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Many healthcare providers have become very concerned about their posted charges for specific services and procedures in the new price transparency world in which they live. To this end, it is very common to see providers either reduce existing charges or refrain from price increases in selected areas. One very common result of price reductions is to increase the number of patient claims where a “lesser than” payment provision comes into effect.

Let’s take a closer look at how lesser than language may impact overall payment from a payer to a provider.  Claims that result in lesser than payment are simply situations where the provider’s actual charges are less than the negotiated fee. In general, there are two methods for assessing whether a lesser than payment provision results in any given situation. The first is on an aggregate claim level basis. For example, a specific contract may specify a payment of $17,000 for MSDRG 794 (Neonate with other significant problems). If actual charges for that claim were $13,000, then the payer would make a payment of $13,000 and not the negotiated fee of $17,000. The second type of lesser than is non-aggregate. This is usually at the individual charge code level, e.g., a lab test or imaging procedure. For example, CPT code 82785 (Assay of IGE) may have a negotiated payment rate of $44.00 when performed on an outpatient basis. If the actual price for this test was $39.00, then the payer would make payment at the actual price of $39.00 and not the negotiated fee of $44.00.

Most health care executives do not like to leave money on the table and their first response is often to remove these lesser than issues by selective price increases. While this may seem relatively simple to achieve, it is often not feasible or desirable. Let’s take the easiest type to fix first which is non-aggregate lesser than cases. In the lab test example above, it is very easy to increase the price from $39.00 to $44.00. This may not however be a good strategy even though it is very feasible. This specific test may be highly price sensitive, and your price may already be well above your peers. In addition, the specific lesser than situation might be just one payer with very low volume, so the dollars lost are not significant. In short, the potential gain in revenue must be balanced with community image and possible lost business.

Fixing aggregate level lesser than claims is often much harder to accomplish. Let’s use the neonate claim from above to illustrate this. Any specific review of lesser than neonate claims will show that there are many specific billed services included in these claims, perhaps 50 or more individual charged services or procedures. In most cases, the largest area is the nursery room rate accommodation, and one may be tempted to just raise that one charge code. However, the increases could be very large in many cases. For example, the current Level 1 room rate may be $2,300 and removal of the lesser than situation might require an increase to $5,800. Most likely, this level of increase is unreasonable and would only fix the one lesser than claim. Reviewing all neonate lesser than claims might suggest that other areas are creating the lesser than status such as drugs or lab tests. The actual size of the loss is also important. As discussed above, a few cases from one payer do not make a strong case for price adjustments.

So, what is the solution to minimize the loss of revenue from lesser than provisions. The best long-term approach is contract term adjustments. There should be a quid pro quo for specific changes from both parties. If you want a specific lesser than provision removed—or all lesser than provisions removed be prepared to negotiate revised fee schedules in other areas. In this era of price transparency, also recognize that your negotiated rates from one payer may be visible to other payers and might create some new demands for rate changes from payers who may feel their rates are much higher than their competitors. In the absence of agreement between payer and provider, selective price changes may still be your best option.

Have questions? Let us know!

What is the relationship between hospital costs CMS quality rating?

At the time of this writing Medicare has provided incentive payments for improvements in hospital inpatient quality to approximately 3,000 acute care hospitals through its Value Based Purchasing (VBP) program. A number of commercial payers have also introduced VBP programs for payment to their participating hospitals. The unanswered question is do improvements in quality come at a cost, or do they actually reduce cost. While there have been many prior studies, those studies varied in their definition of both cost and quality. Some studies reference cost to the patient while others review cost to the hospital. The studies also used different metrics for defining quality.

In this short blog, we will take a look at the relationship between costs incurred by the hospital and the quality rating provided by CMS in Hospital Compare at their website. Hospitals receive an overall star rating from 1 to5. The overall star rating includes a variety of the more than 100 measures CMS publicly reports, divided into 5 measure groups or categories: Mortality, Safety of Care, Readmission, Patient Experience, and Timely & Effective Care. We have pulled the 2021-star ratings reported for short term acute care hospitals. It should be noted that much of this data relied upon three years of reporting 2016 to 2019. We next pulled cost metrics for those hospitals from 2020 Medicare cost reports. Merging those two data bases provided us with 2,762 hospitals. The quality and cost metrics are shown below.

The table shows that there is a reduction in cost for hospitals with higher quality scores. For example, hospitals with the poorest star rating (1) had a median Hospital Cost Index (HCI) value of 103.2 which was 5 percent above the HCI value of 98.5 for hospitals with a 5-star quality score. The largest variance in the HCI values occurs when the quality score improves from 1 to 2. While cost reductions take place in other quality score changes the variance is much smaller.

The HCI is a metric that combines values for the average cost per discharge indexed to the US average and the average cost per outpatient visit which is also indexed to the US average. Both of these metrics are also adjusted for both case mix variation and cost of living differences.

