Most employers are already implementing a variety of strategies to contain health-care costs, such as restructuring benefits, establishing coverage tiers and opting for value-based purchasing or private health-insurance exchanges. CFOs should also, however, look at market-based solutions.
In particular, moving to a cash-pricing model for elective health-care services — that is, virtually anything other than procedures in response to sudden emergencies, like heart bypass surgery in response to a heart attack — has great potential to curb costs. A vast majority of medical procedures are elective.
Cash pricing refers to a payment for medical services that is negotiated between a patient and a provider. Whereas contract rates in PPO health plans are negotiated annually between payers and providers, reflecting the relative market power of each party in a given area, with cash pricing, providers bid on a specific procedure for a specific patient in competition with other providers.
With the selected provider freed from bearing the administrative costs of managed care for that procedure, it can offer significant discounts. Cash pricing is routinely negotiated one on one between patients and providers. It’s less common within employer-sponsored health plan (ESHPs), but employers could readily adopt it.
A key benefit of cash pricing is the opportunity to base the provider selection not only on cost but also on a provider’s proven quality or efficiency. That opportunity doesn’t exist with PPO health plans.
How the Process Works
First, an employee requests medical approval for the procedure from the EHSP. Upon receiving the approval, the employee typically meets with his or her primary-care physician and chooses providers from a list of local ones that have expressed interest in discounted cash payments.
Then, an external vendor retained by the ESHP sends a bid request to the chosen providers that asks not only for a price quote but also for data on how many of the particular procedures they’ve done and their patient outcomes. The vendor can help the employee make the selection based on that data as well publicly available data on things like hospital readmissions, patient satisfaction and complaints, and malpractice lawsuits.
After the procedure is done, such vendors typically take a percentage, often 20 to 25 percent, of the difference between the cash rate and what a network provider would have been paid under the ESHP.
The bid process is generally completed within 48 hours. When a cash-price provider is selected, the employer prefunds an account set up for that particular provider and procedure and then releases the money to the provider’s account at the time of service.
As a financial incentive for employee participation, employers usually waive the deductible and co-payment for the medical procedure. The employer and employee are both indemnified against “balance billing,” where a health-care provider bills for the difference between what the provider chooses to charge and what the health plan chooses to reimburse.
Magnitude of Savings
Here is an example: For an employee who needs a knee replacement and opts for cash pricing, the employer may waive the deductible — perhaps $2,500. The patient could then select an orthopedic surgeon that has bid, say, $22,000 to perform the procedure, or stick with a network provider that will perform the procedure at a typical PPO contract rate of $65,000.
Employers overpay for both outpatient and inpatient services. For example, in the Houston market in 2013, the average outpatient rate for a diagnostic MRI under a PPO health plan was about $1,300, compared to a cash rate of $450, according to MedCostsolutions. Imaging studies such as MRIs are the low-hanging fruit of cash pricing. Providers have wide latitude to schedule the test during off-peak hours when equipment is underutilized.
For an inpatient colectomy, the aggregate PPO cost for all providers contributing to the procedure — institutional professional, surgeon, assistant, anesthesiologist, radiologist and pathologist, plus technical costs — averaged almost $64,000, almost three times the cash rate of $22,000.
Improving Employee Satisfaction
Many employees can’t afford the out-of-pocket portion of medical costs under high-deductible health plans (HDHPs) and are thereby shut out of the cash pricing market. According to a 2013 survey by CashNetUSA, 22 percent of Americans had less than $100 in savings to cover emergencies, and 46% had less than $800. Paying deductibles as high as $5,000 or $10,000 is not feasible for them. And the problem is only getting worse as HDHPs continue to gain market share.
Data from eHealthInsurance.com indicates that 11 percent of employees with an annual deductible of $2,500 spend that amount. For deductibles of $5,000 and $10,000, just 4 percent and 2 percent of employees, respectively, spend that much. In other words, few employees in HDHPs realize a benefit from their coverage. It’s in CFOs’ power to preempt this situation with cash pricing. And they should: not only are rising health-care costs costing them money, another result of unhelpful health “benefits” is disgruntled employees.
New Financial Strategy Needed
In order to substantially reduce health-care spending, CFOs need to employ new business models and financial strategies that align their interests with those of both providers and employees. Cash pricing supports providers by removing the burden of managed-care administrative costs, which are roughly 30 to 40 percent of provider revenue. Providers also get full payment in cash at the time of service and thereby avoid accounts-receivable issues when patients cannot meet their deductibles. And providers that can innovate and increase productivity are financially rewarded.
For employees, cash pricing offers more choice of providers, active engagement in decision-making, improved access to care, and positive financial incentives. Unfortunately, PPOs are moving in the opposite direction by limiting employee choice with restrictive networks and imposing increased financial risk on employees.
Market-driven pricing is certainly not a new concept. It is accepted as a fundamental business principle in all sectors except health care. When employees are empowered to make cost-conscious choices and providers are rewarded for cost-effective care, prices fall significantly.
Peter Boland is president of Boland Healthcare, a health-care management consultant to care providers, employers and insurers. He has advised vendors that offer cash-pricing services to employers. Contact him at email@example.com or 510-527-9907.