, understanding value — the intersection of the cost and quality of a health care service — is possible, creating a potential game-changer for health plan sponsors, including employers, who were formerly in the dark. In turn, "bending the health care cost curve" is now not only possible, but also urgently needed. Ensuring that employees make informed choices about value is the only way for employers to receive "value for money" for their health care expenditures.
Transparency tools shifting locus of competition
Employee health benefits represent one of the biggest line items for employers, with premiums and deductibles rising at almost every company, regardless of size. Suddenly, on the heels of landmark federal and state regulations that enforce transparency in pricing and quality data, it's also one of the ripest cost centers for disruption.
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In June 2019, pursuant to Executive Order 13877, the Trump Administration directed the Secretary of Health and Human Services to require price transparency in order to "protect patients and increase competition, innovation, and value in the health care system." As a result of the executive order, CMS implemented its Transparency in Coverage initiative for health plans. Under these mandates, all negotiated prices — from every health care payer to every medical provider for every service in the U.S. — must be made available to the public and kept up to date.
While price transparency was designed to help consumers make more informed, price-conscious decisions, this new information about negotiated rates is arguably more meaningful to employers and their benefits consultants. Equipped with this new information, they can now understand the vast disparity in rates for identical health care services, providing them with pricing leverage they have never had. In every market, for every health care service, employers can, and will, require health care providers and health plans to defend their negotiated rates.
It is well known that the price commercial health insurers pay for hospitals' and physicians' services are much higher, on average, and have been rising more quickly than the prices paid by public health insurance programs, per a Congressional Budget Office (CBO) analysis. Similarly, a Kaiser Family Foundation (KFF) review of data from 2010 – 2017 found private insurers paid nearly double Medicare rates for all hospital services (199% of Medicare rates, on average), ranging from 141% to 259% of Medicare rates. (Fig 1.)
What has not been known until now is that there is no correlation between the quality of health care services and the negotiated rates for those services. (Fig 2.)
Value for money: A wake-up call for employers
For employers, these findings should be a wake-up call to how little value for money they are receiving. Most notably, these findings suggest that the largest savings are to be found in steering away from a handful of providers in each market for particular services instead of steering to a single provider. As a result, the way employers and benefits consultants think about health benefits design should change, perhaps dramatically.
With the availability of pricing information and ability to connect costs to quality, they must/should:
- Seek broad provider networks, while designing benefits at the service-line level in every market that incentivize employees to use the best value provider, whoever and wherever they are
- Recognize that a true "market price" already exists for every service in every market, and therefore provide employees with incentives to choose from providers who deliver the service at or below the "market price"
- Provide employees with a "value score" at the individual provider level, not just the negotiated rate at the facility level
- Require brokers/benefits consultants to compare networks based on the total cost of care of their employee population as opposed to allowing brokers merely to "price" an employer group
Hal Andrews is a health care business leader with over 25 years' experience as an entrepreneur, executive and investor. Hal has served as the President and CEO of Trilliant Health since its founding in June 2017. Hal currently serves on the Board of Directors of Trilliant Health and Mployer Advisor and on the Board of Advisors for the Nashville Capital Network.
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