Reference Based Pricing

Below is a raw chronology of how health insurance companies have arrived at reference-based pricing (RBP) or “maximum allowable amount” or “max price.” RBP is the new “in-network.” Just one of several trends emerging in this new age of healthcare consumerism in America. It will impact our out of pocket (OOP) costs.

  • 15 years ago when the Clinton administration introduced HMO models, independent/private practice doctors negotiated a price-per-patient [“capitation”] deal with health insurance companies. Which means the insurance companies went to docs to say “we have 1 million patients in our network, we will send them all to you for $X/per patient” and the docs said “okay” and so “in-network” was born. A patient was allowed to go only to that provider that the insurance co. had negotiated with. It was an exclusive deal. And doctors who were good at negotiating/business, made a lot of money.
  • Over time, doctors got angry, because most doctors are not good at negotiating, so insurance companies were making loads of money, and doctors were losing; plus, these contracts were fixed prices over 5/10/15 years, so they did not account for rise in operating/living costs. So private practice/independent doctors banded together to argue against insurance companies. In response, health insurance companies sued the doctors under anti-trust laws. And the insurance companies won, because doctors collaborated with each other even though they were not in the same company – they colluded to negotiate with the insurance companies – which is considered price-fixing. However, when doctors are a part of the same company (like Mayo Clinic), then it’s not price fixing. So doctors formed a new entity in medicine, known as multi-specialty groups. The only examples of multi-specialty groups at the time included for instance, Mayo Clinic and Kaiser Permanente.
  • A doctor who worked for Mayo got paid a salary, regardless of how much work s/he did or didn’t do, and Mayo negotiated w/the health insurance companies. Independent doctors all got together to form these multi-disciplinary groups. It was really hard for doctors at first, because internists wanted to earn the same as neurosurgeons, etc. So there was some storming, but they found a happy medium.
  • So doctors formed multi-specialty groups — for instance, like the group at the hospital at Washington University in St. Louis –when United Healthcare came to the physician network group at Washington University to say “this is what we are going to pay” the docs said “sorry, that’s not acceptable.”  So United said, “Fine, we are going to drop you” to which the docs said “Fine, drop us” but then United realized they needed these docs because they were the largest practice group in St. Louis. Since then, insurance companies and doctors have disliked each other. Doctors were guilty of billing for things that weren’t done to game the system.  Health insurance companies were also dishonest. The TRUST was GONE.
  • In the early 80’s, 85% of doctors coming out of medical school formed their own practice. That percentage is now 5%. Everyone joins a multi-specialty group so they don’t have to be bothered with the business of medicine.
  • And there are gigantic medical groups that offer just one specialty, e. g. a radiology group or a group of ER doctors….and if these groups are big enough, they can negotiate well w/insurance companies. Because it’s about numbers. This causes problems for patients, because this is what causes itemization with billing. Different doctor groups have different deals with the same insurance company. As an Aetna patient, for instance, you can end up in an E.R. and have several separate bills from the hospital and ER doctor who cared for you. This made patients really angry at insurance companies. This is the in-network/out-of-network model we’ve been using.
  • Health insurance companies have been increasing prices (premiums) by 20-30% each year to pay for rising healthcare costs. Like California. Some states (like N.Y.) regulate prices. But the tipping point was when it was revealed that United Healthcare’s CEO was paid a ~$1B salary with tax free money. Insurance companies were spending 30% on administrative costs. So the government passed legislation that said health insurance companies could only spend 15% on administration. Companies must spend a minimum of 85% of premiums on healthcare each year and if you not, they must give customers a rebate. Blue Cross Blue Shield in California in 2011 gave member rebates.
