Providers argue that negotiated rates and patient out-of-pocket costs are two different things. As examples show, the math disagrees.

In the American Hospital Association (AHA) lawsuit against the Price Transparency Final Rule, providers contend that insurer-negotiated rates and patient out-of-pocket costs are two different things:

“The rates negotiated between hospitals and commercial health insurers do not reliably predict the patient’s out-of-pocket costs, and there is no easy way to reverse-engineer one from the other to determine what the patient’s copayment and deductible will be or even if the service is covered at all. The Final Rule will generate confusion about patients’ financial obligations, not quell it.” (AHA lawsuit, page 4)

The government counters that public negotiated rates are the first step to true price transparency. Namely, that these rates will allow patients to do basic math and have a clearer out-of-pocket picture than before.

Let’s unravel the AHA’s statement by answering a few questions:

  • Why is HHS requiring disclosure of negotiated rates, not just patient out-of-pocket costs?
  • What do negotiated rates have to do (if anything) with a patient’s out-of-pocket costs?
  • What are exceptions to both sides of the argument?

Why is HHS requiring disclosure of negotiated rates, not just patient out-of-pocket costs?

HHS makes it clear in the Final Rule that there are two purposes in forcing rate disclosure: 1) to help patients know procedure costs, and 2) to drive down the overall cost of care:

“...the required [rate] disclosures here advance the government’s substantial interest in providing consumers with factual price information to facilitate more informed health care decisions, as well as the government’s substantial interest in lowering healthcare costs, as further discussed below.” (CMS-1717-F2 Final Rule, page 86)

Hospitals and insurers urge that patients only want to know their out-of-pocket costs, and that the rate disclosures are unnecessary. They would prefer to continue to keep these rates private.

However, the negotiated rate and the patient out-of-pocket is often one and the same. Because of the frequent direct linear relationship between the two, the market price of healthcare is attached to the insurance negotiated rate.

In order for basic economic forces to lower the cost of healthcare, the negotiated rate is necessary.

Requiring providers and payers to disclose the out-of-pocket cost (but not the negotiated insurance rate) would be like requiring banks to only disclose the monthly mortgage payment, but not the cost of the house. And which one of those drives real estate prices?

By naming shoppable services and asking for negotiated rates, HHS seeks to create an apples-to-apples list of reference prices in the healthcare market.

Right now, we have no consistency in the names of services or how to find their costs. For example, how do we as patients anticipate the price of delivery services? Is the price different for a “normal delivery?” A delivery with complications? A C-Section?

This conundrum led the late visionary of health economics, Uwe Reinhardt, to proclaim:

“..the often advanced idea that American patients should have 'more skin in the game' through higher cost sharing, inducing them to shop around for cost-effective health care, so far has been about as sensible as blindfolding shoppers entering a department store in the hope that inside they can and will then shop smartly for the merchandise they seek.” - JAMA Article, 2013

For economics to work its magic as it has in the airline industry, standard reference pricing must be established for comparison services at the rates insurers actually reimburse hospitals. Or as Reinhardt concludes, “Reference pricing for health care coupled with full transparency of those prices is one manifestation of raw market forces at work.”

What do negotiated rates have to do, if anything, with the patient’s out-of-pocket?

In order to dive into this issue, let me clarify that we have seen, created, and built systems to calculate rates for dozens of hospitals across the United States. There are a staggering amount of rate structures, payment methodologies, and insurance plan designs.

It’s true that certain hospital visits are extremely difficult to assign a price to, and I confess that I’ve spent the better part of an hour pricing one complex stay.

But most visits aren’t like that. The math behind most visits is incredibly simple, with the insurance negotiated rate playing a key part of out-of-pocket formula.

Let’s take a look at a personal example that I think most patients would face. I wanted a cardiology consultation because of symptoms and a family history of cardiac disease, and I was referred by my primary care to a specific local cardiologist that was part of a major university’s cardiology department.

My Summary of Benefits for my Blue Shield PPO plan says the following:

  • I owe a $75 copay for specialist visits
  • I pay for outpatient facility services up to my $2,500 annual deductible (post insurance discount)

I work in this industry, and I knew that if I visited this cardiologist (even for a consultation) inside a clinic owned by the hospital, I will be charged a “facility fee” on top of the professional fee charged by the doctor. The doctor was only available to see me at the facility. He also would see patients in an office, but the next available was two months out (office) vs. one week (facility).

But pay attention to that second bullet above.

I am at the mercy of the Blue Shield PPO negotiated rate because I will owe 100% of Blue Shield’s contracted facility rate with this hospital for a “New Patient Visit.”

