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Provider unit prices still matter

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As we get close to the halfway point of 2013, many parts of the Patient Protection and Affordable Care Act (PPACA) are being prepped to roll out, with significant structural reforms — including the introduction of the exchanges — scheduled to go into effect starting in January 2014.

Employers who want to provide their employees with an attractive, cost effective benefits program need to consider fully insured options, examine whether self-funding is an option, and look at whether starting a captive would serve their needs better. 

An employer should also take into account how PPACA will affect the actual cost of of health care services.

One of the key drivers of health care trend — change in the underlying cost of care — is the provider unit price.

If the price of a unit of care goes up, that means the cost of care will be higher. What complicates the discussion is that hospitals, doctors and other members of the provider community receive payments from many sources. 

The provider community’s revenue and its expenses are moving in the opposite direction.

The federal government is proposing cuts in Medicare reimbursement rates and Medicaid funding. Meanwhile, as a result of PPACA and other laws, providers need to comply with new reporting and electronic recordkeeping requirements.

The resulting economic model may present hardship for a provider. How hard the hardship is will depend on several factors, including the share of the provider’s total payments that come from federal programs and the size of the gap in technology and administrative infrastructure that the provider must bridge to comply with PPACA requirements and expectations.

To illustrate the effect PPACA may have on health care prices in the private commercial market, here’s one example:

  • A provider gets a total of $1 million in annual revenue, with 60 percent coming from the federal payment system. 
  • The provider wants to remain budget or revenue neutral for the next year.
  • The provider renders 10,000 services, including 6,000 services for Medicare or Medicaid patients and 4,000 services to private insurance patients, with an average charge of $100 per service.
  • The federal government will reduce its payments by an average of 30 percent next year.

To keep revenue neutral, the provider will have to make up for the drop in federal system payments by increasing prices for the privately insured patients by 45 percent.

This increase in fees for the private market will result in higher claims and/or higher insurance premiums.

Shifting the focus from the provider to the insurance carrier or employer, in order for the insurance premium to remain at its current rate, the offsetting reduction in utilization would need to be about 30 percent, assuming a 45 percent increase in the provider price.

This example shows how sensitive health care trend in the private market is when there may be dramatic changes in the federal payment system. It further points to how employers and carriers must understand these drivers and prepare for what may happen.

With the federal government as the largest purchaser of health care, a significant change in its payments will cause disruption in the prices providers charge the private commercial market. This will put pressure on the insurance premiums charged by the carrier or the claim expense paid by the self-funded employer plan.

Without a corresponding offset in the utilization component, overall health care costs will continue to escalate.