Archive for September 26th, 2009

Cost-Plus Hospital Reimbursement Catches On – Employers Embrace Concept

Saturday, September 26th, 2009

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.