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South Dakota hospital price disclosure: implications for the healthcare marketplace.

In early 1992 Sioux Valley Hospital of Sioux Falls, South Dakota, disclosed what hospital trade associations are paid to protect from disclosing - its prices. And it disclosed the prices of its cross-town rival, McKennan Hospital. And it disclosed the prices of 10 regional hospitals located in North Dakota, Minnesota, Nebraska, and Iowa.

The "average charges" - consisting of each hospital's own "sticker prices" for the top 150 diagnostic related groups (DRG) as reported to Medicare - were strategically displayed by Sioux Valley administrators during a series of "Employer Briefings" attended by invited employers, insurers, and other purchasers of healthcare services. Their message to attendees:

1) McKennan prices were higher than Sioux Valley's in

90% of the top 150 DRGs; and conversely Sioux Valley

was higher than McKennan in 10% of the cases;

2) Among the 12 regional hospitals, McKennan was the

second most expensive, behind the for-profit AMI St.

Joseph Hospital in Omaha; only Rapid City Regional

Hospital and St. Luke's Regional Medical Center of

Sioux city had lower average prices than Sioux Valley;

and

3) What can employers do to control health care costs?

"Ask insurance carriers for a review of claims by

provider and by diagnosis."

The Sioux Valley report reached the attention of the media, with television first addressing the issue, followed by more extensive coverage by the Sioux Fall Argus Leader. The news coverage focussed exclusively upon the Sioux Valley and McKennan price comparisons. There was no press review of the implications of the Sioux Falls hospital ranking among the regional competitors. The McKennan response was three-pronged, asserting that:

1) The data contained in the Sioux Valley report was not

current, and therefore did not properly

reflect present pricing structures;

2) The report was selective and failed to

address service areas in which Sioux

Valley prices were higher, particularly

in the obstetrical area, and

3) During the past two years Sioux Valley

increased prices by 20 and 10 per cent

respectively compared to increases of

12 and 5 per cent by McKennan.

An unprecedented disclosure in this region, and a rare disclosure anywhere. Straight, "hardball" price competition among community hospitals. Unheard of five years ago. But in 1992, with Republican George Bush, Democrat Tom Daschle and the Catholic Health Association identifying "managed care" as a cornerstone of their respective healthcare reform proposals, the emergence of hospital price competition appears to be an understandable presage of things to come in a turbulent healthcare marketplace. And if we are observing hospital price disclosure today, can physician price disclosure be far behind? And what are its implications for hospitals? For physicians? For employers? For insurers? And, ultimately, for patients?

The purpose of this article is to offer thoughtful speculation regarding the short-term and long-term effects of community hospital price disclosure; whether price information in the possession of corporate healthcare purchasers carries the potential for altering regional referral patterns; whether periodic and ongoing publication of audited prices would constitute sound public policy; and significantly, whether such publication would alter hospital and/or physician pricing behavior?

I

Short-Term v. Long-Term Effects

The short-term effects of the Sioux Valley disclosure of regional hospital prices are at this time speculative, but potentially assessable through a survey of employers, insurers, and other purchasers who attended the "employer briefings" or otherwise received the pricing data. An important source of such assessment would be Blue Cross Blue Shield, an ambidextrous "cost-shifter" and "cost-shiftee" who as a fiscal intermediary pays "wholesale" prices for Medicare beneficiaries but pays "retail" prices in behalf of its employer-based and individual subscribers. How are the blues responding to employer requests for a review of claims by provider and by diagnosis? Or are the employer asking? Are regional insurers assisting employers in identifying high volume, high-cost areas that could be affected by choice of providers? And if not, why not? Over time, answers to these questions can be obtained by employers who are willing to be as diligent in the purchase of healthcare as they are in the purchase of other commodities. And over time, the employee, now a substantial co-purchaser through deductibles and co-payments, will have the personal economic incentive to buy smarter. With respect to regional hospital pricing patterns, a starting point is an assessment of the general ranking of the 12 hospitals identified in the "Regional Healthcare Comparison Reference Hospitals" section of the Sioux Valley report:
Hospital City Average Charges
1. AMI Saint Joseph, Omaha $14,998
2. McKennan Hospital, Sioux Falls $11,984
3. Bryan Memorial, Lincoln $11,877
4. Abbott-Northwestern, Minneapolis $11,533
5. Dakota Hospital, Fargo $10,401
6. St. Luke's Hospital, Fargo $10,042
7. Saint Marys, Rochester $9,848
8. St. Luke's Hospital, Davenport $9,842
9. Medcenter One, Bismarck $9,564
10. Sioux Valley, Sioux Falls $8,453
11. St. Luke's Regional, Sioux City $7,627
12. Rapid City Regional, Rapid City $6,494


The above rankings would have substantial significance in a competitive marketplace of the type advocated by free market conservatives and the American Medical Association. On the other hand, such rankings would have had little significance during past decades because generally only the hospitals' chief financial officers and a handful of Medicare auditors understood regional pricing structures, and presumably few others, including employers, really cared. And notably, such rankings will have no significance in the future if the "single" or "all-payer" payment feature contained in the majority of healthcare reform plans is adopted. In such a system price becomes irrelevant. A hospital will be free to charge what it wishes, but payments will be essentially the same for all. Accordingly, it can be contended that Sioux Valley has correctly judged that it will be in the best interest of regional hospitals to engage in disclosed price competition; that to do otherwise is to invite further governmental regulation. It follows, then, that hospitals and physicians desirous of being competitively positioned for the "1994 healthcare paradigm," within the price will be the milk of survival, may wish to embrace the opportunity to demonstrate cost-effectiveness.

