Pharmacy costs are dropping, imaging is not an issue, physician expenses are growing modestly, and while PT payments are going up a bit, much of that is fee-schedule driven.

Joe Paduda

The problem area — and it is a big one — is facility cost. (There’s another, more insidious problem we’ll get to later.)

A recent HealthAffairs article highlighted the facility problem: The median price paid by auto insurers and other non-conventional commercial insurers was 2.8 times Medicare reimbursement in 2010, and 3.8 times Medicare six years later.

First, what are the factors driving this?

• The hospital/health system industry is massively consolidating, and consolidated markets are higher-cost markets. Simply put, market share equals pricing power for hospitals.
• Medicare reimbursement is not increasing, and neither is Medicaid. Governmental payers account for more than half of most hospitals' patient loads, so facilities need to find other revenue sources that pay more.
• Nonprofit hospitals are not doing well financially, so they are looking for nickels in the couch cushions.
• Niche payers, like auto and workers' comp, are the softest of targets due to little buying power and inconsistent ability to direct and/or “manage” care.
• Many are investing heavily in outpatient facilities, places where a lot of work comp patients seek treatment.
• Fee schedules in some states — we’re talking about you, Florida — can be highly lucrative and/or are easily gamed.
• Health systems are buying up physician practices, so the care delivered in those practices now comes with a facility bill as well as a procedure cost.

It’s refreshing to see this problem hit the real media, but many payers have been quietly alarmed about facility pricing issues.

Unpacking the HealthAffairs article, there are a few key takeaways:

• The study focused on Florida, which is hugely problematic. It reminds us that when you’ve seen one state, you’ve seen one state. So, payers need solutions targeted specifically to each jurisdiction.
• That said, for-profit systems are way more costly than nonprofits.
• This is a price issue.
• Network direction is hugely important. There are plenty of sources to identify lower-cost facilities, sources that most work comp payers don’t seem to be using.

What does this mean for you?

If you're not at the table, you're on the menu.

Joe Paduda is co-owner of CompPharma, a consortium of pharmacy benefit managers. This column is republished with his permission from his Managed Care Matters blog.