My grandfather earned his living running a chain of five-and-dime stores in my native Louisiana. The best advice that he ever gave my father, and that my father passed onto me, was "Never buy retail what you can get wholesale."
Unfortunately, some advocates of "consumer driven" coverage ignore this admonition, and raise concerns that hospital "retail" pricing is an obstacle to the spread of high-deductible health plans combined with health savings accounts or health reimbursement accounts. In particular, of late, some of these advocates have become exercised over an alleged lack of transparency in hospital pricing.
Many of these advocates voice concern that consumers, who now pay more out-of-pocket for the cost of their hospital care, do not have access to reasonably set "retail" prices from hospitals. They assert that hospital retail prices, as reflected in hospital charge masters, are too high and are not market-driven. And, they are pressing for more market-oriented retail-pricing at hospitals and other information to help consumers shop for the best value.
These advocates make a few good points. Yes, hospitals ought to offer information to help consumers understand a hospital's quality record. Hospitals are responding; already, roughly nine out of 10 qualified hospitals are participating in the Quality Initiative, a voluntary industry-led partnership with the government and accrediting and consumer organizations that is developing standardized quality measures for public reporting. This initiative also will report data about patients' personal experiences in hospitals.
Additionally, it is hard to argue that the pricing system at most hospitals is user-friendly. Buying hospital care, however, is hardly comparable to buying candy in one of my grandfather's stores 40 years ago or buying a computer from a mail-order house today.
This is why it is misguided for advocates of consumer-driven coverage to believe that consumers can get the best price from a hospital by buying care retail. Instead, consumers are best served by private health plans that negotiate for wholesale, volume discounts and then pass on those discounts to the individuals and families that these companies cover.
It is the wholesale payment amount, either from negotiated private-sector prices or government-administered pricing programs, where the rubber really hits the road for virtually all insured Americans. In effect, most private payers and the government buy hospital care in bulk. Private payers pay wholesale prices determined by their negotiations with hospitals, while government plans pay wholesale prices that they dictate to hospitals, based upon legislated formulas. Among private insurers, the company that brings the most customers to a hospital typically gets the best price breaks.
Therefore, if consumer-driven coverage is to work for individual consumers, individual consumers should be positioned to take advantage of consumer-driven insurance with negotiated wholesale hospital rates. Through this process, consumers can be assured of getting the best deal for both their out-of-pocket expenses and their costs covered by insurance premiums.
In other words, transparency works, but only if the lens is focused on the right object. With meaningful transparency, consumers would have access to hospital quality information, and health insurers would make available to consumers information such as the average out-of-pocket costs for a set of common hospitalizations or services from nearby hospitals. These costs should reflect wholesale rates that carriers have negotiated and then passed on to the individuals and families that they cover.
Health insurers are best positioned to array this information for consumers who are shopping for, or who already have, consumer-driven coverage. The carriers already have the data, the relationships with consumers and the negoti-ated wholesale volume-discount rates.
Armed with information from their carriers, consumers can choose their coverage and their hospital based on the most understandable, market-driven pricing, such as the premium for the coverage, average out-of-pocket costs for hospitalizations and other factors, which with health savings account or health reimbursement account coverage would be the amount that an employer is willing to contribute to an employee's individual health account.
At the same time, paying for hospital care obviously is more complicated and stressful for consumers who lack health coverage. We all look forward to the time when every American has health coverage. Until then, hospitals will continue to be available to the uninsured who face a medical crisis, regardless of their ability to pay, 24 hours a day, seven days a week.
Historically, hospitals have provided billions of dollars of charity care and have worked to develop arrangements with uninsured people who can afford to pay something for their care. To make it even more seamless for the un-insured-particularly indigent Americans who are not otherwise eligible for public coverage-hospitals now are instituting explicit programs to help them get necessary care either free to them or at significantly discounted rates.
Consumer-driven coverage has it right-consumers should be actively engaged in making basic economic and quality decisions regarding hospital care. However, this does not mean that we should throw out the current wholesale purchasing system used by insurers today. Instead, we should take what works for Americans with private coverage now and provide it to individuals and families who have or who are seeking consumer- driven coverage.
Chip Kahn is president of the Federation of American Hospitals, Washington.