Looking Under Your Hospital’s Hood

I meet all the time with your clients who are fed up with their healthcare costs. For many businesses, healthcare represents their second-highest expense, behind only payroll. 

Most employers take traditional steps to control cost increases, and what follows is this scenario:

•  First the employer absorbs the costs.
• Then they transfer a higher percentage of the increased premium to their employees.
•  Employee participation then declines, and the death spiral begins.
• In response, the employer reduces benefits to again cut costs. This has the same effect as raising premiums, but because employees don’t see an immediate change in their paycheck, they are generally pacified.
• Over time, employees are left with dysfunctional plans. Most can’t even afford the deductibles.
• Finally, employers are upset they are paying millions for a plan their employees do not necessarily appreciate.

There is a major disconnect between the desires of a business owner and human resources. Owners make it clear they want to reduce costs. Human resources departments interpret this to mean reduced premiums, but there is no silver bullet a broker or HR manager can employ that will magically lower costs.

We can all redesign the dashboard—turn some dials and raise deductibles, remove co-pays, etc. But after the plan value has been gutted with cost shifting to employees, what’s next?

Wellness programs, of course! After all, healthy employees mean fewer claims. Companies have spent millions implementing these plans. If they simply reduce the number of claims, though, they are not really having the desired effect on decreasing the unit cost of care. This is not an indictment of the programs. They do have their place, but they are outmatched by the insanity of the healthcare delivery system. There are anecdotal examples of successful wellness programs, but the evidence suggests that true ROI is difficult to measure, and if wellness programs are effective, they are not effective enough at driving costs lower.

Frustrated yet?

Your clients need to stop tinkering with a broken system. Instead, change the game. They’ve been playing beach volleyball while their opponents on the field—namely hospitals and PPO networks—are in full gladiator mode. The smell of blood is in the air. It’s time business owners woke up and joined the fight.

We spend a lot of time figuring out how to reduce costs but little asking why medical services are so expensive in the first place. The answer is threefold: (1) hospital billed charges rise to compensate for network discounts; (2) billing errors are rampant; and (3) you’re getting slammed on outlier claims.

Hospitals raise their billed charges to absorb the discounts PPO networks require. In a story published in The New York Times in May 2013, Caroline Steinberg, the vice president for trends analysis at the American Hospital Association, said that, as insurers demand bigger discounts from a hospital, a facility may raise its charges to protect its bottom line. “The hospital raises its rate to cover the discount,” Steinberg said.

What does this mean for your U.S. clients? Brokers are still selling the fundamental idea that, if we are going to reduce our clients’ costs, we need more and larger discounts. It’s probably no real surprise that, if discounts increase, all the hospital does is raise its billed charges to compensate.

I recently audited a bill from a regional medical center for a client in California. The medical center billed the client $774,239. The PPO delivered a 57.9% discount. The plan paid $325,970. A 57% discount sounds like a great deal, right?

The hospital’s published costs average 9.95% of billed charges. So on a bill of $774,239, the hospital’s cost was actually $77,036. Who would buy any goods or services with this kind of arrangement?

Billing errors are rampant. Stephen Parente, a professor of health finance at the University of Minnesota who has studied medical billing extensively, estimates 30% to 40% of bills contain errors. The Access Project, a Boston-based healthcare advocacy group, says it’s closer to 80%.

PPO networks regularly agree to what they term “No Audit Provisions.” Simply put, the hospital is willing to reduce its billed charges, i.e. network discount, as long as the claims payer agrees not to audit the bills. Before we process and pay a claim, we compare the universal bill to the itemized bill. This ensures our clients don’t pay for services not received.

Employees often tell me a hospital billed them for services they never received. In a routine claim audit, one client was billed $97,000 for 16 titanium screws on the universal bill—more than $6,000 per screw. Yet the itemized bill showed the hospital used only four screws and charged the client $41,000—more than $10,000 per screw. (Not incidentally, the hospital actually paid $850 for each screw.)

Outlier claims get hurt on discounts. PPO networks often contend their contracts are superior to others, such as DRGs, or Diagnostic Related Groups—industry jargon for case rate. The idea is that, if a patient goes into a hospital and has a specific set of procedures, the hospital agrees to accept an all-inclusive payment. But the

PPO contract includes provisions that explain what happens if the member has procedures outside of the diagnostic related group. The PPO contract calls these “outliers.” So instead of the 30% to 50% discount you would have received, outliers are usually re-priced at 20% off billed charges.

In a recent audit for a prospective client, we explored what we would have paid on a $2.6 million charge for a premature baby. The company hit its outlier provision and knocked 20% off the bill. Total paid: $2.1 million. Using our cost-plus formula, we would have paid $857,000. It is true that DRGs can sometimes work in the client’s favor, but with the myriad ways a routine procedure can become an outlier, I wouldn’t bank on it.

Businesses should pay the bill based on the actual published cost, which is provided by each hospital on an annual basis. Our clients pay hospitals 12% above their published cost. As part of our audit process we compare this amount to what Medicare would pay, plus 20%. We allow their cost, plus 12%, or Medicare, plus 20%, whichever is higher.

We realize hospitals may not accept our payment, so we sign on to a plan as the co-fiduciary, which gives us legal standing to act on behalf of the plan. ERISA makes it clear a plan fiduciary has an obligation to pay “reasonable expenses of administering the plan.” That certainly includes how the plan should pay for what medical providers charge for healthcare. We take that liability and ensure the plan does, in fact, pay reasonable charges.

Does this proposal work? We work for groups that are self-funded—hundreds of them across almost every industry with employees in every state. Our clients engage our services through third-party administrators. Having audited more than $600 million in billed charges, we’ve found we save clients an average $150,000 per 100 employees—much better than network discounts.

And these savings do not include the fixed-cost reduction our clients realize. Clients will see cost decreases not only in claims, but in fixed costs as well. We’ve seen specific stop-loss premiums come in 46% lower after we applied our model. As the claims cost goes down, you can also expect to see reductions in aggregate factors.

It’s time to ditch the beach-ball bikini, don some armor and enter the fray.