  • The cost of healthcare keeps rising because: 1) technical advances in medicine are expensive to build and use – e.g. robotic surgeries; 2) demographics [aging population – there are as many people over the age of 100 today as there were people over the age of 65 in 1965]; 3) we now have the ability to take care of people’s unhealthy lifestyles like obesity and diabetes — we have learned how to take care of those diseases, so that diseased people can keep living really sick. Example: a 7-year old female who weighs 350 pounds — 20 years ago would have died — but she was in a pediatric ICU for one week every month for 7 months at a price of $1 million, and tax dollars pay for that because she is on Medicaid. *Then again, 20 years ago she may not be 350 lbs, but the food industry is another topic 🙂
  • About medical technology costs = the first $1M machine to hit the market was a Cat Scan [CT] scan. The first $2M machine to hit the market was a MRI. Hospital budgets must be operated separately in order to cater to expensive equipment. Hospital technology doesn’t get cheaper, but the technology becomes more capable. Hospitals that can’t afford top equipment lose patients and close. We’re observing hospital closures everywhere. There is no market force to regulate medical tech companies nor health insurance prices and costs. Twenty years ago in pharmacy, the R&D in America was 40%. Different governments around the world (Canada, England and areas with socialized medicine) soon said to U.S. Pharma “you can’t charge that much for medicines” – see,  it can cost $1B to develop a new medicine, and revenue from that drug was 1) profit and 2) further channeled into R&D cycles. Valium was the first $1B drug to come to market. The U.S. government left pharma R&D alone, but other governments said “You can’t charge $10/pill you can charge $1/pill” so now, pharma companies don’t do R&D as much as they used to. This means the # of new medicines in the pipeline is drying up. And there is a major quality difference between generic and brand name drugs.
  •  Reference Based Pricing (RBP) has been a part of U.S. pharma for at least a decade. To control cost. Here are the basis economics: A paten lasts for 17 years. Valium cost $0.20 a pill to make; some companies are charging $10/pill. When that paten runs out, a generic drug company can come along and steal the business. All the generic drug makers went to health insurance companies to show how cheap they could produce a generic Valium. Venture capital start-ups, for instance, are trying to develop one really good drug successfully to be bought out by a pharma company to make lots of money. [The is a big difference in brand/generic drug quality — Pharmacokinetics reveal wild differences in bioavailability].  And as a patient, when you choose a brand name drug, your insurance company will pay some of that cost, while you pay the rest out of pocket. This is RBP – health insurance companies dictate how much they will pay for a medicine (typically that price is set according to the generic brand drug).
  • So now the healthcare system can’t afford to run itself anymore. For instance, reimbursement around mammograms got so bad that waiting lists were so long that medical centers stopped buying more mammo machines, so women are not getting their breast care. Mammo centers have been shutting down. We are now at a point where an irresistible force meets an immovable object = costs have gotten to point where “we can’t afford it anymore” and the system is going to shut down. They only way insurance companies can figure out how to survive is to shift the cost to the patient. Leave it up to the patient to decide if they want to die or get treated. It’s up to patient to choose their healthcare.
  • Consumers need education to figure out how to choose healthcare. The Walmartization of America means price point is everything – much of our consumer psychology is about expecting inexpensive prices.  “Price is what you pay for something, value is what you get” said Warren Buffet. But fewer people are paying attention to quality, just prices.
  • Health insurance companies have been driving to a RBP model for ~3 years. But here’s the deal: RBP for a healthcare services is based on the facility charge (not the provider, testing, etc). You know how you get a bill from a doctor’s visit and there’s a separate charge for the hospital (facility) versus the test versus the doctor? RBP represents the max price a health insurance company will cover, and it is based on the facility charge only.
  • True price transparency is never going to be true in healthcare because RBP is based on a facility charge model. They charge the “upr” which is the usual and prevailing rate. These UPRs are so low because health insurance companies consider geographical (where in the U.S. a patient lives) Medicaid prices and then takes the top 25% most expensive out of the equation and that’s the UPR. Doctor bills will NOT be covered by RBP.
  • Patient needs to know: what is my deductible and what is my out of pocket (OOP) max? Is this new form of reimbursement going to be outside the OOP max so that there is unlimited support to the patient who gets really sick or is the patient’s ultimate cost capped? 

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