Industry leaders share ideas, point fingers on limiting hospital prices

Hospital executives love to brag about all the progress they’re making cutting unnecessary costs out of their operations. As a reporter covering hospital finances, I hear it all the time. So-and-so system managed to get $200 million or $300 million slimmer in three years. So what does that mean for patients? How do hospitals’ cost-cutting efforts translate into lower prices? 

I decided to explore the subject for this article. Think of it as one reporter’s quest to learn what hospitals and other sectors of healthcare view as their role in bringing hospital prices down, especially after rounds of aggressive cost-cutting. Spoiler alert: Almost no one shared practical steps that their own industries could take. Instead, there was a whole lot of blaming the other guys.

Gail Wilensky, an economist and senior fellow at the international health foundation Project HOPE, said my first mistake was trying to get straight answers from parties with personal stakes in the issue.

“That everybody says, ‘It’s the other guy that’s the problem,’ isn’t exactly a surprise,” said Wilensky, who served as administrator of the predecessor agency to the CMS for several years under President George H.W. Bush. 

Here’s what leaders from major wings of the industry see as their role—or not at all their role, how dare you—in lowering hospital prices.

Asking hospital leaders what their own industry can do to lower prices is a bit like staring into the eye of a storm. Maybe that explains the expert-level deflection in their answers.

“Price is something that I think we’re overly focused on, when everything is a rate or a negotiated amount,” said Rick Pollack, who heads the country’s most powerful hospital lobbying group, the American Hospital Association. 

As Pollack explained it, even if hospitals reduce their prices, insurers might be the ones who benefit, not the patients. Other hospital leaders expressed the same skepticism. They said even if hospitals did lower prices, the money saved might just pad insurers’ profits. 

Centura Health in Centennial, Colo., is among the systems working to cut costs, with a goal of saving at least $350 million over a three-year period. But whether the system lowers prices isn’t up to Centura, said the system’s CEO, Peter Banko. Rather, prices hinge on conversations with health insurers and the employers with whom they have direct contracts.

“We want it to translate to the consumer and not go into the pockets of the health plan or the employer,” Banko said. “I think there’s a missing piece there.”

Who captures those savings is indeed a serious question worth exploring, Wilensky said. It often depends on how competitive the market is and it’s often not just 100% one party.

“But you ought to immediately be suspicious of anybody who said, ‘Well, it wouldn’t get to them anyway,’ ” she said. 

Perhaps unsurprisingly, the insurance lobby had some feelings about that. Danielle Lloyd, senior vice president of private market innovations and quality initiatives at America’s Health Insurance Plans, the industry’s main lobbying group, assured me that premiums track directly to underlying costs. So if carriers pay less for services, members’ out-of-pocket costs will go down, too. Insurers are also bound by a federal rule stating that they can’t spend more than 20% of individual and 15% of small-group premium revenue on administration, marketing and profit. 

Besides all that, Pollack said, all people really care about is the out-of-pocket cost their health plan says they have to pay, not hospital prices.

For many Americans, that’s true. But it’s because they don’t understand that the prices hospitals charge are reflected in the premiums and other out-of-pocket costs, which ultimately eat into their raises and affect them in ways far beyond their out-of-pocket costs, said Suzanne Delbanco, executive director of Catalyst for Payment Reform.

“It’s like you put a jar of candy in front of kid and they’re focused on eating it right then,” she said. “They don’t focus on the ramifications.”

Then of course there’s the argument that hospitals simply can’t get any leaner, especially when you consider that more than half of a hospital’s budget is typically tied up in wages and benefits for employees, Pollack noted. 

With supply and labor costs varying from market to market, key factors that go into pricing structures are outside of a hospital’s hands, added Chip Kahn, CEO of the Federation of American Hospitals, a trade group that represents the for-profit sector. 

But there’s some evidence hospitals have more control than they let on. Delbanco pointed back to a 2011 Medicare Payment Advisory Commission report that found hospitals in more competitive markets tend to control their costs better than those in less competitive markets. 

