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Bundled pricing strategies and price variation

The conversation regarding rising healthcare costs in the U.S. continues to swell with tension and uncertainty. Why do U.S. healthcare costs continue to climb at rates far outpacing other industries?

Costs this year alone are expected to rise by 6.8 percent, according to a study by PricewaterhouseCoopers. The answer is, there is not one answer. And unfortunately, there is not one steadfast solution to solve this issue. However, one key contributing factor is the lack of published pricing and comparative information available to patients.

Unlike the clearly marked prices on consumer goods and services, fees for healthcare services are largely unknown, making it difficult for patients to see the tremendous price variances between providers and locations. A recent study revealed that the quoted hospital charge for a routine hip replacement ranged from $11,000 to $125,798.

One increasingly popular method to help identify and control pricing variances is a bundled pricing strategy. As with consumer products and services, it is not uncommon to receive cost savings with a bundled technique. Healthcare doesn't have to be any different. Procedures such as an MRI or an entire episode--a joint replacement--can be priced at a flat "bundled" rate to help payers and patients better control costs.

Bundled pricing strategies provide a consistent and measurable methodology to identify which aspect of the service or procedure is driving up the cost. With this level of transparency, payers have more information at their fingertips to better educate their members to make value-based choices. This consumer-driven model reduces costs and encourages providers to offer competitive fees.

In 2010, the Centers for Medicare & Medicaid Services (CMS) implemented bundled pricing programs, and by the end of 2013 had more than 450 provider organizations signed up to participate in the program. CMS has since stated that its goal is to have 50 percent of its payments tied to quality- or value-based payment models by 2018.

In addition, a growing number of commercial payers have adopted bundled pricing strategies. Only 1.6 percent of commercial payments were flowing through bundled pricing models in 2013. Now, bundled pricing programs are used by numerous commercial payers, including United Healthcare and several Blue Cross Blue Shield affiliates.

As the trend develops, other stakeholders are looking to adopt similar methodologies. States such as Arkansas and Tennessee have implemented bundled payments within their Medicaid programs for specific episodes of care that have high costs and price variability.4 Several hospital systems have also entered into bundled payment programs with some of the nation's largest self-insured employers, such as Walmart, Lowe's and McKesson.

Historically, insurance companies have been responsible for negotiating prices with providers and reimbursing them at the negotiated rates, limiting the amount of data available to a patient regarding their healthcare costs. This model is rapidly changing. Patients are becoming financially responsible for a larger portion of their healthcare costs. As this continues, it becomes more critical for patients to have the ability to seek out the best value for their healthcare services.

Bundled pricing makes it easier for patients to compare and understand how certain variables of a procedure effect the overall medical cost of care. This approach enables patients to be price savvy and gives them the transparency they need to make an educated decision on the facilities and providers who deliver low cost and high value care.

In a matter of simple economics, giving the power to the patient helps create valuable competition in the marketplace. Research has confirmed that the more insight patients have into their cost of care, the more likely they are to seek options of greater value, thus payers across the board could decrease their cost of care.

For example, insured patients who change providers are more likely to switch to a lower-cost provider. When price and quality are well-reported to consumers, about 90 percent chose the high-value option. If price transparency were implemented nationwide, Americans with employer-sponsored insurance could save $36 billion per year.

Establishing a bundled pricing strategy starts by selecting specific episodes of care to target. A good example would be to price out a procedure with high cost variances, and with a specific start and end date (e.g., joint replacements, oncology, births). One must first determine all costs incurred during that episode. This has traditionally been a labor-intensive process, but many businesses are adopting data analytics technology to examine historical claims data, group costs by episodes of care, and determine actual prices.

Disclosing price information and making it available to health plan members and providers creates true pricing transparency that drives informed decisions.

A pricing strategy creates educated and price-conscious patients who become better engaged in their care as they shop for high value providers. Ultimately, patients and payers become aligned in their efforts to focus on value and cost reductions.

A pricing strategy also creates incentives for providers to become more efficient and cost effective in their care delivery. With price transparency, providers who fail to offer high value care may lose business if consumers choose to take their business to other network providers who offer a better value.

Healthcare, like many business-to-consumer companies, is there to meet patients' needs. There is not a one-solution-for-all, but as every facet is examined and improved, progress will be made. A bundled pricing strategy is a powerful way for payers to enhance the value that they provide to employers and members. It gives the control back to the member and keeps the market competitive. With the proper tools, technology and motivation in place, payers, employers and members can make a positive impact and help maximize the value of every healthcare dollar spent.

Brad Hill is vice president of payer solutions at RemitDATA.

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