View: Open those providers' curtains

If you have been selling health benefits for years, you know all of this. If you’re new to the benefits market, you may find yourself shaking your head in disbelief, and wondering how to explain how the U.S. health care market got to be the way it is to employers.

Here’s a review of the U.S. health care cost situation, and an explanation of why making consumers pay attention to medical bills is so important. 

Cost growth has moderated in the past few years, but, in spite of that, U.S. health care costs for employers have doubled in the last 10 years, according to the Kaiser Family Foundation.

The cost of specific services such as baby delivery, appendectomies, and MRIs are five to nine times more expensive in the United States than in France and the United Kingdom. One might assume that the quality and outcomes of care are much greater in the United States than in France and United Kingdom, thus explaining cost divergence. However, the opposite is true. Data from the World Health Organization shows the life expectancy in both France and the United Kingdom is longer than in the United States.

So, why is health care so much more expensive in the United States than in other developed countries in the world? The answer is most easily explained by breaking down the components of those costs into hospitalization, physician, pharmaceutical, and administration.

1. Hospitals represent about 40 percent of all health care spending, and their billing practices provide insight into a significant part of the high cost of health care in the United States.

Hospitals universally utilize a billing and coding system called a charge master. A typical charge master has about 150,000 items, ranging from the paper cups that hold the aspirin delivered at bed side to the charge for pacemakers and other high tech equipment or services.

Hospitals control their own charge master rates. Since much of their fee reimbursements are relative to a discounted percentage of that charge master, there is significant incentive to bloat those rates. On average, not-for-profit hospitals charge master rates start at about 500 percent of Medicare, while for-profit hospital rates start at 900 percent or more of Medicare.

Medicare reimbursement is used as a benchmark because Medicare is the largest payer of hospitals in the country. In addition, hospitals report their own cost of doing business to Medicare, which allows Medicare to determine a fair reimbursement schedule. Medicare also intends for a hospital to profit on its services in the aggregate and adds an incremental profit margin atop the hospital’s own reported cost of doing business (Cost Plus).

The employer community, the second largest payer of health care services after Medicare, typically buys hospital services through a preferred provider organization (PPO), which negotiates rates and discounts with hospitals and doctors and then passes those rates along to an employer-sponsored health plan.

Herein lies a huge part of the problem. The PPOs have no skin in the game relative to costs, as they are paid on a per employee per month basis. The PPOs are seen as more viable to an employer the larger their network, so their incentive is greatly skewed towards network girth rather than discounting of services. Our research has found that, post PPO discount, hospitals are being paid on average 250 percent to 400 percent of what Medicare would pay. Since Medicare is already a cost plus reimburser of services, post-PPO payment levels of over twice that amount is a clear indication of why costs are so much higher in the United States than in other countries.

2. Physician reimbursements for services are handled much differently than hospitals because there is a universal system that details a reasonable and customary (R&C) rate for every possible medical service.