Opinion: Making sense of variation in health care pricing

By Phil Kalin

For those of us who have been in health care for a while, Medicares recent release of hospital data identifying substantial variation between prices charged and actual payments isnt news. Nor is the fact that charges for similar services by one hospital can be vastly different from those of the one down the road. Health insiders have known for years that the amounts charged by hospitals have little or no relationship to what is actually paid. Making the data public for the first time, however, does give us an opportunity to review Medicare payments alongside amounts being paid by other health insurers to start making sense of it all.

Colorados All Payer Claims Database (APCD) puts Colorado ahead of most states in truly understanding and identifying health care payment variation across all insurance plans for both hospital services and those performed outside the hospital. These payments to hospitals and clinical providers are the amounts shown on Explanations of Benefits (EOBs) that are used to calculate the copays and deductibles that consumers end up paying. Thus, the Colorado APCD will provide actionable information to consumers on what services will actually cost them.

Some have been outraged by the seemingly pointless variation in charges the Medicare data show. However, some variation in the base charges for hospital services does make sense. Facilities and providers alike need to charge differently depending on how sick and complicated their patients are, whether they have additional overhead costs because they are a teaching facility, number of patients receiving charity care, etc. The more important task, though, is to figure out where variation is not adding value and to identify opportunities to get health care spending under control.

While the Medicare data focus on the wide variation on charges and paid amounts, the more interesting question is why there is so much variation on how much is being paid for a similar service.

A new report on the Colorado APCD website shows a $44,000 difference in average payments for knee replacements being made to the highest volume facilities in Colorado. The report is based on commercial insurance and Medicaid payments, and some of the discrepancies are likely due to the health status of the patients and the fact that Medicaid may be the dominant payer at some facilities. By December, reports like this will be adjusted for patient health status, will identify facility names, and will be searchable by insurance type so that consumers can evaluate how much they might pay for a procedure or service across different facilities and provider groups. Medicare data, and small group and self-insured commercial data are slated to be included in the Colorado APCD in 2014 allowing for even more shopping comparisons.

A common patient misconception when seeing big price tags associated with health care services is you get what you pay for. There are no data to support that youll get a better result if you pay more. In fact, there is typically no correlation between cost and quality. For this reason, were aiming to include not only a price tag but also a quality score on the Colorado APCD consumer-focused website to enable patients to make a value-based decision.

Colorado is also ahead of the curve in that our medical community is in favor of price transparency. Colorado hospitals have long supported transparent price information. Colorado lawmakers passed a law last year to ensure that uninsured patients would have the same discounted prices at hospitals that insurance companies do. In addition, CIVHC has been working collaboratively with hospitals and physicians to identify appropriate and meaningful quality measures to accompany provider prices that will be displayed on the Colorado APCD later this year.

Medicare should be applauded for taking a step in the right direction and supporting essential health care price transparency. It often takes time and repetition for important information like this to take root, and now were on the road to getting enough meaningful data that well be able to capture patients and purchasers attention. As Medicare indicated, the next critical step is to support data centers in each state to make the information valuable to consumers and allow providers and hospitals to compare themselves on a level playing field. Colorado has a significant head start in making sense of price variation with the APCD and our states efforts will only be strengthened by this additional national push for transparency.

Phil Kalin is president and CEO for the Center for Improving Value in Health Care, a nonprofit organization dedicated to improving health care by increasing quality, containing costs and enhancing the populations health.

Opinions communicated in Solutions represent the view of individual authors, and may not reflect the position of the University of Colorado Denver or the University of Colorado system.