Cost Plus Article – Dallas Morning News


Claim administrator ignores hospital’s billed charges – pays cost plus 12%.  Article states that discounts off billed charges have increased over the years, yet costs keep going up. A shell game?

What makes more sense – cost plus 12% or a “discount” off billed charges? 

With hospital’s real costs, insurers, individuals can negotiate prices News for Dallas, Texas Dallas Morning News Jim Landers Business Columnist Dallas Morning News

Editor’s Note: PPO network representatives, carriers, hospital administrators and bloated insurance brokers are seething. Lucrative revenue streams are threatened. If money drives behaviour, how are hospitals going to fight dastardly cost-plus warriors? Will hospitals “play ball”  or gather their marbles and go home?

Hospital Charge Master – Basis for Cost Plus Pricing?

hospitalchargemasterAn excerpt from trial records gives one a clue to hospital Charge Masters – “The total bill for Mrs. Doe’s hospital stay was $6,731.05. This amount was determined according to the hospital’s “Charge Master”, a confidential list of charges made by the hospital for all its goods and services, which is used to compute charges for all private commercial patients who are treated on a fee-for-service basis. The Charge Master is compiled and maintained by the hospital’s chief financial officier on the hospital’s computer system. In 1991, the Charge Master contained approximately 295 pages and listed prices for approximately 7,650 items. The Charge Master is considered confidential proprietary information and is not shown to anyone other than the officers and employees of the hospital and authorized consultants. The Charge Master is adjusted on a weekly basis to reflect current cost data; the hospital’s costs are marked up by a mathematical formula designed to produce a targeted amount of profit for the hospital. When the Charge Master is adjusted on the hospital’s computer, the hospital does not preserve or archive the earlier versions of the Charge Master.”   Hospital Charge Master

Editor’s Note: Seems to us that  hospitals us their Charge Master as the basis a cost-plus pricing methodology. If that is true, then why do hospitals insist on negotiating pricing with payers on the basis of “discounts off billed charges” rather than a more transparent cost-plus model?”

Cost-Plus Hospital Reimbursement Catches On – Employers Embrace Concept

The cost-plus method of paying hospital bills seems to make sense to many employers, with a growing number switching their plans from “secretly” negotiated PPO contracts to a fully transparent model. Cost savings achieved have been documented to be as high as 40% or more.  Bill Miller Forbes

Cost based pricing makes sense for several reasons. First, the method of pricing is relatively simple and straightforward. Second, in the past hospitals were primarily reimbursed based on costs and to go back to that method of reimbursement is not stepping into new territory. Third, when prices are based on costs, they are generally perceived to be equitable and justifiable. This could be particularly important in view of the current national health care debate –  health care has become a social issue rather than a predominately economic one.

Although cost-plus makes sense to many, hospital administrators we have met  are slow to embrace the concept. While they agree that cost plus makes sense, they cite many reasons for their opposition. “We can’t accept a cost-plus method, what would all our other contracted payers think! – we can’t give you a better deal than we gave all the others!”  “That would violate our Favored Nations Clause with ABC Insurance Company.” “We can’t track a cost-plus method internally, our bookkeeping system won’t allow it.”  Or, “our cost, as reported to CMS, is really not completely accurate (wink, wink) and therefore you won’t be able to know what our true costs are – consequently a cost-plus arrangement would be impossible to quantify both internally and externally – therefore we would be happy to talk to you about discounts off our billed charges.”

Hospitals insist that the only fair and equitable way to develop a reimbursement methodology is to embrace their concept; discount off billed charges. Yet, what are the billed charges and how are they developed? Will hospitals provide their Charge Master pricing to the public? Is there a relationship between billed charges and cost?

In reality, discounts are meaningless. One hospital could offer steeper discounts than another, yet still be the higher cost hospital. Cost plus seems a more logical and prudent business practice. It is a concept hard to argue against.

An Insurance Consultant’s Worst Nightmare

Insurance consultant’s worst fears are vendors who publicly question the validity of their work product. That is especially true if a vendor presents “facts” to support their contention that the consultant’s recommendation/s are based on data that is flawed, fradulent, tainted, incomplete, skewed, misrepresented, or does not generally support the consultant’s recommendation/s in a clear, concise and unquestionably logical way.

Insurance consultants are wise to document all activity as relates to work performed on behalf of his client. All telephone conversations should be memorialized to file, all emails saved, spreadsheets double checked for accuracy, vendor sign off on the consultant’s work product to be presented to his client, careful review of all proposals received and all correspondence between the consultant and his client, as well as all correspondence with vendors, should be kept to file. It is incumbent upon the consultant to document all activities to protect against “vendor backlash”, especially when working with political subdivisions such as the Brownsville Independent School District. E&O Insurance policies may require this as well.

Yesterday at the Brownsville Independent School District, a HealthSmart presentation to the Board of Trustees questioned the work product of the district’s insurance consultant. Contrary to the consultant’s representations to the district (upon which the Board of Trustees awarded a $38 million health insurance contract), the representative from HealthSmart attempted to “set the record straight” by providing “facts.”

