by Hamilton E. Davis
For more than a year, the Green Mountain Care Board has been struggling to understand how the money spent on Vermont doctors and hospitals flows through the system. How much does a hip replacement actually cost at one hospital compared to another? Does that depend on who the insurance company is? Do different insurance companies pay one hospital differently from another? If so, why?
The board has commissioned two studies to tease out these kinds of details about the payment system in the state. Yet the analyses are so convoluted that they have served more to demonstrate how opaque health care financing is than to render it transparent.
The need to cut this knot is critical to the cause of getting costs in the system under control. And cost control is the single most important structural piece of Governor Peter Shumlin’s single payer reform initiative. Act 48, the statute governing health care management in the state, says plainly that the board’s responsibility is to get costs on a sustainable track, and that no single payer system can be put in place until it is clear that they are.
Can it be done? And what will it take?
Everyone involved in the health care arena knows that the way providers are paid makes no sense and badly needs to be rebuilt. But it has been very hard to see the finance problem clearly because for decades insurance carriers and hospitals have kept prices in the system hidden. They do this with non-disclosure agreements that make it impossible for the ordinary consumer, and for regulators like the Green Mountain Care Board, to figure out how the system actually works.
The studies of the transparency issue have shown that there is incoherent variation in who gets paid how much for what. But the non-disclosure agreements have prevented anyone outside the system from seeing what the variations mean in dollars and cents. It works this way: if you call a hospital and ask what it will cost to have your hip replaced, they will ask you what your insurance policy says. Based on that, the hospital will tell you what your out-of-pocket costs will be; if you ask, they will also tell you what they will charge the insurance company for the work. However, no one pays charges, there is always a discount. If you ask what the hospital actually gets paid, they won't tell you because of the non-disclosure agreement. So, you never know the real price.
Buried in these studies, however, is enough information to get a glimpse of what’s going on. Here is an example:
The first transparency study commissioned by the GMC board was carried out by Mike Del Trecco, Gary Zigmann, and Ted Gates of the Vermont Association of Hospitals and Health Systems and published in June of 2013. The second, by a group including Steve Kappel for a group at UVM and the UMass Wakely consortium, was presented to the board a couple of weeks ago. The data in the first study was from 2011.
Both documents are pretty much torture to read, not because of any deficiency on the part of the consultants, but because the whole system has been built to be impenetrable. Still, the Del Trecco study contains a fascinating visual pricing diagram that inadvertently throws the current system into high relief.
The diagram shows the variation in prices for DRG 470, a block of medical care that includes joint replacement of the lower body—mainly hips and knees. Here it is:
The diagram provides a look at how payments to the hospitals by various insurance carriers deviate from a mean value, represented by the heavy grey vertical line down the middle. Paler lines left and right of the central line are shown for amounts that are either plus or minus 25, 50, 75 or 100 percent of the mean.
A quick glance will show you that payments to Rutland, Copley, Porter, and North Country hospitals tend to be higher than the mean, while Fletcher Allen and Central Vermont are below it. There are no dollars shown, of course. For a real shopper it would be like knowing how five television stores differ from one another, but without having any idea what it would cost to buy an actual t.v. set.
The crack in this presentation is the straight line of eight red bullets left of the center line. These are Medicaid payments to the eight hospitals, and Medicaid payments are made by the state and are a matter of public record.
So, voila, once you know from the state that the Medicaid rate for joint replacement is $16,000 per case, and the rest of the diagram is drawn to scale, you can convert the whole thing to dollars. The mean value scales up to $22,000 (hint: one millimeter equals $400).
And the dollars are indeed fascinating. Take a look at Rutland. Vermont Blue Cross paid Rutland $31,200, far more than the mean. The diagram also shows that TVHP paid the hospital $34,000 for the same service. But Vermont Blue Cross and TVHP are the same company…why so high and why the difference within one carrier?
And why are the payments to Fletcher Allen so much lower, ranging from $15,600 to $24,000. As at Rutland, the Blue Cross-TVHP passes understanding. Blue Cross pays FAHC $18,800 per case, while TVHP, the same carrier, pays them just $15,600.
You can see these price differentials in the following table and bar graph:
Getting at what ought to be perfectly transparent payment flows this way is obviously a kind of guerrilla operation, and some caveats are in order. The amounts won’t be exact; scaling deviation from the mean with a ruler graduated in millimeters is less than precise, although the differences are clear enough. Payments from Medicare are not shown, although they would be the same for each hospital.
A more important factor could be that some hospitals may be getting higher than average rates for a joint replacement in order to make up for short falls in revenue for an important community resource, such as delivering babies or running an emergency room, which might not pay for themselves.
But the extra money could also be used for providing staff pay raises, or something else: the point is that nobody knows.
A striking example of payments that don’t seem to make sense can be seen at Copley, a small rural hospital in Morrisville. Copley draws orthopedic patients from a much bigger area than just its community hospital service area. So there would not appear to be any reason why Vermont’s insurance carriers should be paying them such high rates.
MVP pays them $30,000 per case, and Blue Cross pays them even more, $31,600. TVHP on the other hand pays Copley a relatively parsimonious $26,800. You will never find out the reason for these price discrepancies, but they make a mockery of the often-voiced sentiment that patients ought to be price conscious in selecting providers.
One might argue that the patient really needs to know only his out-of-pocket costs. Still, the patient also pays the premiums and if a carrier is paying excessive prices for a service, that fact will drive up the premiums.
The whole system is, in fact, ripe for change and the resistance to such change may be crumbling. Asked about the disparities in the DRG 470 case, Don George, the president of both Vermont Blue Cross and TVHA, said that Blue Cross has shifted its strategy over the last couple of years.
“The payment rates in the reports and the variations they created between payers and providers reflected discounts off fee for service charges and product and network partnerships that made sense in the past, but are not consistent with how we approach things now,” he said.
“Our entire focus is in reforming the payment system, not only to address these variations and provide greater transparency but more importantly to provide incentives to improve outcomes and control costs.”
Responding in the same vein, MVP noted that the contracts reflected the circumstances "unique to each negotiation," but concluded, "We welcome the Green Mountain Care Board's ongoing analysis of payment variations among commercial payers and we fully support transparency moving forward."
The decades-old system is already showing serious cracks in some other states. As of Oct.1 of this year providers in Massachusetts will have to publicly list their actual charges (albeit not the actual prices). And for some time now Maryland law has required that insurance carriers pay providers the same amount for the same service.
Given the fact that the current system can’t be seriously defended, the impetus appears to lie with the Green Mountain Care Board, which has enormous powers in this arena. Act 48, the main health reform statute, empowers the board to set hospital budgets, to set payment rates to providers if it so chooses, and it controls the rates that insurance carriers can charge its customers.
Moreover, the board is the custodian of VCures, a statewide health finance data base that will become the foundation on which the entire system is operated.
If the board tells hospitals and insurance carriers that it won’t accept non-disclosure agreements that curtain the public and the board off from a clear view of the financing in the system then the secrecy will vanish from the scene.
Such a development would be an important step forward for health care reform in Vermont. Neither the Green Mountain Care Board nor anybody else is going to achieve sustainable costs without it.