Billing chaos drives healthcare administrative costs

Arguably, the biggest issue for North Carolina’s financial security — on the individual, business, and governmental level — remains the cost of healthcare. The bipartisan determination to tackle the problem though, seen in efforts like Gov. Josh Stein’s NC Health Care Affordability Commission and the many bills coming out of the legislature, should encourage us that it is not being overlooked.

The direction of price transparency, which North Carolina and the Trump administration have both pursued in recent years, seems among most promising. But there is a deeper problem that transparency alone likely cannot fix — the prices are determined by enormous armies of administrators during private negotiations between insurers and providers, rather than by markets that incentivize consumer choice and provider competition.

The United States is completely alone in this level of administrative bloat. The Peter G. Peterson Foundation analyzed US spending on administrative costs as compared to other developed OECD nations, and found we are spending five times more — about $1,000 per year per person rather than the $200 average for comparable nations.

The Commonwealth Fund found that this spending makes up 30% of American healthcare costs, with exactly half of it (15%) being spent by the insurers and the other half (15%) being spent by providers. The US spends about double what all other comparable nations spend on healthcare, and a huge part of that is this inefficient battle royale between insurers and providers over what any given service is going to cost at any given time and place.

Imagine if the restaurant industry worked this way. We would all show up at the restaurant with our dining insurance card, caring very little what the restaurant was charging, just that we’re “covered.” Maybe we could find out if we really cared and if there were restaurant transparency laws, but the menu of what things cost would be volumes thick, and each of us would be offered a different arrangement for a different price.

Maybe one person at table orders a steak dinner, and the complicated menu says that, based on negotiations with Blue Plate Insurance company, it will include steak, a side, water, and unlimited bread, but limited service from the waiter and no silverware, for $103. And when someone else at the table orders the same thing, it turns out their insurance company had negotiated a totally different deal: They get unlimited service from the waiter, as well as an upgraded drink and silverware, but no bread or sides, for $112.

Rather than just have one collection of goods and services for one price available transparently to all, the administrators for the restaurant and the insurance companies negotiated deals that make the prices different for different people at the table. And the people eating the meal have little real incentive to pay much attention or shop around because someone else is paying most the bill.

No healthy market works this way. We can compare prices on gasoline because there is a common definition of the different products — regular (87), mid-grade (89), and premium (91-93) — as well as a common measurement (gallons) that can be referenced. Major goods sold on the commodity exchanges — like corn, gold, or softwood lumber — are also sold with specific definitions of the product.

The American healthcare system has coding systems that do add a level of standardization on services, and there are “chargemaster” prices of what things allegedly cost at the hospital. But those are just the beginning points of the negotiation for what will end up being included and what it will cost. This throws the efforts for true transparency into a fog of confusion. On top of that, the fact that the consumer (the patient) is not generally the buyer and that the providers often have near-monopolistic control of their local markets — due to certificate of need (CON) laws and hospital consolidation — makes true market incentives even less relevant.

[If you’re not familiar with CON, it’s like the restaurant going before a government board to block any other restaurants in the neighborhood from opening because they’ve already got it covered.]

Both the North Carolina transparency law and the Trump administration’s executive order on healthcare transparency do require the prices to be listed in specific well-recognized codes, like Medicare’s DRG (Diagnosis-Related Group) bundles. Hospitals already use DRGs to do a lot of their inpatient billing, both for CMS and in private arrangements. Basically, rather than the old fee-for-service model, which billed for every individual service performed, DRGs bundle all of those inpatient hospital services together into something like “knee replacement,” with additional general categories for whether it was a typical or more-complex case.

Comparing costs by DRG, or maybe another simple bundled definition of what is being included in the steak dinner, is a good way to standardize the menu. But at the moment, those standardized definitions become just one layer in far more complicated negotiated payment arrangements.

In most industries, the definitions are clear, like with gasoline grades or steak dinners, so price transparency enables customers to shop and businesses to compete. Standardizing and simplifying healthcare billing in a similar way could not only lower administrative spending but would go a long way to creating a real competitive market — and bringing down overall costs.

“Billing chaos drives healthcare administrative costs” was originally published on www.carolinajournal.com.