So Here’s an Idea

If you spend any time writing or speaking about health care reform, eventually you’re asked the, magic wand question: what would you do? . Well, there’s an idea I’ve been thinking about. It’s not a Big Fix. It’s merely something that would improve whatever system is in place – I think – by making the system more simple and transparent. I’m sure it’s riven with problems. And maybe it’s a hot topic, but I’ve missed those articles. In any event, here it is. Please let me know what you think I’m missing.

The Mechanics

The idea is to have providers (physicians, hospitals, clinics, laboratories, etc.) publicize what they charge using a multiple of what Medicare pays. If Medicare pays $100 for a procedure and a doctor charges $300 for the same procedure, this doctor is a 300% provider.

Carriers, meanwhile, will set what they reimbursement providers as a percentage of Medicare as well. If an insurance policy pays up to $250 for this same procedure, it’s a 250% policy.

The key is that this percentage doesn’t vary based on the procedure. Once a provider or carrier sets their multiple, it defines the cost for all treatment and services. Consumers gain two bits of information they lack today: what their provider is charging (300% of Medicare in this example) and what their health plan pays (250% of Medicare here).

There’s two advantages to using Medicare as the benchmark for pricing. First, it’s already in use today. Second, it assures both providers and payers are using the same measurement. When you say “300% of Medicare” doctors and insurers know what you mean whether they’re in San Francisco or San Antonio. (If you’re from elsewhere, it means take the Medicare rate and multiply it by three).

Compare this today when all they know is that the carrier pays in-network services on a mysterious discount and out-of-network services based on an unknowable formula. What is reasonable and customary? Under this proposal, however, the consumer knows what the carrier will pay and what they’re responsible for before they walk through the door for medical care.

If implemented today, a number of things remain unchanged. Deductibles, co-insurance and co-pays: still allowed. The Affordable Care Act’s essential benefits: covered. Preventive care: not subject to deductibles and co-insurance. How emergency treatment is reimbursed will need to change to a standard multiple of Medicare for all payers regardless of the facility’s usual percentage so consumers aren’t subject to balance billing.

Simplicity and Transparency

As noted, this idea overlays the current system; it’s not a substitute. This is an overlay, however, that delivers substantial simplicity and transparency. Consumers know up front which providers they can afford. There would be no networks so there would be no surprises from out-of-network charges, Consumers choose any doctor fully aware of how much of their bill is covered by their health insurance. If they want more covered, they simply choose another provider.

Physicians wouldn’t have to guess what carriers will pay them. They’ll reduce their costs as a lot of unnecessary paperwork goes away. However, they’ll also have to compete with other providers in their community. If a doctor is going to charge 500% more than everyone else, she better have a good reason.

Hospitals could no long hide behind their charge masters– a menu of prices they charge for services that no one ever sees and few hospitals can explain or justify. These inflated costs are the starting point for pricing negotiations with carriers, so few people ever see them. (Steven Brill wrote a special report for Time magazine in 2013 that explains charge masters and should be required reading for anyone attempting to reform American health care).

Consumers and their brokers will be able to compare the value of plans on an apple-to-apple basis. If a 400% policy is more expensive than a competitor’s 500% policy, the carrier better be able to explain why. Consumers won’t face unexpected charges, either. They’ll know if their policy will cover all of a given provider’s expense or if they’ll need to pay a portion of the costs. And they can choose their providers accordingly.

Carriers benefit from this proposal, too (unless you’re employed in the networking department). Actuaries will have more certainty in determining the reimbursement required under each plan, regardless of whether the provider is in o out-of-network. With better information on their exposure, carriers can price more accurately. The simplicity of the system will also reduce operating costs and that’s critical for carriers needing to meet a legally required medical loss ratio.

An Improvement, Not a Revolution

I know this idea doesn’t fix America’s health care system. The goal is to inject greater simplicity and transparency into whatever system is in place. If transparency advocates are right, this will revolutionize health care. I’m not sure I buy into the idea that transparency is all that game changing, but to the extent it is, this proposal dramatically increases transparency throughout the health care system.

