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Making Sense of Variation in Colorado Health Care Pricing

Medicare made news recently by releasing data demonstrating variation in hospital inpatient and outpatient charges and payments. Colorado is uniquely positioned to couple the Medicare information with other payer data contained in the Colorado All Payer Claims Database (APCD) to better understand and identify variation in our own backyard. Medicare’s data showed substantial variation between prices charged and actual payments, which in the world of health care isn’t exactly new news. Nor is the fact that charges for similar services by one hospital can be vastly different than the one down the road. Making the data public for the first time, however, does give us an opportunity to review Medicare payments alongside commercial and Medicaid payments in Colorado to start making sense of it all.

Various articles and studies that received a great deal of media attention have highlighted that there is essentially no correlation between actual hospital charges and actual payments from payers to providers. These amounts have been diverging since the early 70’s and sometimes they lead to disastrous results for uninsured and underinsured Americans. Fortunately, Colorado, with leadership from the Colorado Hospital Association, has taken some important steps to mitigate those situations.

So, it’s not surprising to find a huge gap when we compare the average charged amounts to paid amounts made to the top hospitals by volume across common procedures. According to recent analysis of the Colorado APCD which currently includes commercial insurers (large-group and individual fully insured) and Medicaid, hospitals received their highest payments from commercial payers which on average paid 44 percent of charges in 2011. These same hospitals were paid an average of 23 percent for serving Medicare patients, and 16 percent of charges for their Medicaid patients. As a former hospital executive, I know it’s common and often necessary for hospitals to negotiate higher reimbursements with commercial payers in order to serve a higher number of Medicare and Medicaid patients with lower reimbursement rates. It’s this disparity in payments that lead to the “cost shift” with commercial payers paying a premium for the care provided to uninsured and to an extent, the public payers.

While the difference in charged and reimbursed amounts made for a flurry of news stories, the more interesting and important question is to figure out where there is variation in paid amounts and if the additional payments add value to patient care. We must get to this question of value to affect the rate at which health care is gobbling up the salaries and resources of our citizens and communities.

Colorado APCD analysis on payments from commercial insurers alone varied by as much as 150 percent or more between the lowest and highest average payments for every procedure analyzed. For example, the average commercial payment for heart stents across all hospitals studied was $30,000. However, one hospital’s payments averaged as low as $20,000 while the highest paid hospital received an average of $50,000 for the same procedure. Similar results were found for treating pneumonia, pulmonary embolisms, heart arrhythmia, and for knee replacements and spinal fusion procedures. The key question that we must answer is what value do we get in return for spending 150 percent more on health care services? Better care? Better patient results? Most studies point to the opposite – there is little to no direct correlation between higher prices and better care.

Some variation in payments is warranted. Certainly some facilities and providers treat more complicated patients with multiple health problems and/or a disproportionate share of uninsured or underinsured patients. Teaching costs are another variable cost for some hospitals, although a discussion should be held on whether paying more to one hospital for the same outcome should be borne by patients and employers or through other mechanisms.

CIVHC is beginning to provide data that will help answer these questions and hopefully impact the market by letting consumers, providers and businesses understand the variation in cost and quality. By December, the Colorado APCD will have cost and quality information adjusted for patient health status so 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 is planned to be included in the Colorado APCD in 2014 allowing for even more shopping comparisons, and robust analysis of price variation.

Colorado is also ahead of the curve in that our hospital and medical community are generally in favor of price transparency. Colorado hospitals have long supported transparent price information. A law was passed last year to ensure 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 we’re on the road to getting enough meaningful data that we’ll be able to capture patients’ and purchasers’ attention. Colorado has a significant head start in making sense of price variation with the APCD and our state’s efforts will only be strengthened by this additional national push for transparency.

About the Author: Phil Kalin is CIVHC's President and CEO. Contact him at pkalin@civhc.org.

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