Monday, February 20, 2012

Managing Rate Variations

I have a quick quiz for you. Rank the following factors in terms of their effect on regional health care costs in a health plan:

• Health status of beneficiaries

• Differences in hospital prices paid by the health plan not explained by regional cost of doing business

• Excess utilization of services not tied to health status

• Demographics (age and sex) of beneficiaries

• Differences in provider costs of doing business in region

If you put them in that order, top to bottom, congratulations! You are correct! And, if you are like me, you are surprised not only at the order of effect, but also the magnitude. These finds were recently published by the National Institute for Health Care Reform’s (NIHCR) in their report, Health Status and Hospital Prices Key to Regional Variation in Private Health Care Spending. That unexplained variation in hospital rates in markets was responsible for a third of the variation in health plans costs. This is certainly worth thinking about.

The author found that "wide differences across communities in the prices paid to health care providers explain a large share of regional spending variation. The study found that for physician office visits, prices paid by the plan varied little across communities but for hospital services, the prices varied widely across communities." To address this issue, the study identifies the two options to normalize service rates – market forces and regulation.

Using market forces, the two main approaches used by health plans are to offer consumers either narrow networks, or tiered networks. Narrow-network products exclude non-preferred providers from the network altogether, while tiered-network products place these providers in tiers requiring higher patient cost sharing at the point of service (We’ve written before on consumer selection of service provider organizations based on quality and cost factors – see Custom-Fit Marketing all members, The New Health Care Market: Consumers Spend More & Consumers Want More premium members and A Long (Long) Way to go in Customer Service all members).

The alternative to these two market-based approaches is rate review or rate setting by a public entity, most likely at the state level – which also brings many questions and concerns (see When Do Organizations Say No To Low Rates? all members and Who Should Set Rates – and How? all members).

I think the strategic implication of studies like this one is that we are going to see increased action by payers to "normalize" payments to hospitals and other institutions providing intensive levels of service. Any organization that is "above the mean" in cost – and can’t demonstrate additional quality for that additional cost – will be the focus of these payer initiatives.

Sincerely,
Monica E. Oss
Chief Executive Officer, OPEN MINDS

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For another free resource, see: OPEN MINDS Circle members can view In Search of A Solution That Payers Want? Look at Consumers with Chronic Conditions  all members 

This resource is free for the next sixty days to all registered OPEN MINDS Circle members.

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