How a clearer view of healthcare price data will shake markets
Price transparency in commercial health plans makes cost reduction an imperative for healthcare providers
The recent CMS hospital price transparency ruling requires providers to release negotiated rates for 300 “shoppable services” for each of their contracted payers. The ruling aims to help Americans understand the cost of a hospital item or service before receiving it.
CMS has also finalized the payer equivalent; payers will have to make their negotiated rates with in-network providers public in January 2023. As a result, payers, providers, and consumers will be able to compare rates across the healthcare system, making healthcare costs more transparent.
Price transparency will drive both providers and payers to understand their own businesses through the data they collect; which is a good thing. It is fair to say that businesses in all markets are becoming more data driven as they understand the value that data analytics can produce.
Organizations that seek to navigate this transition should start by finding the internal product owner for the chosen system and understanding the reports that can be generated. Often, the business and IT work together so that the business suggest areas they need analysis in or the problem they are trying to solve, then IT can advise on the potential solutions.
The impact of price transparency
These CMS rulings will have several notable impacts on the healthcare market. First, payers will use the public information to compare negotiated rates across their network. Payers can use these comparisons to negotiate lower rates where they can see other payers—their competitors—have contracted lower rates.
Conversely, providers can use this data to drive negotiations in their favor by identifying services where they are the most cost-competitive and where payers have accepted higher rates. The interplay of providers’ market power and transparency of rates probably won't trigger a race to the bottom, but they will drive commercial insurance rates to decrease.
Additionally, using both publicly available and proprietary data, payers and providers can combine price transparency, quality and patient experience data to derive a value-based approach to healthcare and network optimization. Providers can set higher prices for high-quality services, and payers can identify ways to improve network quality.
As price and quality data become increasingly accessible, consumers—especially employers buying healthcare on behalf of their employees—are expected to take a more active role choosing healthcare providers. This shift is already happening to some extent, as Medicare Advantage plans nudge consumers to low-cost providers.
As a result, providers may lose revenue as ACA, Medicare and Medicaid plans replace commercial plans. Current price transparency data indicates that negotiated rates for ACA plans are comparable to Medicare/Medicaid, while negotiated rates for commercial plans are generally higher.
For example, a sample of negotiated rates for radiology-based shoppable services from more than 300 hospitals in the Northeast shows that commercial insurance plans pay on average 408 percent of the Medicare rate, whereas ACA based plans pay 199 percent of the Medicare rate, and Medicaid Advantage plans pay 143 percent. One consequence of this visibility may be that more employers will consider offering their employees defined contributions instead of health insurance or other arrangements, such as the Walmart Centers of Excellence model. Walmart contracts with a select group of providers that deliver high-quality care, frequently at no cost to the patient.
Cumulatively, market forces are increasing competition between healthcare providers and adding downward pressure on negotiated rates and upward pressure on quality. In this context, providers must understand how they can improve efficiency and lower service costs without diminishing quality of care and patient trust. The following approach can be used to set up a transformation program that is centered around identifying opportunity, engaging stakeholders, and successfully planning and executing on change initiatives.
Setting up the program to be transformational at the outset, rather than a small set of individual incremental changes, offers a greater chance of success by: using experts to identify a long list of improvement initiatives and ensuring that the change is executed by a team large enough to take on the size of change and have the required transformational expertise needed to release the benefits quickly.
1. Follow the data
Identify the greatest areas of opportunity by using price transparency, quality and patient experience to benchmark provider rates against patient outcomes. A large variance from the benchmark likely signals opportunities to improve cost and quality; benchmarks should provide direction rather than a fixed target. For example, we analyzed the price transparency data for an MRI of the head (CPT code 70450) at multiple hospital systems in upstate New York. We found that rates vary not only within systems but also between systems. The difference between average negotiated rates for commercial plans across systems ranges from $416 to $883. Within some systems, this variance is even greater.
Data from operational, HR and finance systems also can be usefully used in business cases, scenario modeling or data feeds for new applications. For example, outpatient data can be used to improve capacity and delivery models, operating room data can be used to maximize utilization and throughput, inpatient data can be used to optimize patient flow, and workforce data can be used to identify areas of high spending.
