California Legislature proposes “fixing” our soaring healthcare costs by setting “fixed” levels of reimbursement to providers. Does that sound familiar?

Reports from California is that their is legislation proposed that would set the fee schedules by which providers would be paid by insurers and other private medical plans.  Services ranging from hospital inpatient stays, doctor and specialist visits, surgeries, lab and diagnostics such as MRI or CT scans plus basically every health care service would have a fee schedule attached for which providers would be paid. If legislation introduced recently in Ca is passed it would drastically change the way healthcare services are paid.

Is setting a fee schedule a new idea?  No.
Has it been tried before? Yes.
Will providers oppose it? Oh, yes!
Will it work? Yes probably, if not sabotaged by political ideology.

We are all aware that, since 2010, the cost of health care and the premiums to pay for that care has risen 100%+ and is causing crushing financial pain for tens of millions of Americans. The politics surrounding the healthcare issue makes it seem that nobody has an answer and no one seems willing to try new ideas.
But that’s not exactly true, the private sector is continually trying new ideas but gets very little press supporting its actions. This idea of setting a fee schedule has been and is currently being used by many plans in Ca.

In fact, this proposal submitted in the Ca. legislature is already successful in the private healthcare sector being used for medical plans, dental plans as well as vision and wellness plans. Employers as well as insurers are boldly trying to control their costs and the cost to their employees, our citizens. Too often, it’s the government that gets in the way of the private sector’s innovations.

The California proposal would affect private health plans of insurers as well as plans sponsored by employers which then provide the medical coverage to their employees. The idea is to limit or set the reimbursements to providers as a percentage of what Medicare allows. According to the proposal a commission of some number of people, appointed by the governor and legislative leaders, would actually set the reimbursement rate for basically every service provided by doctors, hospitals, surgery centers and other facilities.

While I hate the political nature of “a commission of appointees) the fee structure must be determined in some transparent manner. Setting reimbursements as a percentage of Medicare would be transparent.

In the private sector this concept of reimbursements being tied to Medicare is referred to as Reference Based Pricing (RBP). Some health plan payers call it Value Based Pricing in an effort to add a little marketing pizzazz. But it is a concept with merit because Medicare pricing is supposed to be based on setting a reimbursement that covers a provider’s cost-plus a little profit. People often forget that Medicare allowed rates include a profit margin.

There are a number of examples of how this idea of a fix rate has/is being used now.

  • Dental Plans – One common and successful method is a scheduled plan that dental plans have implemented for years. The dental plan pays a set amount for each service that a dentist can provide.
    For ex:
    * Exam pays $60
    * Cleaning pays $75
    * X-rays pays $45
    These fix schedule dental plans are generally less expensive that standard dental plans yet provide very rich benefits.
  • Medical plans have used EPOs (Exclusive Provider Organization) which means on that plan you only see “in Network” providers or else it is not paid for at all.
  • How ever, many insurers took this EPO idea to the extreme after the ACA was enacted. Insurers created plans with what’s known as “skinny” networks which drastically reduces the number of providers in a member’s area. Most of these “skinny” network plans suck, to be blunt but honest. Few members are satisfied with the choice of Docs on these skinny networks but these plans helped reduce or at least slow the premium increases Americans faced.

The proposal to set reimbursement levels faces opposition in the heavily Liberal Ca Legislature.  One reason may be because many on the Left wish to push for Single Payer and any prospect of controlling costs or improving benefits produces obstacles to the healthcare take-over that Single Payer represents. Thus, many lawmakers are unwilling to make significant changes even if those changes could help lower costs for the employers and employees in Ca.

A good example of this reluctance to help lower cost is the Ca. healthcare law known as SB 161. This SB 161 was enacted to make it virtually impossible for small employers with fewer that 100 employees to self-insure the group health plan they provide for their employees. SB 161 set artificial pricing levels for re-insurers that increase the risk and cost that small employers would bare. It makes the option of self-insuring to risky.
SB 161 was enacted solely to protect Covered California group plan (Ca.’s Exchange)  thereby shielding Covered Cal from the competition by employers self-insuring their health plans. Simply put legislators wanted SB 161 to eliminate Covered Ca’s competition even though it eliminated a popular alternative for employers with as few as 15 employees.

The point is that many Ca. legislators want single payer so badly that setting reimbursement levels which could reduce costs is contrary to their objectives.

Initially, the proposal sets reimbursement levels at 125% to 140% of what Medicare would pay a provider for the same service. The Private sector has many TPAs implementing RBP for employers and the reimbursement level of 125% to 180% is common.

Some argue that these price controls could push doctors to move out-of-state or retire. That’s always the fear-tactic for innovative ideas. Opponents say that it will be much harder for folks to see a physician when they’re sick, or will force hospitals to lay off staff and cut back or even close. Again a common fear tactic used by opponents.

“No state in America has ever attempted such an unproven policy of inflexible, government-managed price caps across every health care service,” Dr. Theodore Mazer, the CMA president, said in a statement.

Dr. Mazer is partially correct however his statement is a bit skewed. Medicare and Medical already sets reimbursements and in Ca accounts for 30+% of Ca.’s 34 million people. It’s true that not every provider accepts Medicare because of the reimbursement levels but that can be addressed in private plans.

But if the State backed this idea of RBP affecting private payers, such as insurers and self-funded employers, then it would bring down the unit cost of care dramatically. We all know that the total cost of healthcare is the unit cost of care times the number of units consumed. Controlling the unit cost of care is a big step to controlling total cost.

Dietmar Grellman, senior vice president of the California Hospital Association states, “from the providers perspective there is some concern and rightly so. Paying hospitals 125 percent of Medicare’s rate would cut $18 billion in revenue and force them to trim nurses and other support staff”.

Mr. Grellman’s point is valid and highlights why our healthcare delivery and finance system has run so a muck.
He says, “Private insurers make up for the low payments from government-funded health care, which doesn’t cover the full cost of care”. It is a fact for 40 years and once again the actions by the government cost employers, employees, you and me because the Hospitals and other Providers charge us more to make up what they say they lose to Medicare plans.

This proposed legislation in Ca. is not the worse idea ever considered in Ca. Trust me on that. But, it may not get traction because of the forces amassed against it. No one wants Hospitals to curtail services or lay off staff. That is not part of the solution to an already over-stressed delivery system. But there must be some room for discussion.

Several years ago, a friend of mine who managed a medium size hospital in the mid-west was grousing about the cut backs his hospital had to accept by insurers and the government. I’ll simplify but he said:

  • We invoiced $460 million for services.
  • We only collected $340 million.
  • I asked “What were your operating cost to provide services”?
  • He said “I can’t/won’t tell you that”

Maybe that’s why an aspirin can cost $18 dollars in some hospitals.

This idea of RBP is a good idea but it is not the save-all to end-all in the fight against rising premiums and care. We need to tie several of these good ideas, we discussed, together to make the solution that all America is hoping for and deserves.

Together, we could make it happen, because we are all in this together.
Let me know what you think.

Until next week.

Mark Reynolds, RHU
It stands for “Walk the Faith”.

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