Single payer advocates will not be impressed by this idea. However, I believe, in spite of its current momentum, single payer is a long way away. Single payer proposals cost too much, impose too much centralized control and are too disruptive. The ACA cost Democrats Congress (and arguably the White House) and Obamacare is far less radical than any single payer plan out there. Imagine the political blow back at a government-run insurance by voters already fearful of death panels and distrustful of Washington?

ACA supporters should like this approach. A common criticism is that the ACA is that it doesn’t do enough to make health care or health care coverage affordable. Simplicity saves money. Transparency empowers consumers to reduce their health care costs. The ACA plus a Medicare-pegged health care system will help the ACA keep its affordability promise.

Advocates of reference-based pricing should also be happy. I’m proposing reference-based pricing on a nationwide scale with everyone using the same reference: the Medicare reimbursement schedule. This goes further than most of the reference-based pricing proposals or implementations I’ve seen, but it’s a logical expansion of the concept. And because both the provider and the payer are referencing the same benchmark, litigation — a too common result of current reference-based efforts — is unnecessary.

This proposal isn’t a panacea. The question is, it is a practical improvement? Please let me know what you think – and what I’m missing here – in the comments.

11 thoughts on “So Here’s an Idea

  1. Are we addressing out of pocket risk to the consumer with this approach? Although you purchase a plan that fits what YOUR provider is charging, the higher costs come with all of the ancillary providers around your primary care. When people start in with the “I don’t care what it costs” attitude during a pants-on-fire moment…..we have unlimited exposure.

    What am I missing? Once his out of pocket is met and he start hitting the 600% providers……. Does the patient pay the overage and because it is above the purchase percentage (covered amount)? Is there truly an out of pocket max in this scenario?

    Paula Wilson

    • Good questions Paula. Thank you for them and the feedback. I envisioned out-of-pocket requirements continuing beyond the satisfaction of deductibles and co-insurance — but only if a consumer goes to a more expensive provider. So long as you stay in the virtual-network created by your plan (a 400% benefits plan creates a virtual network of all providers at 400% or less) the you pay nothing after meeting deductibles, co-insurance and co-pays. Going to a, say, 425% provider would result in a payment obligation, just like going out-of-network does today.

      This isn’t much different than what happens today. Even if you hit your maximum out-of-pocket for out-of-network providers an out-of-network provider can still balance bill you for the difference between what the carrier paid and what the provider charged. This just quantifies ahead of time what that balance billed amount might be.

      As for specialists, labs, etc. — providers could offer a range of companies and the consumer could choose one who charges what the policy covers (e.g., 400% of the CMS schedule). If we want to complicate things, carriers could offer 400%/600%/500% plans — the first number is what they cover for physicians; the second for hospitals; and the third for ancillary services. But it’d be nice to keep it simple and just have one number.

    • Hi Alan – I won’t pretend to understand all the ramifications of your idea, but I think that injecting simplicity and transparency into this market will have a powerful and positive impact. Any time a consumer can easily assess the cost of a service in relation to the value received, the power of free market dynamics will do magical things. What we have now is a market (if you can call it that) where the participants have imperfect knowledge at best. Your concept would light up many of the dark places where market distortion occurs and allow participants to make more informed decisions.

      Two additional elements that would strengthen the free market dynamic are increased adoption of consumer-driven plans and an objective method for rating provider quality. When consumers can understand the real value of the services being provided (via transparent pricing and understandable quality measures) and are using their own dollars to pay for services, the market will be vastly improved. There’s a lot of talk about wanting to bend the cost curve. Putting knowledge and the purchasing decision and responsibility into the hands of the consumer is a great way to start.

      These are big concepts and who knows if they can be implemented, but kudos to you for starting the discussion with a creative idea.

