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Why Healthcare Pricing Stays Opaque

In almost every industry in the U.S., consumers can easily access price information to shop. There is one glaring exception to this rule: goods and services in our nation’s healthcare system. Why do we accept the concept that it’s OK that we have no idea what the costs will be until after we have received the service?

As a result, there is no price elasticity that would normally reward vendors who don’t overcharge and reward innovators that reduce costs while improving quality. Because the market for healthcare is broken, disparate prices bear no relationship to cost and quality. Table 1 shows very common examples of how the same medical procedure can have wild price variations within short distances.

Many believe there’s no fix without healthcare price legislation, and recently we have seen some regulations passed and additional measures discussed by our political leaders. But Americans already get consumer-based pricing models in nearly every other industry, and shopping comes naturally to most of us.

See also: Is Transparency the Answer in Healthcare?  

So why would anyone wait for the passage of special price transparency regulations before requiring their medical suppliers to support a normal shopping experience?

According to the Peterson Center on Healthcare, U.S. residents paid over $352 billion in out-of-pocket healthcare costs—along with another $3 trillion in healthcare premiums and taxes—to pay for commercial and government healthcare programs last year. This represents a staggering 10x, or 1,000% more than, what parents paid when baby boomers were teenagers. Unlike in the mid-‘70s, most medical tests and procedures vary in cost by 5–10x within a short distance of home, but very few of us recognize this. When we consider we’re just as likely to get the best care at the lowest-cost facility, you might think that we’d all take a personal interest in how we choose the providers and locations we use to receive “shoppable” medical tests and procedures. Yet most of us don’t.

The reason is that the continuing rhetoric among suppliers, legislators and payers—created by the combination of the quasi-regulated environment of healthcare with a third-party, indirect, payer system—interferes with normal market dynamics.

Most legislation aiming to mandate some sort of price transparency has simply provided plausible excuses for the industry to say “we use industry best practices” and “we complied.” This provides cover so the industry isn’t subjected to the same consumer protection laws that affect goods and services in every other market. What’s actually needed is less regulatory meddling and more free market principles to reward innovations that lead to higher-quality care at lower costs.

Rhetoric around “personal mandates,” “lifetime caps,” “pre-existing conditions,” “market stabilization,” “Cadillac tax” and other things that relate only to who will pay for healthcare coverage create a smokescreen that ensures that we never talk about the most basic issue in delivering services to this mass-market – price of medical procedures.

Unfortunately, severe unintended consequences were created when many of our state legislators created a set of rules known as Medical Loss Ratio (MLR) rules, and, more recently, these rules have been codified in federal law known as the 80/20 rule. The intended effect was to limit the amount a healthcare carrier could charge a customer in insurance premiums to no more than the actual medical charges plus a fixed percentage to operate the business and provide a reasonable return to shareholders. This type of rule or contract is often referred to as “cost plus.”

The unintended consequence is that carriers have no incentive to reduce medical claims, and therefore premiums and out-of-pocket expenses. Regardless of the carrier’s wish to help you, as long as there are MLR rules (a.k.a. 80/20, “cost plus”), carriers have a financial disincentive that makes them likely unable to survive if the amount of spending on medical procedures and drugs dropped substantially.

Because research has shown that medical price transparency alone (shopping) could knock more than 50% out of healthcare expense, you can see why some might want to slow the movement to consumerism by continuing to maintain secrecy on procedure prices, while beating the drums of healthcare rhetoric. This approach will keep us ignorant of the root cause of the outrageous cost of care in the U.S. – overpaying for medical procedures.

See also: The Search For True Healthcare Transparency  

The good news is that more and more individuals have high-deductible health insurance plans, with roughly 36% of all people under the age of 65 currently enrolled in an HDHP. Now there’s a grassroots movement, debunking lies and empowering patients and employers—not lobbyists—to take action.

Intuitive decision support tools continue to be adopted by those who want to be able to compare their options for healthcare based on price, in addition to quality and convenience. Eventually, as price-elasticity is restored to our broken healthcare market, we will see a full reversal of the unsustainable cost trends we’ve experienced over the last decade.

Consumer-Friendly Healthcare Model

Best-selling Author Og Mandino once said:  “Always seek out the seed of triumph in every adversity.”

It appears that a small, yet growing number of America’s front line health providers are doing just that. Instead taking on increased risk, greater healthcare bureaucracy and more administration headaches, these medical mavericks have drawn a philosophical line in the sand.

I’m speaking of direct primary care (DPC). For the uninitiated, DPC is an emerging model where general practitioners elect to disassociate from, and no longer bill services to, health payers, including Medicare. DPC practices average between 600 and 800 total patients (vs. the national 2,300-patient average for traditional primary care provider (PCP) patient panels).

This return to front-line doctoring — “sans insurance” — translates into a cost-reduction of as much as 40% in staffing and reduced administrative complexity. Electronic health records (EHR) software finds itself replaced with lighter applications to track, schedule and bill patients. Practices may also choose to use mhealth/telehealth technology to monitor/connect with patients.

Patients in these practices are often those with low to middle incomes, with high-deductible health plans (HDHPs). For this reason, DPC doctors develop network relationships with other local medical specialists and services. The result is patients gaining access to discounted medications, imaging and labs, plus lower service fees from local specialists — all on a cash basis.

And presto! We have a true two-party care relationship, where doctors focus purely on patients, instead of blending in payers as their second healthcare customer.

The median monthly DPC fee for an adult is about $70; and fees for kids are priced between $10 and $20 per child. Many DPC practices also cap monthly family fees. Pricing is independent of pre-existing conditions and current health status and allows for more face-to-face time, as often as needed.

