Health care in the United States is a convoluted mess. Just think about it. About half of Americans have health insurance that is mostly of their employer’s choosing. The employer acts as the insurer for nearly two-thirds of those. Consumers see a doctor or seek care in hospitals without ever knowing the price. Prices are not transparent and vary from location to location. Once in the hospital, patients are in no position to negotiate or even ask questions about prices. Hospitals are free to charge whatever they want but offer significant discounts to large payers. There is not one price but more than a dozen prices for the same service depending on the payer. List prices, also known as the chargemaster, are two to three times the customary price. Occasionally rogue providers try to ambush patients with surprise bills and price levels that should be criminal.
Speaking of criminal acts, there is also a conspiracy of sorts. Several large health insurers also own pharmacies and pharmacy benefit managers (PBMs). The three biggest PBMs control around 80% of the drug market. Ninety percent of drugs dispensed are generic drugs, allowing the prices charged to vary considerably. This arrangement means that when patients fill a generic prescription their health insurers often make money off the transaction, essentially selling the drugs to their plan member at a profit. Critics argue the same is often true of medical procedures. Employer plans contract with third-party administrators (TPAs) to manage benefits. TPAs do not always disclose the prices they pay hospitals for surgeries, etc. Furthermore, many employers claim it is difficult to get TPAs to reveal the actual prices employers are asked to reimburse. The management fees paid to TPAs are generally a function of spending. Thus, TPAs have a perverse incentive to increase spending, as do PBMs and hospitals.
Employers pass much of the costs on to employees in lieu of higher take home pay and direct employee contributions. For their part, employees often have little incentive to control spending. Most employer plans, insurers, TPAs and PBMs do not provide consumers with any kind of assistance to compare prices. In other words, nobody is really trying to hold costs down and therefore, providers do not have to compete on price or even disclose price.
Although not yet common, some employer plans are looking for ways to use direct contracting to reduce perverse incentives. This from Health Affairs:
Employer-provider direct contracting refers to a process by which employers negotiate directly with providers and set transparent prices for procedures and medications, without TPAs, to avoid administrative obfuscation and distorted incentives.
Direct contracting follows a variety of models.
Direct Primary Care.
The direct primary care model allows patients unlimited office visits and office-based services for a flat monthly fee paid by their employer plan. Specialist visits are available for low cash prices.
Direct Contract Pricing.
One way this works is for a large, self-insured employer to contract a specific hospital or hospital system for preferential pricing. Workers have financial incentives to seek care from that hospital system, which has an incentive to offer lower prices. Workers choosing a different health system may face financial penalties in the form of higher cost-sharing.
Providers are willing to offer competitive cash prices due to the absence of administrative complexities and the fraction of price-sensitive patients. Direct contracting may put further downward pressure on cash prices by bringing higher patient volumes to the contracted providers.
Employers can also encourage employees to find better prices than are routinely available through their health plan. For instance, all health plans are required to provide preventive services like colonoscopies under certain conditions. Colonoscopies vary in price, ranging from $1,250 to $4,800. If the benchmark price is, say, $2,500 a worker selecting the provider charging $1,250 should share the savings. The same worker choosing a high-cost facility should face additional cost-sharing. This is sometimes called reference pricing.
Smaller providers are often willing to offer better prices than large health care systems with a dominant market position. A necessary condition to do direct contracting well is price transparency and, preferably, decision-support tools to compare prices. There are third parties that collaborate with employer plans to assist workers in their choice of providers for specific conditions. So-called high touch services have a representative who advises patients, may even make calls and schedule appointments. Alternatively, a low-touch service may be little more than a web-based directory of providers offering better prices or perhaps a list of prices from various providers.
Policy makers have long sought to incentivize patients to be prudent consumers of medicine. The right combination can achieve this.
Read more at Health Affairs: Employer-Provider Direct Contracting: Practice And Policy