In 1963, Canadian television personality Monty Hall began what would be a three-decade run as host of the game show known as “Let’s Make A Deal”. Contestants who dressed in comical costumes that were designed to attract Monty’s attention were given a prize of moderate value and then faced the decision between keeping the known quantity or trading it for one of two unknown alternatives, each hidden behind a curtain. One of the alternative prizes was always worth more than the bird in hand…it might be a set of kitchen appliances, a luxury vacation or even a new car. Behind the other curtain might be an empty wheelbarrow or a barnyard animal. The excitement for the audience was watching the contestants struggle with their choice, with no clue as to the price tag of each alternative. He became so famous for tempting contestants to make these blind swaps that a mathematical probability theory first published in 1889 is now widely dubbed the “Monty Hall Problem” in scientific literature.
Health care pricing—in particular, the variability in what different payers pay providers for the same services—takes on an element of “Let’s Make a Deal” as the amount the provider gets paid has less to do with the cost of care and is more dependent on who pays the bill. The subsidization of government payments by private-sector insurers is well documented. What is less widely known is the difference in provider payments between services covered by health insurers and those paid for by a segment of the industry known as property and casualty insurers—companies that provide automobile, homeowners or workers’ compensation coverage. While not accounting for a large portion of overall health care spending, the variation in prices paid by different classes of insurers underscores the irrationality of the patchwork quilt that is our national financing system.
If I’m playing catch with my grandson and tear my rotator cuff, my health insurer and I might together pay a total of $13,100 for scheduled outpatient surgery. Alternatively, if the torn rotator cuff resulted from repeated shoulder stress from being a carpenter, my employer’s workers’ compensation insurer might pay $21,325 for the same surgery in the same facility. In some states, payment rates by workers’ compensation insurers are limited to usual and customary benchmarks; in other states, prices are whatever providers charge.
In another scenario, my neighbor is at the top of a ladder cleaning the gutters when they fall and hit their head. Arriving at the hospital emergency room, they receive a CT scan. If they are covered by an insurer with significant market share, the trip to the ED and resulting imaging would likely generate an insurance payment of approximately $1,900 to the hospital. If my neighbor was covered by a smaller health insurer, the payment might be $4,900. If they suffered the same head injury in an automobile accident instead of at home and arrived at the same hospital emergency room, their automobile insurer would likely spend $8,350—more than four times the price paid by a health insurer with strong bargaining clout. If the gutter mishap occurred on the patient’s 65th birthday, rather than being paid between $1,900 and $4,900 by a private health insurer, the hospital would only receive approximately $775 from Medicare for the same services rendered. And if a different neighbor who has been out of work for an extended period and is covered by Medicaid suffered the identical injury, the provider would likely be paid $725 or less.
If the dizzying number of different payment rates for the same services was not confusing enough, consider a situation in which a claim for a fractured leg is filed with a health insurer and a payment of $5,250 is made to the hospital before it is discovered by the insurer that the injury happened during an accident covered by an automobile insurer.
Having already paid the bill, the health insurer is entitled to recover its expenditure, through a legal process known as subrogation, by collecting that amount from the automobile insurer, who actually bears the financial responsibility for the claim. But if the claim had been submitted by the hospital directly to the auto insurer instead of routing it through the health insurer, the hospital would have been paid $14,300 rather than $5,250. So, is the hospital entitled to collect an additional $9,000 even though they normally accept $5,250 from the health insurer for the same services? And who pays for the administrative expenses associated with tracking the payments and reconciling the balances? We all do.
The often-enormous variation in payment rates for identical services, dependent not on clinical needs but on who writes the checks, is anything but rational. The complex web of cross-subsidization arises not through any thoughtful process but is instead based on insurer market share, local government policy decisions, unilateral federal program rate setting, or sometimes simply who paid the bill first. Another enormously popular TV game show, first appearing during the 1950s and still on the air today, made Bob Barker a household name over his 35 years as its host. With contestants guessing at the prices of common commodities, trying to get as close as possible without going over, the show is called “The Price is Right”. Our trouble in health care is that it so seldom is.
About the author: As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for more than 25 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.