Healthcare leaders also should evaluate treatments as an end-to-end service. Although treatments will vary from patient to patient, understanding the average total cost of a treatment—from diagnosis to cure—can provide greater insight into cost and quality than focusing on the individual components of a treatment. Current practices in healthcare financial analysis can present this complication as hospitals often evaluate profitability on a departmental basis or by creating averages across a wide range of services, as either adjusted or equivalent discharges. While these approaches can represent the financial performance of a provider system as an aggregate, they are not effective for diagnosing and reducing expense on a service-by-service basis.
Viewing treatment as an end-to-end process also can help healthcare leaders reduce the number of handoffs between departments and/or physicians. Excessive handoffs can increase costs, waste time, and heighten the risk of communication errors. Research indicates that these types of communication errors are responsible for nearly 80 percent of medical errors and 30 percent of malpractice claims.
2. Ideate with the experts
Collaborate with physicians and employees who are closest to the problems to generate innovative solutions. These employees will have the best understanding of the processes they follow and the issues they encounter every day. They also likely share the goal of improving patient care, which helps to promote engagement in the transformation and supports benefits release later on.
An “outside in” perspective also can work well to gain a new point of view. Bringing together physicians with similar skill sets or those who perform the same types of operations but who do not usually work together will drive cross fertilization of ideas and bolster opportunities to improve patient outcomes. For example, creating internal benchmarks on the cost makeup and patient outcomes of an operation performed by different surgeons, then bringing those surgeons together and presenting the data to them can drive an agreed upon, optimized way to perform the operation. Not only does this drive cost down, by combining with quality data the team can make informed decisions to drive the best patient outcomes.
The Wall Street Journal describes the scenario: at Sutter Hospital, where knee replacement surgery is performed more than 400 times per year and can cost from $7,300 to $10,500. Analysis found that surgeons had been using an expensive cement premixed with antibiotics. By switching to a less expensive variety and implementing other process changes, the hospital saved 18 percent on knee surgery ($1,800 on average) without harming patient outcomes.
Providers also share success stories, which are now known throughout the industry. For example, John Hopkins implemented an Enhanced Recovery After Surgery (ERAS) program with the Agency for Healthcare Research and Quality’s (AHRQ) Comprehensive Unit-Based Safety Program (CUSP). The combination of initiatives reduced length of stay by 1.5 days, reduced cost by $1,500, and reduced surgical site infections by 50 percent for colorectal surgery. ERAS strategies are employed across the entire care process and drives a collaborative care approach, involving surgeons, anesthesia providers and nurses. These strategies can be applied across numerous services.
Many transformation programs fail to meet targets simply because they do not generate enough ideas at this stage; benefits are overestimated or costs underestimated. It is therefore important to solicit as many ideas as possible at the outset.
3. Assemble the right expertise and prioritize based on Time to Value
A transformation program will be judged on the speed at which it delivers value to the business. This is driven primarily by two factors; how well the transformation is planned and the skilled resources used to execute the change.
A successful transformation requires finding the right team size and expertise needed in the project; teams must be big enough that they are not overburdened with workload and have the critical expertise needed to enable the change. Teams will need to have transformation skills, like project and change management, and specific subject matter expertise on topics like process automation, organization design and medical process. Creating a transformation program that tackles multiple change initiatives at once enables an organization to construct a larger team where resources are not overburdened and occupy specialized roles. These roles can be shared across change initiatives, resulting in more efficient workloads and shared expertise.
Plan and prioritize change initiatives using Weighted Shorted Job First Agile technique to determine which ideas will produce the most significant benefits in the shortest timeframe. If planned well, the initiatives will deliver value incrementally instead of in a lump sum at the end. Secondly, some of these initiatives will likely be linked, but this doesn’t need to mean that one initiative is wholly dependent on the success of another. Remove dependencies across projects to minimize the impact of potential delays and further enable incremental value delivery.
Price Transparency is the first step on the journey to a more competitive marketplace
The Price Transparency ruling is an indication that the market is going to be driven to become more competitive through regulatory policy. The sustainable Health Care Cost Growth Target in Oregon is another. In January 2021, the Oregon Health Policy Board set the annual per capita healthcare cost growth target at 3.4 percent for 2021-2025 and 3 percent for 2026-2030. Similar policies are also being discussed in six other states. Some providers may view these policies as a threat, but others will see it as an opportunity to set themselves apart from competitors by delivering high-value patient care. Ultimately, this shift will provide higher quality, less expensive healthcare for patients—but providers that fail to respond may soon be acquired by those who do.
Matthew Harrison is a healthcare operating model expert at PA Consulting