The 25% of hospitals in the study experiencing high competitive pressure had median costs per case that were roughly 10% lower than the national median, according to MedPAC. Those hospitals in turn generated Medicare profit margins that were 10 percentage points above the national median. The 60% of hospitals experiencing low competitive pressure had costs per case that were 4% above the national median and a median Medicare profit margin that was 4 percentage points below the national median, the study found. The study didn’t explore what the more profitable hospitals did differently, but it shows that when pressure is applied, they find ways to be more efficient. 

“It’s much easier to keep charging more than to figure out how to root out costs,” Delbanco said. “It’s like swimming downstream as opposed to swimming upstream.”

Salt Lake City-based Intermountain Healthcare is unique in its outspokenness about its success in lowering its prices, both in the form of cheaper services and lower premiums through its health plan. Its CEO, Dr. Marc Harrison, said being integrated with a health plan allows Intermountain to align incentives across the payer and provider segments. 

Intermountain has identified certain shoppable procedures and lowered their out-of-pocket prices. One example is a normal, vaginal delivery, with a plan available for uninsured patients that reduced the cost from approximately $6,000 to $4,150, Harrison said. 

“We thought it was really important,” he said. He estimates Intermountain’s pricing initiatives will save Utah consumers $35 million in 2019. “If we have the discipline to change our cost structure without hurting quality, we should do that.” 

Intermountain’s SelectHealth insurance plans decreased their premiums 2.7% on average in 2019 for individuals insured through the exchange.

Hospitals aren’t the only ones trying to shift responsibility. There’s research showing that physicians also feel that managing costs is beyond their pay grade and something management should handle. 

Fewer than 60% of physicians said they have “some” responsibility for reducing healthcare costs, and 36% said they have a “major” responsibility, according to a survey of about 2,600 physicians published in JAMA in 2013.

The connection between physicians and hospital prices perhaps isn’t as direct as between hospitals and their own prices, but it exists. It’s easy to see why doctors play a major role in hospitals’ internal costs, and not only because they need to get paid—orthopedic surgeons made an average of more than $500,000 per year, according to Modern Healthcare’s latest physician compensation survey—but because hospitals often foot the bill for the supplies and devices they use on patients. But what about price?

Dr. Peter Angood, CEO of the American Association for Physician Leadership, said it’s about time physicians take more ownership of the problem. To do that, they need to “have more skin in the game” when it comes to health systems’ finances. That means getting involved at the administrative level, as a chief medical officer or vice president of medical affairs, for example, he said.

“A good, high-quality physician should be taking a holistic approach toward patient care and in that holistic approach, should consider the financial impact and burden on their patients or their patient population,” Angood said. 

The benefit is twofold: Clinicians gain a better sense of financial decisionmakers’ priorities, and financial decisionmakers learn more about clinicians’ behaviors and why certain practice patterns make sense. To make that happen, though, doctors are going to have to learn some finance. 

Physicians are very willing to discuss lowering their costs in all practice settings, which is a necessary first step toward lowering hospital prices, Dr. Patrice Harris, president-elect of the American Medical Association, said, noting that current AMA President Dr. Barbara McAneny has developed an innovative cancer care model that’s designed to keep patients out of the hospital.

But in order for that to happen, doctors must have access to both cost and quality data, Harris said. They must know not only the cost, but also patients’ needs and outcomes. 

“It is absolutely appropriate to get this data and to look at this data in the aggregate and make sure physicians have this data so they can then have the opportunity to make different choices,” she said. “But those choices have to be based on the needs of the patient.”

Decades of mistrust prevent some providers from lowering their prices as aggressively as they could out of fear they’ll be handing the savings to insurers. But health insurers say collaborating with providers, especially around value-based care, is the golden ticket. 

AHIP’s Lloyd added that insurers are willing to move to models where they share more risk.

It’s easier to make the pivot when all parts of the industry are aligned. 

“When you have an integrated system—a plan, hospitals and doctors—all in a single entity or working in these close collaborations, you naturally see savings and you see greater value,” said Ceci Connolly, CEO of the Alliance of Community Health Plans. Her organization’s membership is made up of provider-aligned plans collaborating with health systems.