If a consultant represents that Company “A” is less expensive than Company “B”, but a vendor goes on public record and states that Company “A” is more expensive that Company “B”, would it not be true that one or the other may be misinformed? If PPO Network “A” has better discounts than PPO Network “B” according to the consultant, then how can PPO Network “B” be better according to the vendor? If premium for stop loss insurance is lower for Stop Loss Company “A” ,according to the consultant, than for Stop Loss Company “B”, then how can a vendor support the statement that Stop Loss Company “B” is less expensive?

If, as the HealthSmart representative stated, that moving the $38 million contract from HealthSmart to the recommended vendor will cost the district (taxpayers) more, then who are we to believe? Do we believe the “expert” consultant, or do we believe HealthSmart who lost the business? The presentation by the HealthSmart representative, in our view, was compelling.

There is one way to ferret out the truth. A careful review of all documents submitted during the request for proposal process should put to rest any alleged descrepancies. We have asked under the Open Records Act for documents relating to the BISD proposal process. Once we receive this public information, our staff will devote the time and resources necessary to evaluate the proposals in question to determine the truth. We will publish the results on this weblog, with detailed documentation.

In light of this apparent controversy, it would not surprise us if all of the other vendors (as many as 21 different companies) who submitted proposals under the BISD health insurance request for proposal process, ask for copies of the consultant’s work product in order to determine if their proposals were accurately and fairly presented to the Board of Trustees.

Editor’s Note: It will be interesting to review the various contracts to be issued with the new health insurance plan. Will the contracts be part of the public record? Or will the contracts be proprietary and unavailable to the public? Will the various contracts be directly with the BISD, or will some or all of the contracts be with third parties? For example, will the Pharmacy Benefit Manager contract be with BISD, or will the contract be with the TPA? Will all the contracts contain a “right to audit” clause that favors BISD, or one that favors the vendor? Will the contracts disclose financial arrangements with parties to the contract?  Will all vendors be required to sign a disclaimer clause stating that they will receive no additional renumeration of any kind other than what is disclosed in the contract?

MedCost Market Intelligence – A Review of Network Evaluation Models

Email received recently from a consultant friend of ours up North:

“Hey All, this piece really says it all about all these network savings analysis’ by insurance carriers…..well written from a PPO in the Carolinas. I plan on posting it to my website. Even using the best methods of comparison that they recommend, it’s still a crap shoot as to the savings…………….of course this is all the stuff that the “consultants” who place all their business with the carriers are not saying…………..besides, a good majority of them dont know S__T from shine-ola (as my Dad used to say) and wouldn’t understand this if they read it.”

“Some of you who I am sending this to are struggling with these issues right now. Best of Luck!”


Basic PPO Fallacies Revealed

Alan T. Sorensen wrote a treatise on PPO discounts. He is affiliated with the Graduate School of Business, Stanford University. Below are a few excerpts in which he exposes some basic fallacies we all have been educated to believe.

“Payer size appears to affect bargaining power, but the economic significance of the effect is small. Much larger that the effect of payer size is the influence of payer’s abilities to “move market share” by channeling patients to hospitals with which favorable discounts have been negotiated.”

Interpretation: Size matters little, steerage matters greatly. However, when you look at the provider panels of PPO networks, you see almost every hospital on the network – therefore little or no steerage – we dont have PPO’s anymore, we have APO’s (all providers network).

“Pauly (1998) has noted (and the data here confirm) that even very small managed care organizations (MCO’s) often negotiate substantial discounts from hospitals.”

Interpretation: Size matters little

“Results from an econometric model suggest patient channeling is relatively more important than payor size in determining discount magnitudes; in particular, the impact on discounts of a one standard deviation increase in a payer’s ability to channel patients is roughly eight times larger than the impact on an equivalent increase in payer size.”

Interpretation: Size is not as important as steerage

“The second difficulty inherent in this study is that hospital’s listed rates may vary, so that reported discounts may reflect percentages of unequal bases. For instance, if two hospitals charge $200 and $180 (respectively) for the same procedure, and a payer negotiates a 10% discount at the first hospital but no discount at the other, the data will indicate that the payer has a more favorable discount agreement with the first hos;pital even though it pays the same price at either facility.”

Interpretation: Discounts off billed charges mean little when comparing PPO discounts

“The point estimate suggests that increasing a payer’s hospital payments in a county by 10% would enable the payer to extract an additional one tenth of a percentage point in discount negotiations with hospitals. Although this effect is statistically distinguishable from zero, its apparent economic significance is very small.”

Interpretation: Size matters little

Editor’s Note: Bigger is Better, or is it? Not according to this expert. How many times have you heard a group representative for one of the national carriers tout their “superior” discounts due to their large market clout? How then, did a small company out of San Angelo, Texas, for example, assist the Tyler Independent School District in negotiating better provider contracts and save +40%  without reducing benefits? Could the answer be “Steerage?”

For a copy of Mr. Sorensen’s treatise, email