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Secret Pricing Contracts – How Health Insurance Carriers Negotiate with Hospitals

Posted on February 20, 2014 by Randy Cox   (all articles)

Price negotiations between insurance carriers and healthcare facilities on allowable rates are not rocket science, though they happen behind closed doors. You might even be surprised by news that one carrier can negotiate an incredibly low rate while another carrier, even a large carrier, can get the short end of the stick. Unfortunately, secrecy of the agreed-on rates is usually part of a legal contract between the two parties (though California made this illegal in January of 2013, and other states are considering similar legislation). Not only are consumers taken advantage of by means of this secrecy, but in some cases so are insurers, and even facilities themselves.

Let me try to shed a little light on the negotiation process that affects us all so much. It's really a simple matter of leverage, margin, and volume.

Leverage

In terms of insurance carrier leverage, a plan with 100,000 subscribers in close proximity to a hospital will get a much better discount than someone with only 1,500 subscribers (hospitals don't like to turn away patient business in large quantities). Sometimes the contractual discount will be a flat rate (i.e. 40% off the list price), and sometimes a percentage above the Medicare rate for the procedure at the facility (115% to 130% is fairly normal, although it is much, much higher for many services, especially in-patient procedures).

Facilities also have leverage. If a hospital has near monopoly status in an area, or if their brand value is far above the competition (i.e. Mayo or the Cleveland Clinic), they can push back during negotiations. Some insurers and facilities have actually merged, which causes the rates to jump up toward the hospital's top rate. There’s also a matter of how crowded a facility is, and how much it worries about gaining/losing patients.

Hospitals try to use other things as leverage too. A number of studies have been done showing that hospitals with higher list prices have higher revenues, even though almost no one ever pays the list price. Part of the reason is that hospitals with higher prices are better able to convince payers, including insurers, of higher perceived value. In a similar vein, Kaiser Permanente tends not to inflate their list prices nearly as much as other hospitals, so they give up much less ground with insurers during negotiations.

Margin and Volume

There are different factors guiding hospitals around pricing. Revenue and profit are clearly important, but so are responsible and compassionate care. The balance between the two at each facility has a big effect on the variety of healthcare prices. Some facilities charge more because they can, and some charge less even though they could easily get more from patients. These factors influence the negotiating table with insurers.

In markets with increasing price visibility, lower prices can produce greater volume. This is good for patients, whether a facility's goal is an increase in revenue or an increase in the number of patients it can help. Facilities understand the margin/volume trade-off, but have not had to sacrifice volume in the past because prices were hidden and viewed by consumers as inflexible. That is changing, and making it easier for insurers to get lower contracted rates. A hospital in Maricopa Co., AZ recently cut their list prices by 50%, to the astonishment of all their staff, in order to draw more patients. Miami Children's Hospital slashed their chargemaster rates by 30% in January, 2014. Related to this is volume adjustments due to shrinking provider networks as a result of Obamacare, which also affects negotiated rates.

Increasing patient volume by lowering prices eventually reduces margins enough to make a hospital worried. Again, in the past a facility could claim that they were forced to charge higher amounts because of their costs. Unfortunately, there's been as little transparency on cost as on charges (customer prices). But in a world increasingly competitive on price, some facilities are cutting their costs precisely so they can better advertise lower rates. Some hospitals like Virginia Mason in Seattle have substantially lower costs, as do some smaller, rural hospitals (state-of-the-art facilities and equipment are typical reasons for higher costs, as well as salaries, as Steven Brill documents well).

Hospitals do know their own costs. Some costs are necessary and even beneficial, while others are a tax on patients as an excuse for luxury. When negotiating with a high-cost provider, even an insurer with a lot of leverage may not be able to get prices down to a reasonable level.

Consumer Visibility

It's usually pretty near impossible to work through the bureaucracy to find someone who can give you information about prices and costs at a hospital or other medical facility. Pricing Healthcare is gathering prices both from patients' medical bills, from facility lists, and a number of public and private sources to pull back the curtain on pricing. Insured rates may be negotiated in secret, but when those rates show up on a patient's bill (or online via an insurer's cost estimator tool), the cat's out of the bag. A little visibility goes a long way!