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Published on : January 15, 2014

What’s in a Word?

What’s in a Word?

What’s in a word? A lot – especially when it comes to talking about health care and health care financing.  For example, there is a great deal of current discussion around the concept of “transparency” in health care.  What exactly is meant by that?  Unfortunately, a discussion of transparency inevitably leads to the need to define a lot of other words as well, and it can cause us to become lost in an ever expanding maze of logical distinctions and subtle etymological parsing.  Let’s try focusing on a particular example of the difficulties we encounter when attempting to define, and then apply, the concept of transparency to health care.

Let’s look at the issue of transparency in hospital “prices.”  You will note I have highlighted the word “prices” in bold font.  I am going to do that with a number of words in what you will read here and below.  The reason is to point out the particular problem we have when trying to discuss this very topic.  We immediately have to decide what we mean by prices.  (We will ignore the first more obvious term that needs defining – “hospitals” – and presume that we agree on the particular entities under discussion.)  It will also lead to the need to define exactly “what” it is that we want the prices of – i.e., the services or products for which we assume prices exists.

Here I would like to bring a particular example of how this issue arises in the media, and where there appears to be a general impression of understanding that, in reality, is hiding the reason society has a difficult time coming to grips with the rise in health care costs.  In aWashington Examinerstory from May 9, 2012 (you will find that similar stories abound in newspapers across the country right through today’s issues)there was an article titled “Hospital rates jump across Washington region.”  Embedded in this story is a stretch of writing that I quote here:

“Four hospitals in Northern Virginia charged patients an average of 11 percent more for three dozen services between 2008 and 2010, according to The Washington Examiner's review of the most recent data from Virginia Health Information…..

For example, patients at Inova Fairfax paid an average $21,333 for gynecological surgery in 2010, up 31 percent from 2008. The average cost of open heart surgery rose by $6,800 in the same period, to roughly $94,928.”

Please note the use of four different words between the article title itself and the two paragraphs that I have quoted, all of which are intended by the author to describe a single concept – rates, charges, payments, and costs.  We haven’t even seen the word price.  Why is this so difficult?  The reason is because when it comes to hospital services, each of these terms can actually mean something different, but the media, and politicians and regulators, use them interchangeably.  To help understand how to make a big first step towards bringing the health care costtrend curve under control, it is vital to understand the important distinctions that these terms embody.

Hospitals typically have something called a “Charge, or Bill, Master,” which may be thought of as their “list” prices, and this is typically the source of a bill or invoice from the hospital itself.  However, if the patient is insured, normally the hospital sends the invoice to the insurer or health plan, which may re-price the bill utilizing a prior contract arrangement with that hospital if the hospital is “in network” for that health plan.  The contract will often utilize a special set of prices called the contract rates(which may derive from a formula relating to the Charge Master) to recalculate the amount the hospital is allowed to receive for the services rendered to that patient.  This recalculated amount will show up on the Explanation of Benefits (EOB) that the patient receives from the insurance administrator, and will then document what portion of the resulting amount may be owed by the patient in the form of deductible, coinsurance, or copayments – the cost sharing parameters of the insurance contract itself.
What the hospital is actually paid depends on the amounts they ultimately receive from the insurer, patient, or other outside sources (charity support for uninsured patients, for example).  However, what it actually costs the hospital to provide the services is another figure altogether that has nothing to do with what they charge, price (contract rate), or are paid.  The true cost to the hospital of providing the service is an internal accounting concept that may or may not be refined sufficiently to relate item by item as is done with the Charge Master, though one does wonder why that should be the case.

Now, when we want to discuss transparency for hospital services, which one of these terms is it we want to be able to “see,” or be made transparent?  When a state or federal study purports to disclose what given procedures costs at different hospitals, but are simply telling us averages from Medicare (a very specialized set of “network” rates or prices not available to the rest of us), or relate figures taken from Charge Masters, are they actually providing us with anything useful?  Why not get down to the basics and disclose all of the options in a way that will make the full picture truly transparent?

This past year, Health and Human Services, through their CMS division, made a lot of news with their release of the top 100 DRG billed charges versus cost for Medicare inpatient facilities.  They also released similar data for certain outpatient services.  This generated a lot of discussion, but it is important to note that it was for Medicare patients only, and the “cost” component is the basis dictated by CMS rules, rather than general accounting principles, even if it might serve as a reasonable proxy for actual cost to the facility to provide the service.  However, there are lots of reasons why this analysis could be misleading when attempting to apply it to the actual situation for patients who are not covered by Medicare.

The detail of what hospitals actually receive from different payers for different classes of patients (commercial in network, other commercial, Medicare, Medicaid, and “uninsured” patients) for each of different admission types (such as a breakdown utilizing Medicare DRGs and APCs), and a comparison with what Medicare would have paid, defines the full disclosure of information required by and owed to the public (society as a whole) in order to begin the process of bringing transparency to hospital service economics, and shedding light on a corner of the mystery that surrounds health care finance in the United States.  The Affordable Care Act actually provides a requirement for hospitals to disclose this data in its entirety, and the department of Health and Human Services has been provided detailed guidance on how and why to put forth a useful regulation implementing this requirement.  It is high time they got on with their job.

About the Author

Hobson D. Carroll, ZSA, MAAA, is a 1974 graduate of Coe College.  After a year of graduate studies in mathematics, he began his actuarial career in 1975.  Hobson worked for several insurance related entities before striking out on his own in 2000.  In 2011, he joined the Entrust, Inc. family of companies headquartered in the Houston area to become President of MedRisk Actuarial Services, Inc., bringing along a literal world of experience in healthcare finance and insurance.