Admittedly, periodic, ongoing price disclosure will contain risk for hospitals, as well as for the physicians with whom hospitals contract and collaborate in economic joint ventures. For example, a quick reading of the Sioux Valley report raises some interesting questions:

1) Query for employers: How good of a buy is healthcare

in South Dakota? Surveys conducted in the mid-1980s

indicated that South Dakota healthcare costs were among

the lowest in the nation. Now, Medicare data shows that

in 1990 McKennan prices were among the highest in the

region and for some procedures above national norms.

The numbers substantiate U.S. Senator Tom Daschle's

assertion that South Dakota healthcare costs, when

adjusted for per capital income, are the fourth highest in

the nation.

2) Query for policymakers: How insulated from price

competition should hospitals and physicians be? The

report, in a section comparing Sioux Valley and McKennan

prices by procedure, demonstrates the extent of demand

inelasticity in relation to the pricing of medical procedures.

Take a look at the 1990 price comparisons for

Sioux Valley's top 10 diagnosis related groups:

[TABULAR DATA OMITTED]

3) Query for the McKennan trustees who approved, e.g.,

the $40,007 price for the coronary bypass with cardiac

catheterization procedure, for the physicians who admitted

patients without disclosing the $15,949 price

difference, for the insurers and employers who paid

their share of the higher price: Would specific price

information be helpful? Trustees justified the $40,007

price on the rationale that McKennan's heart surgery

program was in its start-up phase in 1990 and high per

procedure revenues were required to have the program

break even. Virtually no other business, including those

owned and managed by regional trustees, enjoys such

pricing latitude. A restaurant that charged $35 for its

prime rib during its "start-up phase" would in all

probability never "get started-up".

And what about a physician's fiduciary relationship to

the patient, and the American Medical Association

ethical requirement that "A physician shall deal honestly

with patients and colleagues...," does the physician, as

"healer", have an obligation to disclose to patients the

economic implications of the physician's treatment?

And what about the insurer who receives premiums

from employers, employees, and individual insureds,

and uses those monies to make payments to hospitals

and physicians, how effectively is pricing information

being used?

4) Query for politicians: Would price information help

introduce into the system the essential elements of

"managed competition", or alternatively, establish some

outer limits of regulation? Business Week addressed the

alternative: "If the system is left to its own devices, the

vicious cycle of rising costs and declining coverage will

intensify. As the ranks of uninsured grow, hospitals and

physicians will continue making up for unpaid bills by

charging employers more. They, in turn, will keep

shifting more costs on to workers or drop coverage

altogether. Employers will also squeeze payments to

hospitals and other care providers, who will then be less

able to provide free care to the uninsured. That, in turn,

will further swell the numbers of uninsured which is

turn threatens treatment for everyone."

II

Price Disclosure: Sound Public Policy?

It may not be improper to suggest that during the past 25 years America's supply-side driven healthcare system has almost proven Enlightenment Philosophers Hobbs and Montesquieu wrong in their free-enterprise contention that "for as each man pursues his interests he will be a countervailing force to others." Observers like former Colorado Governor Richard Lamm, who addressed the USD School of Law-sponsored 1991 Conference Health Law and Politics, has called out for the "countervailing force" that could effectively retard healthcare's cost growth, proclaiming that, "No more than trees can grow into the sky, can health care costs continue indefinitely to grow at two or three times the consumer price index." And President Bush, warning in his 1992 State of the Union address that national health expenditures will reach a projected $1.6 Trillion by 2000, offered a combination of tax credits and managed care as "countervailing forces"; Senator Daschle has suggested his "American Health Security Act"; Senator Bob Kerrey of Nebraska served up a national health insurance plan in his failed bid for the presidency, and there are at least dozen other credible proposals being proffered to Washington.

But as we move toward the 1992 Summer Presidential Campaign there appears to be little agreement upon which legislative "countervailing force" should be implemented. The country appears to be at a political impasse. And employers - at whom this article is directed - might properly pose a self-directed query: What can be done while the rhetoric drones on? One suggestion: Understand and properly utilize healthcare pricing data of the type contained in the Sioux Valley report. Which brings us to the conclusions and recommendations of this article:

1. Medicare, through the application of diagnosis related groups, has taken the "mystery and obfuscation" out of hospital pricing, and through its RBRVS fee scale will remove much of the "mystery and obfuscation " from physician pricing.

2. Within the regional healthcare system constituency, employers emerge as possessing the best information and the best incentives for the effective utilization of healthcare pricing information.

3. The private sector does not need to rely upon legislation to introduce into the marketplace critical elements of competition. With modest coordination employers can extract data from insurers and providers and establish a "Regional Healthcare Purchasing Organization" of the type suggested by proponents of a "managed competition" response to the marketplace.

4. The short-term impact of the Sioux Valley pricing disclosure is not likely to be strong, in part due to a public and media response that treated the disclosure as another symptom of intra-city hospital rivalry.

5. The long-term impact of healthcare pricing disclosure is likely to be substantial to the extent the information is gathered by a credible source, shared with competitors prior to disclosure, and published on a predictable and ongoing basis.

6. Healthcare pricing disclosure is likely to increase accountability on all sectors of the delivery system.

7. Healthcare pricing disclosure has the potential for enhancing credibility among hospitals, physicians and other providers.

Michael J. Myers, J.D. is the director of the USD School of Business Department of Health Services Administration, with associate professor appointments to the School of Business and to the School of Law. Prior to joining the USD faculty he served as chief executive officer of Saint Marys Hospitals, Rochester, Minnesota and Riverside Medical Center, Minneapolis.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Myers, Michael J.
Publication:South Dakota Business Review
Article Type:Industry Overview
Date:Mar 1, 1992
Words:2065
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