In the Texas Community

Blue Promise: How Do Hospitals Make Money? Part 2

Join us for the second part of our discussion about hospital business models and the price you pay for health care. The panel for this segment includes Shara McClure, DSVP of Texas Health Care Delivery, David Cripe, DVP of Network Management, and co-host Ross Blackstone, Director of Strategic Influence. You can listen to the complete discussion in podcast form on Apple Podcasts and SoundCloud.

Additional links in the How Do Hospitals Make Money Series:

Blue Promise is an online video blog that aims to address complicated health issues with candid conversations from subject matter experts. New editions are published regularly and are hosted by Dr. Dan McCoy, President of Blue Cross and Blue Shield of Texas.

Show Transcript

Music In

 

DAN:

Thanks for joining us for this addition of Blue Promise, we'll continue our discussion about how hospitals make money. I'm joined by my co-host Ross Blackstone, Shara McClure and Dave Cripe from our network team.

So let's talk a little bit about how you as a consumer might know which hospitals a better value… Is that hard?

 

SHARA:

So I think it can be hard and hospitals market and people when we look at how individuals make health care decisions, it's word of mouth its reputation and primarily people go where their physicians tell them to go and rarely occasionally but rarely do consumers look at price when making those decisions.

 

DAN:

So let me ask you a question if I have insurance, does it matter to me where I go my insurance is going to

take care of it. Is it important for me to care?

 

DAVID:

Many times it's important because you want to go to a hospital that's actually in your network and because if you go out of network you're going to typically have higher costs.

 

DAN:

Some would I take it some insured patients are probably having to pay a percentage of their charge or they're having to pay higher cost.  So having a little bit of an idea if their hospitals in network how it fits on the on the cost scales is important and also probably on the quality scale to how do they match on their quality is this a good

hospital for them to have a certain procedure at.

 

SHARA:

So you mention out-of-pocket and we're seeing higher deductibles higher out-of-pocket spend required from patients and our members and part of that is to encourage those members to use price in part of their decision making but also when patients or members go to higher cost hospitals they'll see it later in premiums and their employers will see it.

 

DAN:

Yes, let me ask a question here because I'm always been a little befuddled by this one.  So if I'm going to have an appendectomy or my gallbladder out and I pick up the phone and I call my local hospital can they tell me what it's going to cost me… will they tell me?

 

DAVID:

They have to tell you but it would be an average price.  So across every patient who's been in the hospital

over the last 12 months so it's going to be a guesstimate.

 

DAN:

That’s a little scary if you're having your colon out or colosectomy or gallbladder. I guess you don't know the price before you actually go into the hospital.

 

ROSS:

You know that issue of price transparency is actually one of the four trends that Becker’s Hospital Review identified as, you know, revenue cycle trends for this year.  Transparency, because consumers are becoming more aware as one mega megamergers was another one we talked about that in our previous segment also using technology to geared toward risk adjustment, tracking and coding is a big driver for revenue. And also you know just the trends in general include reduced reimbursement for certain patient populations, rising supplies and equipment costs and rising bad debt expense.  So all of these things are impacting the hospitals that we serve.  We talked about our members accessing these facilities.  Does anybody here know what the profit margin is for most hospitals on a Blue Cross Blue Shield of Texas member.

 

SHARA:

It's pretty high, can go into the 50, 60, We've seen up to 70 percent profit margin and we know that or we estimate that because hospitals publish what they consider their cost to charge ratio so charge being that Charge Master that we've covered.  It's the list of prices that the hospital establishes, but what's that cost in relation and we've seen cost to charge ratio as low as 13 percent.  That means that hospitals are charging almost ten times more than it cost to provide the service in their Charge Master.

 

DAN:

So Shara, let me ask a question here, so there are some changes happening in the hospital world because, I mean it's not just us, the payers and the patients that have figured that out.  I mean, hospital CEOs have figured this out too that they can't really continue along raising prices, at some point when you raise your prices to the point it starts to hit the radar screen either of government or newspapers or even Twitter.  Ok, so some hospitals are moving into this value based care system and you want to tell us a little bit about that. I know your team has been pretty progressive in working with hospitals about that. What is that?

 

DAVID:

So value based care is the idea that we're going to actually pay somebody or a facility based on providing quality care?  It's a simple statement but it's not so easy necessarily to execute. And so some of the simple things are,

you know, do you have complications?  You know one of the big cost drivers and at least Medicare and some of the other government funded programs is patients tend to come back to hospitals.  That's not a sign of good quality.