These practices report reducing urgent care and ER visits, plus hospital admits and re-admits. Quality and outcome data has apparently started reaching malpractice insurers, now quoting lower rates for direct vs. traditional primary care practices.

Here is where it gets sticky. DPC is rightly considered a “health service,” both by the Affordable Care Act (ACA) and by 16 states. However, under section 223(c) of the U.S. tax code, the I.R.S. wrongly considers DPC a “gap,” or secondary, health plan. Therefore, DPC is not a qualified medical expense — and fees paid by patients are not reimbursable by health savings accounts (HSAs).

Changes are in the works, per the introduction of Senate Bill 1989 – The Primary Care Enhancement Act of 2015, which would make DPC fees a part of HSAs. The bill, with strong support from the American Academy of Family Physicians, also seeks to require the Center for Medicare and Medicaid Innovation (CMMI) to create a new payment pathway for DPC as an alternative payment model (APM) in Medicare and with dual eligibles.

The plan is for DPC to show Medicare its mettle — and eventually receive a modest flat fee payment for primary care services offered by a DPC medical home. The legislation includes allowing qualified physicians who have opted out of Medicare to participate in the program. It also serves as a partnering catalyst with Medicare Advantage, in an affordable care organization (ACO)-like structure.

DPC is a disruptive “hot knife” model, whose entry is well-timed to cut through the cold stick of butter called high health costs.

Today, PCP co-pays have gone up to $45, and deductibles are sky high. Many consumers have no idea that at or around the same per-visit patient fee, DPC exists as an option. Employers are just beginning, on a larger scale, to integrate DPC with other options such as HDHPs and self-insured health coverage. Using this new model with self-insured companies makes sense, to hedge risk, lower health costs, improve outcomes and improve quality of care.

One county in North Carolina, which employed a DPC option, saved nearly $1.5 million on yearly medical expenses — on just 800 covered lives! It may surprise you that, apart from HSA standing, there are already early employer adopters who have chosen to pay the monthly DPC fees for employees themselves.

A British Medical Journal study showed patients of Washington state DPC provider Qliance coming in with 35% fewer hospitalizations, 65% fewer emergency department visits, 66% fewer specialist visits and 82% fewer surgeries. DPC benefits appear to not only reduce primary care costs, but lessen the healthcare costs and utilization outside of their practices.

Payer transparency is a significantly important strategy to the future growth and integration of DPC.

We talk about the importance of transparency in hospital pricing to patients, and for drug companies to reveal their true R&D costs. But have you ever stopped to consider the importance of transparency in how payers calculate and price plan premiums for each covered member? Just how much of the premium payment can be carved out as estimated primary care services to be received?

More than ever, healthcare consumer groups and fully insured employers should push health payers for transparency. Because I’ll bet what payers have estimated for per-person primary care usage and costs, adding in the associated patient responsibility portions (co-pays, and any applicable deductible or co-insurance fees) will be much more than an $840 yearly DPC payment.

But wait…there’s more. Don’t forget to have payers deduct an additional…let’s be conservative…1/3 of the Qliance savings percentages for the estimated care cost savings relating to carved-out estimated care outside of primary services.

Next, look at Medicare and do the same thing. But…instead of the wallets of health plan members, think federal budgets, taxpayers, subsidies, growing liabilities and the potential to hold off future tax increases.

Then look at Medicaid for the same reasons, remembering that DPC would certainly create a greater improvement of care quality than Medicaid care providers and facilities. Remember the “triple aim” — cost, outcomes and quality — and that doctors are happier.

DPC injects disruption and greater consumerism into healthcare.

Something interesting happened along the way to transforming our healthcare system. The ACA fell far short of its goals, and America’s care delivery and coverage became even less affordable for millions of employers and individual consumers.

We should know by now that improving quality and pricing for all will not come from laws — specifically, from those who force people into lower-quality Medicaid coverage, and insurance plan exchange options with punishing deductibles; in essence, giving people a broken Christmas toy with a pretty bow on it and pretending they will enjoy it.  

No matter how you dress it up, and much money you throw at it: Healthcare coverage is not the same as affordable healthcare.

In the heart of even the toughest situations, there are innately driven people who make bold, fresh choices and take stands — efforts that emphasize principles we know to be just and right, rather than gaining financially on the backs of others’ misery. My hope resides in what Lincoln called “the better angels of our nature.”

DPC offers a free-market “injection” into healthcare’s regulated pricing model. If Senate Bill 1989 or a similar law passes, it will provide individuals and companies a better chance to gain better quality, more affordable care. Unlike some DPC purists, I see a future inflow of Medicare dollars to non-enrolled DPC qualified providers as stimulating a transformation where coordinated care begins from outside of the umbrella of big medicine ownership.

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Like the plunging penguins who emulate the courageous actions of others, I believe many primary care physicians are looking for the right time to enter a DPC model. Whether that happens individually, through groups, or by strategic partnerships, is up to industry forces. It’s the beauty of filling consumer demand.

Making healthcare services, drugs and coverage affordable to consumers appears completely disconnected from the industry’s mission to improve care quality and outcomes, and lowering health “costs.”

Free market forces are what bring down consumer prices in most every market. Their introduction into U.S. healthcare will likely cause short-term fallout and financial pain within healthcare industries, but it would leave us, and future generations, with a more sustainable, stronger system. We’ve gotten to the point where healthcare bloat and unaffordability will require sacrifice from all involved.

By allowing consumer-friendly models like DPC to enter the regulated world of healthcare, perhaps slowly through the back door, we will see transformation come from within. History has repeatedly shown us that better models fueled by consumer desire rise to the top.