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Paying for health care

Recent media stories illuminating the wide variation in hospital rates for the same service points to a well-known problem in the health care industry.  Hospitals almost always charge employers much more than they get from Medicare.  The result is that costs get shifted to employers through health plan contracts and to the uninsured. Employer premiums end up as much as 30 percent higher than they should be, which means less money for employee raises and company profits. 

Ordinary people expect that if they pay more, they get better quality.  But in health care, there’s no proof higher cost hospitals provide better care or superior outcomes. In fact, research shows the most expensive hospitals are the least efficient and least effective.

That’s because higher rates often reflect a greater number of mistakes. One recent study indicated that when a privately insured patient experiences one or more complications -- such as blood clots, stroke, infection, septic shock, pneumonia or cardiac arrest -- hospitals' profit margins are 330 percent higher compared with a patient with no complications. Rather than losing the hospital money, mistakes actually earn hospitals more money!

In the end, hospital costs or payments do not cause or contribute to a dysfunctional healthcare market, but are the result of a dysfunctional market.  Hospitals are acting in their own short-term best interests – as are physicians, clinics, health plans, employees and even employers.

We need to shift away from the perverse financial incentives of our current “reimbursement” system to the kind of price and quality transparency we find in every other industry. Instead of paying separately for an engine, a chassis, and an interior, we need a single price for a package of services and a simple scorecard that consumers can understand listing mortality rates, infection rates, and other outcomes measures.

Wal-Mart and Lowe's have taken issue in hand. They are working with groups of high performance hospitals and paying a flat fee for each procedure. Employees travel to hospitals to get care and pay no out-of-pocket costs. Employers know the total cost of care in advance. If there are complications, the hospital pays for them, not the employer.

Called “bundled pricing,” such initiatives are growing in popularity. A recent Booz & Co. study found that 78 percent of consumers find bundled pricing attractive. Over half of consumers said they would travel within their region to save even 10 percent the cost of a delivery or a knee replacement. Moving to bundled pricing would allow – or force – hospitals to compete for revenue like other manufacturers and service providers.  It would require doctors and hospitals to cooperate to reduce variation and mistakes.  Real competition will be the result.

Obviously, the system we have today is not working. It is time for employers and employees to demand a new health care marketplace.

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Bob Smith

Bob Smith is project manager for the Colorado Business Group on Health, where he is responsible for a major pilot project on payment reform in Colorado. Reach him at robert.smith@cbghealth.org

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