We also included another metric for hospital cost, Cost per Equivalent Discharge (CPED), to further assess the relationship between quality and cost. The results were a mirror image of the variation observed when the HCI metric was used as the measure of hospital cost. Hospitals with the lowest quality rating had the highest CPED which was 9 percent above hospitals with 2-star rating. While variation between other quality scores showed reduced costs with higher quality scores, the variation was smaller.

Given these results, the question that needs answered is why are costs higher for the lowest quality rated hospitals? The table below shows median net patient revenue and median number of inpatient discharges for each Hospital Compare star rating. The data suggests that the largest hospitals are more likely to have the lowest quality rating. Further, the data suggests that hospitals with higher volumes of inpatient discharges are more likely to have lower Hospital Compare quality ratings. When we ran a simple correlation between quality scores and either net patient revenue or inpatient discharges, we found that both were highly correlated, but inpatient discharges had a higher correlation coefficient (.64) compared to net patient revenue (.56).

While this is a preliminary analysis, there are several key findings. First, larger hospitals –especially those with high volumes of inpatient care-have lower Hospital Compare quality scores. Second, hospitals with the lowest Hospital Compare quality score do have higher levels of cost but variation is much less across the remaining 4 quality levels. One possible explanation for these findings might be a bias in the Hospital Compare quality scoring methodology. A higher percentage of the Hospital Compare quality score is related to inpatient procedures. If larger hospitals treat more severely ill patients, it is possible that the Hospital Compare quality score might not recognize severity of care variation. For example, would death rates for pneumonia patients be higher for larger referral hospitals who might be receiving more severely ill patients? If this is true, larger hospitals might have lower scores in this area.

Have questions about this or want to learn more? Let us know!

Cleverley + Associates Will Attend the HFMA Annual Conference

We’re headed to HFMA’s Annual Conference in Denver, Colorado. Bryan Gordon, our Senior Regional Account Executive will be presenting on Price Transparency, the history of regulation, what hospitals are facing now, and what might be next.

The HFMA’s Annual Conference is a three-day-long, interactive forum where attendees can learn about new solutions, best practices, and trends that can help drive performance improvement and achieve measurable results.

It is the premier event for healthcare financial management professionals in the United States and Canada. Cleverley + Associates has been a proud part of this conference since its inception. Our team is excited to attend and help other attendees provide value to their communities by improving their revenue cycle, budgeting, decision support, and finance operations.

Price Transparency is a growing bipartisan concern, and year after year hospitals navigate new guidelines and expectations from congress as well as local governments. We’re excited to see our old friends and make new connections, hear how the industry has adjusted to recent changes in regulations, and see how we might be able to help your facility accomplish your goals.

Feel free to swing by and visit the Cleverley and Associates booth (#522) to get more information about Price Transparency as well as their other consulting and data analytics services. Representatives at the booth will help you be ready for anything, whether it’s an appointment to take a look at your Price Transparency strategy, or one of our free umbrellas!

How Do We Compare Payment Rates Across Health Plans and Hospitals?

Recently we were asked by a hospital client to address three common questions they hear from the public regarding price transparency. We’ve already answered “Why do Hospitals Offer Lower rates to Some Payers?” and “What Is The Relationship Between Insurance Contracts and What Members Pay?” so let’s look at “Why do Hospitals Offer Lower Rates to Some Payers?”

Comparison of payment rates across health plans is a complex process because of the large number of contractual provisions and it is often difficult, if not impossible, to conclude that one health plan has more favorable terms. While this statement is true, there are factors that can and do create difference in payment terms across health plans.

Administrative costs: Specific administrative costs such as contract negotiation and claims payment can, and often do, vary by the size of health plan volume. Health plans with larger volumes will naturally incur lower costs per procedure than plans with lower volumes. Health plans with a historical record of claims denial or delayed payment might also have higher payment terms than a plan that has a lower rate of claim denials and a record of prompt payment.

Plan/Coverage design differences: The nature of specific plan provisions such as deductible and coinsurance terms affect payment terms. Plans with higher deductibles and coinsurance often result in unpaid patient responsibility amounts and may require higher payment to cover expected costs of treatment.

Patient population differences: The underlying risk pool of the health plan’s insured population may also affect payment terms. For example, a health plan with an older population might require higher payment terms because the intensity of services for specific procedures might be higher due to the greater presence of preexisting conditions.

Hospitals are in a unique position where what they are paid and how and when can vary dramatically between each person who walks through their door, even if they have the same insurance. There are a lot of factors in play as hospitals balance these differences.

To see how we answered the other questions click here:

What Is The Relationship Between Insurance Contracts and What Members Pay?

Why Hospitals Charge Payers Different Rates?

Have questions? You can contact us here.