I had never seen this cardiologist before. My primary care doctor had never met him. At this point, I have no brand loyalty. I would go to any cardiologist that charged the lowest rate with acceptable quality. There are four major health systems within ten miles of my house.

I called the hospital, asked for the facility fee for a 60-minute new patient visit (a shoppable service defined by CMS) and was quoted $561.00. Steep! I then asked for the negotiated rate with Blue Shield PPO, and the representative could not give it to me. She referred me to another department. I waited on hold and gave up.

As the industry stands, what are my options from here?

  • Persist until someone can give me an answer. But I’ve got a job and don’t want to spend an hour on a wild goose chase!
  • Call around other doctors and ask if they charge a facility fee, and price compare over the course of lots of phone calls (imagine having to call barbecue grill companies on Amazon to ask individually the cost of each grill)
  • Give in and just schedule the appointment (This is what I did)

As a shopper, what would I prefer to do here?

I would prefer to search “new patient visit” in a search engine, plug in my plan “Blue Shield PPO” and see the negotiated rate number (which, in my case, was $302.38).

I could then weigh price, quality, convenience and service availability to make an informed decision about where to go out of the four major health systems near me (a huge amount of available providers in my area are attached to facilities).

Here is what my final bill (for the facility fee) looked like. I ended up owing $377.38 out-of-pocket (copay + Blue Shield facility rate) for my consultation.

As I mentioned, New Patient Visit 60 Minutes is a shoppable service CMS defines in its Final Rule. If I had been able to search for this Arcosta’s Price Estimation Tool, this is what I would have seen before making a care decision:

There’s a good chance that the peace of mind from simply knowing my cost would make me feel better about scheduling the appointment with the referred provider. The same search could be performed (and the math is relevant) to any facility service where the negotiated rate falls below my deductible.

If the hospitals in my area all offered this uniform tool on their websites for my research, I could compare rates in about 5 minutes.

Developers won't stop there. As we make the case elsewhere, third party tools will arise and allow cross hospital comparison shopping as instant as shopping for a flight.

Ultimately, what if all the prices I encounter are too expensive for my taste? I might choose to forgo preventative care which is what a staggering amount of Americans do in the face of high healthcare costs.

What are exceptions to both sides of the argument?

As I mentioned, I’ve seen the gamut of hospital negotiated rate agreements. Certain hospital services are in fact too complex to price on the front end, and hospitals are correct to worry about the discrepancy between a quoted price and the ultimate patient cost for those services. Generally, trauma and emergency is hard to anticipate (and despite some extreme sports videos I've seen, most patients don't actively shop for these).

Here are a few examples of non-emergent cases that are hard to estimate:

  • An outpatient non-emergent intervention, like a planned visit to the Card Cath Lab, where a surgeon might elect to intervene in any number of vessels as she sees appropriate for the patients’ health. This surgeon might not know the number of interventions until she is witnessing the vessel blockage during the procedure
  • An inpatient admission where the negotiated insurance rate is based on length of stay. Even for many elective and planned admissions (such as deliveries), it’s still difficult to anticipate how long the patient will be in the hospital if complications arise
  • Any admission where the negotiated rate is linearly tied to the charge amount on the claim. Many hospitals negotiate “percent of charge” rates for certain services and supplies

If you couple these scenarios with certain complex health plan designs (with service-specific copays, deductibles, coinsurance and out-of-pocket maximums), the calculations get complex.

This should not daunt hospitals, however. A lion's share of encounters are easy to anticipate and price.

Just the 70 shoppable services defined by CMS account for 12% of total medical spending, and shoppable services in total  (more than just those defined by CMS) account for an estimated 36% of total spending, according to the Health Care Cost Institute. But they account for an even higher share of total healthcare episodes.

Shoppable services are easy to price. They are easy to anticipate and bundle. And they are often patients' earliest experiences with a provider (where will they go when emergencies arise?) Let's make them easy to find.

Hospitals can avoid including complex services in their list of 230 required additional shoppable services.

For complex services they do include, hospitals can provide confidence ranges on estimates based off of past claims data. We offer this service to providers, and it is not a difficult feature to implement.

In the future, HHS hopes that price transparency pressure will encourage hospitals to negotiate more bundled rates. These are rates where, like inpatient DRG rates negotiated with Medicare patients, there is one all-in fee for items and services tied to a certain type of admission.

Many hospitals already take a bundled services approach for most contracts. This makes the implementation of a price estimate tool relatively straightforward, contrary to what the AHA lawsuit states.

Ultimately, the 70 shoppable services that CMS defines in its Final Rule are services that should have little variation between stays. Providers should be able to furnish consistent rates for these services. And providers that choose not to may feel patient pressure to restructure their rates.

Do you have more questions about preparing negotiated rates for the Price Transparency Final Rule? Drop us a line at