2007 Spring, Pg. 16. Healthcare Pricing Revealed.

AuthorBy Attorney Leslie Ludtke and Tyler Brannen

New Hampshire Bar Journal


2007 Spring, Pg. 16.

Healthcare Pricing Revealed

New Hampshire Bar JournalSpring 2007, Volume 48, No. 1Health Care & the LawHealthcare Pricing RevealedBy Attorney Leslie Ludtke and Tyler BrannenIntroduction

Few people understand how health care is priced, and even fewer know the actual price of a health care service or procedure. Until recently, the intricacies of the health care pricing system had little practical importance to the average person. Patients sought the care that their doctors believed that they should have. Health insurance paid for that care. Managed care employed a gatekeeper model, not a market-driven approach, as the primary mechanism for controlling costs. Insurance carriers negotiated contract prices with providers to establish the amount that the carrier would pay for certain procedures or services. When the contract price for health care services went up, and the cost of medical claims increased, insurance carriers raised the premiums to reflect the increased medical claims costs.

To contain the rising cost of the unit or contract price for medical goods and services, health insurance companies instituted a gatekeeper model to control utilization. Under this model, while the unit price for the service might increase, the increase in cost would be offset by reduced utilization of specialty health care services. Members in a managed care plan had minimal co-pays to encourage them to use preventive and primary interventions, rather than the services of specialists. The member cared little, if at all, about the actual price that the carrier paid for a service or procedure because once a carrier or a primary physician approved a service, the member had no financial liability beyond perhaps minimal co-pay.

During the early years of managed care, the gatekeeper model worked well in controlling rising medical claims costs. Gatekeepers, who were generally primary care physicians, controlled utilization of medical services through a tightly managed referral system monitored by the carrier. While effective initially, this model resulted in significant patient backlash. Patients demanded more choice and more expansive networks, and the health carriers responded by broadening their networks and relaxing the restrictions around referrals. As the gatekeeper model of managed care weakened, health care costs started to increase. At present, the rate of increase appears unsustainable. According to annual surveys conducted by the Kaiser Family Foundation, health care costs have increased nearly 90 percent since 2000 compared with increases in the consumer price index and workers' earnings of slightly less than 20 percent.

With substantial increases in the cost of health care and increasing consumer resistance to the gatekeeper model for controlling utilization, the response has been to adopt a market-driven model to contain costs. Managed care products that previously did not require a financial contribution now are subject to high deductibles and co-insurance. Individuals, who formerly sought health care services as patients, have now become consumers of health care. Under this new health insurance paradigm, it is believed that shifting costs to individuals will unleash market forces stifled by the gatekeeper model and consumer demand will be allowed to function as a cost control mechanism.

From a practical standpoint, the efficacy of the market-based model in reducing the increase in health care costs is a matter of secondary concern to individuals. While patients or consumers of health care certainly hope that the escalating cost of health care services abates over time, their more immediate and pressing concern is how to pay for the health care services that they need right now. When both insured and uninsured individuals are expected to pay for an increasing portion of their health care costs, it is hardly surprising that they want to know how much the services will cost before they obtain them. Equally unsurprising is the new consumer demand for comparative cost information across different providers and carriers and comparative cost information on the price paid by the uninsured and the financially indigent.

  1. New Hampshire's Response to the Shift to a Market-Based Model of Health Care

    1. The Creation of the Comprehensive Healthcare Information System

      The New Hampshire Insurance Department (NHID) has taken a proactive approach in responding to the shift away from a gatekeeper model to a market-based model of health insurance. In 2003, the General Court established a Comprehensive Health Care Information System that is now codified in RSA 420-G:11-a. The Comprehensive Health Care Information System is a central repository of claims data and other health care data that allows the NHID to analyze and understand how the health care dollar is being spent in New Hampshire. RSA 420-G:11 requires all health carriers and third party administrators to electronically submit their encrypted claims data to the state.

      The inclusion of all payer claims data in New Hampshire's comprehensive health care information system provides the mechanism whereby the NHID is able to provide information to consumers of health care about the actual cost of health services in New Hampshire. In determining how to use the claims data, the NHID has been guided by the statutory statement of intent in the Comprehensive Healthcare Information System. RSA 420-G:11-a provides that the comprehensive health care information system shall function as a resource to make health care data available to insurers, employers, providers, purchasers of health care and state agencies.

      New Hampshire is the only state in the nation that has created a comprehensive health care information system in this fashion, and one of only several states that collects claims data from both carriers and third party administrators. The claims database is essential both in determining the actual cost of health care services and in understanding what we, as a state, are purchasing with the money we spend on health care. It is the only window into how New Hampshire as a state spends its health care dollar.

      The reason why the claims database is essential for understanding how health care services are priced is that health care services delivered to individuals covered by private insurance plans are paid at an "allowed" amount. The "allowed" amount is the negotiated payment level agreed to between the carrier and the provider and it is this amount that is used to determine the patient's financial liability. Services that are covered benefits under a health insurance plan are paid at the "allowed" amount regardless of whether they are subject to a deductible or co-insurance. For example, if the charge is $2,000, but the contract rate is $1,000, the patient liability when based on a $500 deductible and a twenty percent co-insurance is $600. When the patient is insured, the provider's charge rate is irrelevant when the health care service is a covered...

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