What is the Price and Cost of Healthcare

June 10, 2014

“Our average price for a total hip replacement is $34,866.03. And for that procedure, our average Medicare payment is $14,974.69, our average Medicaid payment is $9,583.80 and our average private insurance payment is $27,369.83.”

Is this what the future looks like in the wake of the recent announcement of the proposed price transparency rule by the Centers for Medicare & Medicaid services (CMS)?

Actually, this vision of tomorrow is the reality of today for a number of health systems, including the example above which you can find on the website for Spectrum Healthcare, a not-for-profit healthcare system in Michigan with 11 hospitals and 170 ambulatory and service sites.

But the pricing and payment information they have made available isn’t just for total hip replacement procedures. It is right there on Spectrum’s website for 44 inpatient procedures, 56 outpatient procedures, and for 314 diagnostic procedures. And if you don’t see the procedure you are looking for, you can call or send a secure message to a pricing specialist.

Clearly Spectrum is a first mover, but as the CMS rule is finalized, every health system’s Board of Directors will be pushing the organization’s executive teams to lead not follow on this one.

Why?

With high-deductible health plans (HDHPs) being selected by 20 percent of individuals on employer-sponsored plans (up from 0 percent only a few years ago), it has become clear that conversations about cost with patients are going to be the new normal.

But the conversation on price is complex, because all stakeholders have different definitions of what the term price actually means. From the patients’ perspective, price ultimately refers to their deductible and out of pocket cost. From a hospital’s perspective, price is how much it charges. From a payer’s perspective, price is what the payer negotiated.

Although those definitions will certainly be debated, hospitals and health systems all will acknowledge that they are struggling with the topic of pricing. A core concern for them is that, like any business, they cannot set their price effectively and responsibly without knowing their actual ‘cost” and, therefore, their margins. Yet in health care, most organizations simply don’t have access to accurate cost data. So when it comes to pricing, they are flying blind.

The recognition of this cost data gap has resulted in a major movement to gain better access (data liquidity) to accurate cost data (data integrity) and then have the ability to drill into those data at a deeper, more actionable level (data density).

In this new environment, healthcare organizations require sophisticated cost accounting systems that enable them to understand cost and margins across service lines and across the entire continuum of care. Traditional cost accounting systems provided only inpatient cost and have significant issues relative to data accuracy and exceptionally poor access to data, often taking a week or longer to run a costing process. The end result is that most organizations only run costing once or twice a year.

Can you imagine executives in a healthcare system looking at clinical outcomes only once or twice a year? In today’s world, this is unimaginable—and it should be similarly unimaginable for an organization to review data on its true cost and margins so infrequently. The simple fact is that healthcare providers require the data liquidity, integrity, and density that are achievable with today’s more advanced cost-accounting systems to understand their cost and margins in support of developing a data-driven and effective pricing strategy.

The bottom line is that there is an underlying call to action attached to the CMS announcement. To prepare for the new conversation in health care, hospitals and health systems need to be able to price effectively, and to do so, they have to know their cost. Having this knowledge is not optional; it will be critical to an organization’s survival and ability to remain competitive in the future.