By Bill Rusteberg
Billed charges are manufactured numbers having nothing to do with cost or value. It’s simply a starting point designed to create the illusion of value to the benefit of hordes of middlemen feeding off one fifth of the American economy.
The illusion of value is memorialized in Explanation of Benefits (EOB) issued every time an insured has a claim. “Look Alice, our insurance got a $50,000 discount off my $100,000 hospital bill! Thank God we have insurance!”……………..“That’s wonderful George, let’s buy more of it!”
Working the Spread
Middlemen make billions off discount “savings.” There are more examples than you can shake a stick at. Subrogation firms can earn 35% of “savings,” ceding back 5% to the TPA in return for doing nothing. Audit firms charge anywhere from 20-50% of “savings” or worse yet, a percentage of billed charges. Insurance carriers earn a portion of the discounts they negotiate with in-network providers. PPO networks share network “savings” with insurance brokers, consultants, and TPAs.
The graph above shows the difference between billed charges (red line) and actual costs (green line). Hospitals accepting Medicare patients must attest to their cost every year to CMS under threat of punishment if they don’t. This illustration is for a hospital in deep South Texas by an audit firm based in Austin, Texas. This firm has data on every hospital in the United States and all the graphs we’ve studied look almost identical.
Best Kept Secret In Health Care
The real money for health care intermediaries lies between the red line and the green line. This is where working the spread takes place behind the scenes, out of view of clueless consumers who are paying for all of this.
Pharmacy benefit managers are the most proficient actors on the planet in working the spread on their side of the business. They have built a shakedown system in such a manner it’s nearly impossible to dissect. In partnership with the pharmaceutical manufacturers and the three national distributors, they earn 40-70% commission off brand and specialty drugs and even more, in some cases, on lower cost generic drugs. PBMs leave nothing to chance. To capture revenue off non-insured consumers PBMs push “discount cards” wherein list prices no one ever pays are discounted leaving PBMs left to profit off the difference.
George & Alice
Consumers are simply pawns to be exploited. In George’s case the $100,000 no-one-ever-pays hospital bill was reduced by 50%. George and Alice see value in paying for health insurance and are thankful they have it. Alice is so happy they have health insurance she wants more of it.
But was George’s hospital bill discounted by 50%? Nope, not in this case. The actual discount was 45%. The 5% difference was paid to the TPA which equals to 10% of the fake discount amount.
Was the final bill fair and reasonable? You decide. You must consider that Medicare would have paid $10,000 and hospitals earn a profit off Medicare patients. In this instance George’s insurance paid five time the amount Medicare would have paid. If Alice loves commercial health insurance as much as she does, she’s going to love Medicare even more.
Solving Health Care Costs
Cutting out value draining middlemen saves 50-75% off medical care in this country. More plan sponsors, with their financial backs to the wall, are cutting out as many middlemen as possible and returning the savings to employees in the form of higher wages and better benefits.
Commission driven insurance brokers, ones who bring little value, are the first to go in favor of professional fee-based insurance consultants who do not sell insurance and whose duty of loyalty is solely to the plan sponsor. Next to go are PPO networks followed by PBMs. Add cash pay strategies and health care becomes affordable again.
Meanwhile Alice has an epiphany. “George, why can’t employers rent Medicare’s network? Lower costs mean better coverage! Right”?
“Why do that? Reference Based Pricing accomplishes the same thing without paying the rent Alice!
