Bob Semro column: A tool for lowering health-care costs
The cost of health care is the single biggest driver of the health insurance premiums that you pay every month. And according to a November study from the Center for Improving Value in Health Care (CIVHC), the cost of some inpatient and outpatient services is a lot higher in rural Colorado than in other parts of the state.
Inpatient care is medical treatment provided by a hospital or other facility that requires at least one overnight stay. According to the CIVHC report, the highest average prices for some inpatient services are in Western Colorado. And those prices are 60 percent higher than in Boulder, one of the highest cost-of-living areas on the front-range.
Outpatient services are procedures or tests that can be done in a medical facility without an overnight stay. Some of those services are 114 percent higher on the east slope than in Colorado Springs which has the lowest outpatient costs. West slope outpatient costs (not including Grand Junction) are twice as high as in Colorado Springs.
These calculations are based on data from CIVHC’s All-Payer Claims Database which collects medical and pharmacy claims from public and private insurers. In the study, CIVHC compared the actual charges for twenty-two of the most commonly used inpatient and outpatient services against the price for those services set by Medicare. And that comparison with the benchmark Medicare rate is what’s most important.
For the most part, insurance companies negotiate rates with health care providers based on a starting price set by the providers they do business with. Since those prices are set independently by each provider, it’s difficult for health plans to determine whether those charges are reasonable.
For example, according to reporting from the Colorado Hospital Association, the price of a minor-severity knee replacement surgery in 2012 could vary from $23,000 in one hospital to almost $95,000 in another. As a result, even if an insurance company negotiates a 20 percent discount they could still be paying a much higher price depending on the hospital where the surgery was performed.
But Medicare rates can provide a comparable baseline. Medicare sets a single payment rate for procedures and treatments across all hospitals and medical providers based upon patient mix and geographical location. And unlike the non-public proprietary rates negotiated between private payers and providers, Medicare data is open and available. Analysts can better evaluate prices by comparing actual claims to that benchmark Medicare charge.
To be sure, Medicare rates are underpriced. In order to make a profit most hospitals have to charge more than the Medicare rate. The CIVHC study assumes that hospitals would have to charge 1.5 to 2 times more in order to do so.
Yet, according to the study, insurance companies across Colorado are paying nearly 3 times the Medicare rate for inpatient services and 5.5 times the rate for outpatient services. Across each of the 10 outpatient services analyzed, payments ranged from 2.5 to 11.5 times higher.
In western Colorado (not including Grand Junction) the median cost for major joint replacement surgery is 383 percent more than the Medicare rate. Chemo Infusions cost 541 percent more. Colonoscopies with biopsies are 857 percent higher and knee arthroscopic surgeries cost 861 percent more. And finally, median appendectomy charges in western Colorado are 1,304 percent higher than the Medicare rate.
By comparing actual claims to Medicare rates you can clearly identify huge charge disparities that need to be addressed. What explains a 1,300 percent price spread?
Medicare reference pricing can also provide a starting point for employers, legislators, health care providers and the public to begin a discussion about how to effectively manage the ever rising cost of medical care.
For example, in 2017 the state of Montana started using Medicare reference pricing for their state employee health plan. Under the Montana plan, the vast majority of hospitals agreed to place a cap on outpatient and inpatient services equal to 234 percent of the Medicare rate. In the period since this plan was adopted, the state employee health plan went from a $9 million deficit to a program that saved $15.6 million and now has over $100 million in reserves. The results in Montana were so positive that the state of North Carolina decided to implement a similar pricing structure for its state employee plan in 2020.
But it doesn’t end with state employees. Private, self-insured and employer plans could use Medicare reference pricing to negotiate lower rates that could be passed on to policy holders in the form of lower premiums. And more extensive studies like the November CIVHC report could be applied to a larger number of procedures and treatments in order to cast more light on what some health care providers actually charge.
Implementing Medicare reference pricing might be a meaningful way to better understand the health care cost problem and a practical first step toward managing it.
Bob Semro of Glenwood Springs is a former health policy analyst for the Bell Policy Center, and a legislative and senior advocate. His column appears monthly in the Post Independent and at postindependent.com