Eating My Cake

Last week, we took a look at a recent RAND study that showed hospital pricing for commercial insurers to be, on average, 2x what Medicare pays for inpatient services and 3x on the rapidly growing outpatient business. 

And that got me thinking about my grandmother’s chocolate cake and the first meeting between my wife and my brother.  No, I have no idea how the neurons in my brain are organized.

We had been dating long enough that it was time to take Justine to her first extended family gathering.  When it was time for dessert, she, as the guest of honor, was ushered to the front of the line.  There was Mammaw’s famous cake with the more famous fudge icing.  It would change your life.  She took the knife and started cutting out the first corner.

Which was when she first got introduced to the depths of the redneck in my brother Chris.  With all the burly bravado he could muster (he has perfected this mode), he stepped in, took the knife out of her hand and pronounced that she might soon be the newest member of the family, but she had not yet earned a corner of the cake.  See, the fudge was a little thicker in the corners, so those had long ago been claimed by various family members, of which he was one.  She was not about to take what belonged to him.

That is a bit of how physicians must think about the hospital pricing levels revealed by this study.  There is only so much cake and when they use their monopoly pricing power to take more than they should, they are taking it from someone else…and that includes your practice. 

I want to challenge you to not just read this as another data point, another statistic.  I want you to think very intentionally about the strategic opportunity this represents. 

First, note the sub-title in the RAND report: ‘Findings from an Employer-Led Transparency Initiative.’ The people behind this are the employers who pay most of the bill for over half of all Americans.  They are fed up and looking for better answers.  Get their issues firmly fixed in your mind, let this drive your thinking.

Second, you now have a very clear target for your business case.  Your services – your professional fees, your ancillary services, your ASC – compete directly with the hospital’s outpatient business.  If you can’t deliver your services at a material discount to these high hospital prices and still make good money, you’ve got big problems. That should be easy enough.

Third, and this is where docs struggle, you have to go tell your story to everyone that matters – the commercial payers who sit in the middle, the brokers and consultants who advise the employers, the employers themselves.  Yes, inertia and incumbent power are against you. But you have a better story, a story the employers want to hear.

You are effectively giving them back a corner of their own cake.

Big Flashlight

Lumens are the standard measure for light brightness and a typical flashlight can range from just a few lumens for one of those mini, key-chain gadgets to around 1,000 for a really good light.  Get into the kind emergency responders use and you’re talking up to 3,000 lumens. 

Then there is the Torch, which claims to be the world’s most powerful flashlight, weighing in at 4,100 lumens.  The company’s website shows a video of someone setting paper on fire with the beam.  Another shows a lady scrambling eggs with the thing.  A multi-functional camping tool.

It also sounds like the recent RAND report on hospital pricing.  It is shining a really bright light into some dark places.  Things may get scrambled or even set on fire.

RAND got their hands on a big ‘ol pile of commercial claims paid to hospitals between 2015 and 2017.  These were not Medicare claims or charges, but the amounts actually paid to hospitals by commercial payers for both impatient and outpatient services.  Most of the data came from self-funded employers who pay their own claims; some came from the All Payer Claims Databases mandated by Colorado and Indiana; a few payers participated by sharing their numbers. 

In all, the study had claims for 330,000 inpatient stays and 14.2 million line items for outpatient services.  These represented $13.0 billion in allowed amounts – $6.3 billion inpatient and $6.6 billion for outpatient – across 1,598 hospitals in 25 states. The RAND folks then also repriced every one of these claims as if it had been paid by Medicare, creating a very robust comparative data set.

Stop and understand that this kind of information – actual negotiated and paid prices by commercial payers – has been shrouded in more secrecy than the Coca-Cola formula.  RAND is shining its mega-lumen data into a dark corner.

The study found that hospitals in the study were paid, on average, 241% of Medicare rates in 2017, up from 236% in 2015.

[Pause for you to confirm your commercial rates as a multiple of Medicare.  Yep, no where close to 2.4x, are they?]

Another recent study put the average rate in 2012 at about 175% of Medicare.  Now we’re at 241%?  Man, those reform strategies to control cost are spectacular, aren’t they?  Failures, that is.

To rub salt in the wound, while the impatient rates were right at 2 times Medicare, hospital outpatient rates were almost 3 times Medicare (293%).  And where is volume moving? To the outpatient setting.

There is more to unpack here, so we’ll come back to it next week.  In the meantime, I’ll just let you soak over the Memorial Day weekend in the fact that while your payers have told you that you are being unrealistic, demanding and petulant asking for that highly unreasonable 125% or 130% of Medicare, the hospitals are being told, ‘300% and not a penny more…until next year…we’ll give you more then.’

Yeah, this stinks.  Enjoy your holiday.