  2. Alan,
    This is exactly why I consider you a mentor. Another great idea and really so simple.
    It reminds me of the Automobile sales industry. When they became regulated for new car sales and had to disclose everything, they went to pushing the leasing of cars because they did not have to disclose the money factor. It allowed them to hide dollars in the sale and not have to disclose to the consumer. One time when I was leasing a car, I was actually told that they couldn’t tell me because they didn’t know and it was a number in the computer. Sounds like a carrier or a doctors office when you are trying to find out a cost or reimbursement.
    I am happy to get behind this idea. It’s easy, doesn’t cost anyone anything other than disclosure and could once and for all deliver consumerism.
    Well done Mr. Katz.

  3. Transparency, with or without pricing controls would be an improvement. I think all pricing should be published today. Medicare is the best known price, so using that as a standard makes sense. But then you have those who will be much higher than the standard, so will the medical community be willing to establish a standard price or will they just start billing for more services as mentioned above? The actual volume also has to be taken into account, or you’ve just shifted the problem to another problem. To affect volume, best practices have to be implemented across the board, but that is a much larger problem because medicine can be so subjective and the patient is not knowledgeable about the services they are “buying”. I find a lot of improvement can be made simply, just by looking at the current system. For example, when a doctor calls in a lab order, it has no date “to be done” on it. That leaves it up to the patient to remember to schedule it at the appropriate time, or they accidentally do it too soon, too late or never. Wouldn’t it be easier to just add a date to the lab of the time frame when it can be done, and then the lab/doctor can send a reminder or not, but at least the patient isn’t getting useless lab work or showing up to an appointment unprepared and requiring a second lab/appointment. I know this is a small thing, but all of the little things are adding up.

  4. Hey Alan, great idea. I’ve been very recently talking about this same concept with some colleagues up here in Sacramento. I really like the idea of judging or comparing a contract as a multiple of what CMS pays. I think it’s a missed opportunity that we are not already doing this. It would be difficult to use this tool for HMO plans or ACO models, but I imagine there would be a way to compare it against the Medicare Advantage model to be able to get an “apples to apples”. I also think that if we want to throw single payers a bone…or perhaps go even deeper on reform, we could potentially look at a federal stop-loss program. Something akin to the US Government reinsuring a specific stop loss for all 300+ million americans. Then the private insurance companies would sell fully insured IFP and small group products with a limit of say…$50,000 or $100,000–maybe the limit changes based on income. Large employers could still self-fund to the limit as well.

    In my humble opinion, a federal reinsurance program coupled with your idea of reference-based pricing would be a good kick in the pants for healthcare reform.

    • I wouldn’t call a federal, national stop-loss program a “bone.” It’s a substantial reform. Plus, it would be fun to see Congress debate raising the stop-loss limit during Republican administrations and lowering it during Democratic administrations. Of course, single payer advocates will claim it fails to “save” the cost of greedy insurance companies and the overhead of competing health plans. So while they might view it as a start, they’ll be far from satisfied. But it’s an interesting concept. Thanks for putting it forward.

      • It would be “fun” to watch the Reps and Dems play rollercoaster with the stop loss limit? You are one sick puppy. I’ll make the popcorn. 🙂

  5. Alan, I think that it’s a GREAT idea! It addresses the root problem of high cost medical insurance which is high cost medical care. I suspect that if your proposal were to become law that providers may find clever ways to maintain revenue, such as billing for more services… Still, I love the fact that it moves the conversation away from proposals that will not reduce the cost of care but would make matters worse, such as buying across state lines; reintroducing medical underwriting and expanding high risk pools; or, severely reducing benefits to below Bronze level, etc.

    Your idea is a great one. How will you promote it and how can agents help?

    • Glad you like the concept, Bruce. Thank you. First step is to flesh it out with more comments and suggestions. Then it will be circulating to opinion-shapers and decision-makers both in the industry (e.g., NAHU, CAHU) and beyond. I’ll keep you posted.

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