If once you've gone in for a procedure, you should go home and not have to come back.  But many times there's infection, there's other complications that arise.  The patient may have left the hospital too soon and as a result they come back and then they incur a brand new set of charges.  And so one of the things we've looked at is how do we reward a hospital for avoiding readmissions.

 

DAN:

Ok so today let me just kind of walk you through an example and you tell me if I've got this right.  So today a hospital is rewarded by potentially the more complicated the case the higher the charge.. the charges or you called it the Charge Master of the list price, the more things that are done in the hospital.  And I don't want to say that hospitals are rewarded for complications but clearly if you get sicker and you have to stay longer, your bill may be higher.

Is that fair?

 

DAVID:

That's very fair

 

DAN:

But your system you're talking about, is the hospital might actually get rewarded more if your …if your stay was higher value, you got better faster you had fewer complications and it was done in a way where you had maybe less impact from extra tests and extra procedures.

 

DAVID:

Yes.

 

DAN:

So it's not about limiting care and kicking you out early?

 

DAVID:

No, it's trying to make sure that you get the right care at the right time in the right place.

 

ROSS:

And it's about helping them control their cost as well.  Can we.. can we talk a little bit about the expenditures

hospitals have.  Why do they have a need to charge as much as they do?  I presume it's because they have a lot of expenses.  Can you shed a little bit of light on that?

 

SHARA:

Well they certainly… hospital certainly have expenses, they have expenses of nurses, they have expenses of buying drugs, they have expenses of all the equipment that they need and they have expenses to make sure that they maintain quality and accreditation and can keep their doors open and can provide good care and good customer service to their patients.  And of course they see those expenses rising but they all also as they see this payor mix change of course, the private member's… private patients yield more margin.  Medicare, Medicaid members or patients yield sometimes losses and so we have seen several efforts on behalf of hospitals to try to manage their costs.  We've also seen hospitals and large integrated systems invest in these value based care programs.  They see CMS moving, toward value based care.  They see the private market moving before moving to value based care as

well as Medicaid.  So they are investing in these areas so that they can provide more cost effective quality care.

 

ROSS:

And even among on the private side private health insurers such as Blue Cross and Blue Shield will pay maybe a different rate than one of our competitors might pay, right?  And that information is kept confidential, we don't like to discuss that because it's kind of proprietary but that does… that does play a role.

 

SHARA:

It could and we do publish a lot of information about common procedures, whether they're provided by physicians or whether they're provided by hospitals and we want our members to access that because we don't we don't see enough of members using price in that decision.  I mean we use price in every purchasing decision, whether we're buying a car, buying a house or buying groceries.  Doesn't mean we always buy the lowest cost item but we use it as a factor in our decision and we would like… we would like hospitals and physicians, especially those participating in

value based care and members to start using prices, just use it as a component in your decision making on where you access.

 

DAN:

So Shara on the value based care side it seems like on the physicians side the transition to value based care has been fairly fast and when I mean fairly fast I'm saying five to seven years but it seems like hospitals have been investing in value based care for a decade.  Is that… is it just slow because the infrastructure that needs changed and the historical processing methods are what's the impediment for hospitals to move to value based care?  What's the challenge that they have?

 

SHARA:

I think the challenge is through value based care, hospitals might be incentivized to think twice about whether they need to replicate services or whether service need to be treated in hospital an alternative setting.  But by making those decisions that it might have a negative impact on their bottom line, it's hard for hospitals to make more money, not providing care or providing cost effective care than providing high cost care.

 

DAN:

Well a negative effect on their bottom line but potentially a very positive effect on the patients livelihood and the

patients bottom line.

 

SHARA:

That's true and that's why we see them both investing in fee for service and fee for value at the same time as they as

they try to move toward fee for value. Because I think intellectually they realize that that's how they can better serve their communities.  But it could come at a price of their own bottom line.

 

ROSS:

You know at the end of the day, Dr. McCoy, hospital stays make up about 16 percent of our healthcare costs and I think it's important  to point out to help people understand exactly how hospitals do make their money so they can better understand why prices are the way they are and what we're doing to try to help.

 

DAN:

I agree with that and I think one thing I would leave everybody here, Prices are too high… I think all consumers would think that.  Well thanks for being here, thanks for joining us for this edition of Blue Promise.

 

 

Music Out

 

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