That’s the type of work Connolly thinks insurers need to get involved in if they want to make healthcare more affordable. She shared the example of the Marshfield Clinic in Wisconsin having built an ambulatory surgery center that handles elective surgeries, especially hip and knee replacements, and also houses rehabilitation services and skilled nursing. Using its so-called comfort and recovery suites, Marshfield Clinic’s integrated health plan, Security Health Plan, has saved nearly $6 million since in 2015.

And when it became necessary to build a hospital in Eau Claire, Wis., Marshfield chose a modest, 44-bed facility and since then, Security has encouraged the use of alternative sites of care, whether it’s telehealth, ambulatory surgery centers or Marshfield’s hospital-at-home program, said Julie Brussow, CEO of Security Health Plan. The hospital-at-home program provides patients hospital-level care in their homes for acute conditions like congestive heart failure. The health plan also funds disease management programs. 

“We are seeing remarkable results around patient outcomes,” she said. “All care doesn’t have to be managed by physicians. It can be managed by the healthcare team.”

Employers bought healthcare for 56% of insured Americans in 2017, according to the Census Bureau. Considering that they’re some of the largest purchasers, it stands to reason they should use their power to help bring down prices. The folks I talked to said employers need to take more active roles in their coverage. 

That’s just what’s happening in Summit County, Colo., where locals say healthcare costs are out of control. There, group employers and individuals called the Peak Health Alliance have banded together to negotiate rates directly with providers.

It sounds like direct contracting, but instead, the group sends its negotiated rates to health insurers and asks for their best health plan options. 

Some say direct contracting itself is a great way for providers to bring down their healthcare costs. Not only that, direct contracting can educate both sides about their needs, said Steve Wojcik, vice president of public policy for the National Business Group on Health.

“It’s also a benefit for the health system to see where the employer is coming from,” he said, “and it’s broader than healthcare. It’s returning people to functionality so they can return to their job. It’s returning them to work faster.”

If employers can partner with health systems to drive down costs, that’s a win-win for everyone, Wojcik said. That way, health systems don’t have to focus so much on admissions and can instead look at, for example, offering incentives to use outpatient care over emergency rooms.

Setting reference prices for specific services and understanding which providers meet or beat those is another good option, said Delbanco, of Catalyst for Payment Reform. 

“That puts providers on notice that the employer is aware of variation in price,” she said. 

Employers can also develop centers of excellence programs, where they select specific hospitals or physician groups to be their preferred provider for specific services. Delbanco said she’s also a fan of creating atypical competition, such as launching on-site clinics or sharing nearby clinics with other employers. 

“Between quality and price criteria, employers can identify better value for members of their population and create network benefit designs that require people to get care there,” she said.

The two sectors that would have you believe they play absolutely zero role in hospital pricing are drugmakers and group purchasing organizations. 

Other sectors may have deflected in their answers, but at least they hopped on the phone—not so with drugmakers. Novartis and Merck didn’t even respond to emails requesting interviews, if that’s any indication of their perceived role in hospital prices. AbbVie said they didn’t have anyone who could comment. 

That’s telling, especially as health systems routinely cite pharmaceuticals as one of their fastest-growing costs and an inhibitor to lowering prices. Although drug price increases are expected to be lower in 2019—under 5% compared with about 7.6% in 2018—the development of expensive specialty drugs could offset some of that benefit, according to a report by Moody’s Investors Service.

The one company that did offer an idea was the main trade group representing drugmakers, the Pharmaceutical Research and Manufacturers of America. 

Its answer? It’s the hospitals’ fault.

“For hospitals, higher charges are associated with greater profitability,” PhRMA spokeswoman Holly Campbell wrote in an email. “These markups lead to higher costs for everyone—patients, employers and payers. For one, they often lead to higher reimbursement by health plans; more than half of commercial payers reimburse hospital outpatient departments as a percent of billed charges.”

Pharmacy benefit managers have also been blamed for driving up drug prices, but senators at a committee hearing last week signaled less enthusiasm for a Trump administration proposal to ban their rebates within Medicare Part D. Instead, lawmakers urged more transparency into their operations.  

GPOs help health systems get the products the need at competitive prices, but they have absolutely no control over what those providers charge for their services, said Todd Ebert, the outgoing CEO of the Healthcare Supply Chain Association. 

“The hospitals determine whatever their pricing structures are, and GPOs don’t engage in that,” he said.