There’s been a lot of discussion in the last few years about Reference Based Pricing – commonly referred to as Medicare Plus or Cost Plus pricing. For those clients of mine that have utilized this methodology for repricing their hospital and other facility claims on their health plan, it has been a real game changer. Their costs have dropped dramatically by over $2,000 per employee per year. This has enabled them to continue to provide generous levels of benefits to their employees rather than cost shift the increases to employees through benefit reductions or increased contributions by employees, like many other employers.
Medical services in this country are the only product or service that we receive whereby we don’t know what the price is prior to the service being rendered. The first question typically asked by the hospital is “who is your insurance company?”
Hospitals and other facilities have what is called a Charge Master. A Charge Master is a voluminous file of all of the products and services that they offer and render to you and I when we walk in the door – and it also includes the associated prices of all the services. This would include everything from the Emergency Room and ICU, to Advil and gauze pads, to minutes in the Operating Room – everything that they provide when we’re patients.
When an insurance company or PPO network negotiates with a hospital or other facility, they negotiate a discount off of those billed charges. There may be some modification in the formula of the discount (limited DRG pricing) but by and large, the discount is off of the billed charges. I refer to this as Top-Down pricing.
The interesting thing is that the prices on the Charge Master can change at any time. More often than not, they’re typically changed on an annual basis, but theoretically they could change at any time the hospital chooses. There are no rules, regulations, laws, or any other requirements that can prevent this from occurring at any time and, there is no limit to what the charges could go up to. As an associate of mine said “the only limit to the amount of the price increase on the Charge Master is the hospital CFO’s imagination”.
When an insurance company negotiates off of billed charges, and the insurance company states that they have the best discounts, my cynical response to that statement is “discount off of what?” Just because an insurance company has negotiated a more favorable discount than their competitor, who’s to say that the price on the Charge Master wasn’t increased to offset that newly negotiated discount.
I subscribe to the method of Bottom – Up pricing, or Medicare Plus pricing methodology. The bottom is Medicare – the world’s largest payer. Medicare sets reimbursement rates for hospital services for Medicare patients and are adjusted from time to time by the federal government by a number of variables.
While every hospital is reimbursed by Medicare in a variety ways and amounts for the same services, many hospitals turn a profit on Medicare reimbursements. In a recent review of hospitals in my geographic area and other areas throughout the country, public data indicates that the average charge by hospitals (to you and me) range between 300% and 700% of what they receive from Medicare for the same service! If the hospital is already receiving a fair profit on Medicare, what does this say about their charges to you and me through the insurance company?
Bottom – Up or Medicare Plus pricing utilizes a formula and methodology to eliminate the variable and unknown price of the service that you and I receive. It replaces it with a fixed dollar reimbursement to the hospital or facility that can be more than fair, and still enables the hospital to receive a significant profit over their costs. This can only occur when a traditional PPO is eliminated – otherwise the PPO must pay the facility based upon their contract – a discount off of billed charges.
To learn more about Reference Based Pricing and what it can mean to you, go to www.strategichpc.com and connect for a free conversation and consultation. What would $2,000 per employee per year savings mean to your organization?