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Hospital Pricing Data Dump Won't Hurt You, Yet

 |  By Philip Betbeze  
   May 17, 2013

If you are a high-cost outlier, don't panic. Even if you can't kill your chargemaster, you can mitigate its effect by identifying—and rectifying—what your hospital charges.

My column last week, "Kill Your Chargemaster," predictably generated a lot of reader response. With a provocative headline like that, I expected to get a lot of "you don't know what you're talking about," types of emails and comments. I can take that, and I fully recognize that I'm not an expert on the intricacies of healthcare finance and what got us into this mess.

But I was surprised.

Instead of nasty condemnation, I got thoughtful responses. Exhibit A is from Frank Poggio, a former hospital CFO who is now a consultant, about why hospital prices are such a Gordian Knot, and why killing your chargemaster (or at least making sensible changes to it) is so tough. Read what he says (edited for punctuation and grammar):

"Yes, hospital charges are nonsense, all over the map, and not based on logic. All true. But how'd that happen? As a former CFO, I can tell you it was all done via the Medicare Cost Report, the core basis of the Medicare payment system. For almost five decades the government has used the Cost Report, and a myriad of other convoluted reimbursement systems, to calculate payments to hospitals.

So over the decades, any good CFO would make sure that his charges maximized his governmental payments. And Medicare and Medicaid usually make up 60% of his total payments.

Some 30 years ago charges became a substitute for statistics and cost accounting to estimate how much the government was going to pay you. Ever hear of RCCAC? That's the Ratio of Costs to Charges as Applied to Costs, a key calculation in the Cost Report. One of the most insane ways of 'identifying' costs ever cooked up. And it's still used today!

Hospitals get paid based on DRGs, but still must do a Cost Report to justify the DRG amounts. I was around in 1983 when the feds came up with DRGs, they said back then the DRG system would replace the Cost Report... and here we are 30 years later—with both! If you want to know why charges are a mess, just look at the Cost Report, and ask who created that monster? Oh, the government, the same one that now complains about warped prices. What did they expect?"

Whether or not bureaucrats 30 or 50 years ago cooked up insane compensation guidelines is, of course, out of your control. If you want to get paid, you have to play that game. But the rules are slowly changing, and you have to adapt.

Because of this convoluted system, you can't kill your chargemaster today, but over time, you may be able to minimize its importance and its outrageousness. We've at least dispensed with the myth that the chargemaster doesn't matter.


See Also: Kill Your Chargemaster


In fact, it does matter a lot. The chargemaster is one variable in the Rube Goldberg device that determines how you are reimbursed for the work your organization does. It also matters in public perception, but you should have known that for the past decade or so.

Still, take solace in the fact that you have time to rectify the situation. Or so suggests a report from Moody's Investors Service that maintains that the near-term credit impact of the big CMS data release is minimal. (Moody's is supposed to be in the business of measuring risk, after all, for institutional investors in your bonds). The report says, in part:

"The CMS data provide transparency in hospital charges, but given the fact that the actual price for a given service depends on the negotiated price between the hospital and insurance company, the disclosure of charges does not allow consumers to compare actual prices. Therefore, we believe the immediate credit impact to individual hospitals and the industry as a whole is minimal."

Never mind that consumers are the last group hospitals should worry about comparing their prices, but over time, says Moody's, greater threats will come from payers, employers, and yes, Washington, DC. For this time period, the credit rating firm is more concerned along these lines:

"First, it's conceivable that a hospital system may adopt price transparency as a marketing strategy. Such a strategy would appeal to large self-insured employers and price sensitive consumers (ie: those with high deductibles or co-insurance rates) shopping for discrete, non-emergent healthcare services such as hip or knee replacement, bariatric surgery, elective heart surgery and other procedures.

This strategy could be national in scope and would not need to be limited to a single market or region. There are already examples of domestic medical tourism whereby a hospital provides a discrete set of services for a flat fee. In some cases, the hospital also offers a quality guarantee." (italics are mine, because I'll have a story out about this in the July issue of HealthLeaders magazine, so stay tuned.)

Also from the Moody's analysis:

"Second, the data could also be used by third parties advocating for change among hospital pricing and billing practices. The cost of healthcare services is receiving significant media attention and is the subject of intense political debate in Washington DC as federal healthcare spending on Medicare and Medicaid are significant drivers of the federal deficit. California already requires hospitals to disclose data on charges (similar to what CMS has published) and similar requirements are under consideration in other states including Maine and North Carolina.

Massachusetts enacted legislation to limit the growth in healthcare costs to state GDP, and numerous states have rejected insurance premium increases deemed excessive. Although none of these actions is individually responsible for a slowdown in healthcare cost, collectively they point to the significant attention policymakers are giving to the issue of healthcare costs.

It is conceivable that states will require additional disclosure on actual prices paid, inviting greater regulation of the industry. Such a development would have material impact on hospitals' marketing and billing strategies and would carry negative credit implications for those that are slow to adapt." (emphasis mine)


How much hospitals charge for the same procedures (source: The New York Times)

So, even if you can't kill your chargemaster, you can modify it appropriately, and by doing so, you could go a long way toward rationalizing the insane numbers that make it up. Better yet, perhaps you could adopt a strategy of being the low-cost, high quality leader in your area.

At its core, this data release paints a portrait of what a screwy health reimbursement system we have in those numbers in black and white on the map application I steered you to last week at the New York Times.

Anyone can look into the black box that cooks up their  payment rate and make a reasonable guess as to whether their the high-cost outlier in their area. Those numbers have the power—at least in non-near-monopoly markets—to steer business to competitors if the difference is enough.

Even if that educated guess isn't enough to move your customers (that is, payers, employers, and patients) to the competition, you can bet they'll assume the worst, and at the very least ask you to prove that you're not the high-cost outlier, despite what the CMS data says about your chargemaster and what the government pays you.

So, your commercial payers and local employers are looking at it, even if individual patients aren't—yet. That brings us to the health insurance exchanges, which, at least in states with significant payer competition, may prove another blow to high-cost hospitals.

What some hospital leaders don't seem to understand is that you are doing the work, and you're billing for it, despite how screwy the system is. So, although blame can be heaped upon the government for getting you into this mess—and the former CFO above makes a good case for that—you are at the end of the line. You're holding the bag on public perception.

Besides that, it's tough to successfully claim hardship when your hospital has that 10-story crane building a new patient tower and attached parking garage.

This is not an attempt to demonize hospitals. All I'm saying is don't be caught flat-footed as the high-cost leader in your area. Take small steps to rationalize your pricing structure so you don't have to make big gouges later, when the government, individuals and commercial insurers start to hold your feet to the fire. In the meantime, use this reprieve to find a better way. Let's stop being victims, shall we?

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Philip Betbeze is the senior leadership editor at HealthLeaders.

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