One Enraging Reason Why Health Care Costs Are Killing Us

By Mark Galvin, CEO Talon

Real Clear Health

As of last month, a federal rule called the Hospital Price Transparency Rule took effect.  It mandates that the nation’s 6,000 or so hospitals must reveal the confidential prices they have been charging different insurers and employers for 300 different tests and procedures—like MRIs, blood tests and surgeries.  The data revealed so far are shocking:  Not only do prices for the same test or procedure sometimes vary between hospitals in the same city by 1,000 percent or more, but some health plans are charged four or five or six times more for the same procedure at the same hospital.

That’s right:  Not only can an MRI at one hospital in Boston cost a quarter the price of an MRI at a hospital down the street, but a person getting that MRI at the same hospital might pay 75 percent less than someone else, depending on which health insurance plan they have.

Two people, at the same hospital in New York City, getting the same surgery, from the same surgeon, can be charged $3,000 in one case and $15,000 in another.

How can that be?  Why would health insurers paying the higher prices (sometimes, say, ten times higher) tolerate such a thing?  Don’t they always negotiate the best rates for themselves, thereby keeping their costs lower and keeping our premiums under control?

Well, in a word, “no.”  See, bizarre market forces are built into the health insurance business.  Among the most toxic is something called the 80/20 Rule, which can make insurers want to pay more, not less, for health care services and then pass the inflated cost along to consumers in the form of higher monthly premiums. 

Here’s how the rule works:  Insurance companies must spend at least 80% of the revenue they generate from premiums on health care costs and quality improvement activities. The other 20% can be used for administrative, overhead, and marketing costs—like, say, advertising campaigns to get more customers or salaries of executives.

Insurance companies serving large businesses have to spend at least 85% of premiums on care and quality improvement, with the remaining 15 percent being theirs to spend as they wish.

That means there’s only one way to make the 15-20 percent of discretionary money a bigger number for, say, those big salaries for executives.  And that’s to make sure more is spent on health care services, not less, because 20 percent of $1B is $200M, but 20 percent of $2B is $400M. 

The fun money in the health care insurance business can only grow if the prices paid for health care services grow.  And the higher costs are just covered by subscribers via higher premiums, anyhow.  So, why would any health care insurance company aggressively negotiate the lowest possible prices for a blood test or an MRI or cardiac surgery?  Talk about cutting off your nose to spite compensation. 

The Obama Administration put the legal architecture in place that allowed the Hospital Price Transparency Rule (championed by the Trump Administration) to withstand cynical lawsuits from hospitals wanting to keep their prices secret.  It’s a rare and brilliant example of bipartisanship.  Now, the Biden Administration could take the next step in healing the health care delivery system by surgically removing the 80/20 Rule.


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