Creative Solutions Needed to Improve Healthcare in 2018

By Tom Hayes

With a new year comes hope for change and brighter days ahead. For many, it’s a time to set new goals, whether personal or professional, and to start again with a renewed purpose.

When it comes to improving healthcare in this country, it seems the more things change the more they stay the same. Or, unfortunately, they get worse. Despite seven years of the Affordable Care Act – a misnomer of a title by any account – the cost of healthcare continues to rise. In fact, over the past decade, commercial health insurance rates have risen almost nine percent each year. By comparison, consumer pricing in 2017 increased a paltry 1.6 percent and compared to modest 3 percent increase in wages, healthcare costs continue to erode any gains in household incomes.

While recent legislative attempts to alter this trajectory have failed, the focus now seems to center on creating competition by selling insurance policies across state lines and artificially shifting costs through tax credits versus subsidies.

The reality is that none of these so-called solutions address what has become a real shell game between insurance carriers, pharmacy benefit managers (PBMs) and healthcare providers – all of which have a vested stake in driving market share and profits. How can you create competition in a game where only the stakeholders know the rules and transparency is virtually non-existent? The consumer, unfortunately, is left guessing how to navigate a system that, for the most part, doesn’t disclose the cost and quality of its product.

Can you imagine going to Amazon to purchase a pair of headphones, surveying dozens of options, and purchasing the model with the most features with no price listed? Of course not. However, in the world of healthcare, this happens every day. And the results are as varied as they are staggering.

The barrier to coverage and care in this country is cost. It’s a known fact that medical care and prescription drug costs in America are higher than any other industrial nation. Yes, it can be argued we have the best hospitals and physicians, the latest innovations in technology and lead the world in pharmaceutical research and development. Unfortunately, the fact remains that there are tremendous and unexplained variances in the cost of these resources and services across the country, even within communities.

In a recent study of cost variations of knee and hip replacement surgeries in the U.S., it was determined the average cost of total knee replacement surgery without complications across 64 markets was $31,124. However, that cost could be as low as $11,317 in Montgomery, Alabama and as high as $64,654 in New York. Within Dallas alone, the cost varied from $16,772 to $61,585 – a 267% cost difference. These same variations can be found with the cost of prescription drugs across different PBM and health plan formularies as well.

The solution to this problem may be as old as it is new. Does anyone remember traditional major medical coverage before the introduction of preferred provider networks? The reimbursement term used by insurance carriers in the 1970s and 1980s was “usual, customary and reasonable,” or UCR. Simply explained, the insurance company would reimburse an individual or employer plan based on the average cost of a medical procedure in that market.

Today, the new term gaining popularity among self-insured employers is Reference Based Pricing (RBP), and it works in a similar fashion. Using RBP, an employer or third-party vendor specializing in this strategy negotiates fixed pricing for procedures with high cost, low quality variation, like joint replacement surgeries and certain medical testing, often set around 150% of negotiated Medicare pricing. The fundamental premise behind RBP is to provide an incentive for employees to review procedure costs in advance of selecting a provider. If the provider charges more than the fixed reimbursement, the employee pays more out of pocket. If the provider charges less, the employee pays less. Pretty simple.

A great example recently published in the Wall Street Journal noted the California Public Employees’ Retirement System’s (CalPERS) recent success in using RBP. The state agency had discovered a wide variance in hip and knee replacement costs ranging from $15,000 to $110,000. CalPERS set a reference price of $30,000 for the procedure and, from the outset, employees selected the lower cost facilities. In just a few years the number of California hospitals charging below $30,000 for hip replacements jumped by more than 50 percent. In the first year, CalPERS saved an estimated $2.8 million on joint replacements.

Now major health insurers and pharmacy benefit managers are making an aggressive move from payers to providers in an effort to impact cost in the healthcare delivery model at the initial point of service – the primary care physician. Within the same week in December, CVS Health Corporation inked a $69 billion deal to purchase Aetna, Inc. and UnitedHealth Group, Inc., which had been quietly purchasing physician practices, clinics, and surgery centers under its Optum Health Services arm, announced it would acquire one of the nation’s largest physician groups.

As we head into 2018 facing familiar challenges, RBP and other strategies are gaining traction as the private sector seeks more aggressive solutions to a cost problem that Washington seems unable to resolve.

Tom Hayes
National Practice Leader
Employee Benefits
Regions Insurance, Inc.