Healthcare providers experiment with lump-sum pricing


Tom Taylor learned a lesson about healthcare finances when he had both his knees replaced a couple of months apart at separate hospitals in Northern California.

The tab at the first hospital was $95,000, but the second cost $55,000. The same doctor performed identical surgeries on both knees, and Taylor says he can’t detect any differences between the two.

“Nobody knows what it costs,” said Taylor, 53, a former health insurance sales executive. “There is a complete lack of transparency in the healthcare system.”

Wildly different prices for the same medical procedures, sometimes in the same towns, are prompting doctors and hospitals across the nation to experiment with new ways to cut unpredictable healthcare spending that often leaves consumers bewildered and financially ruined.

In one closely watched test beginning in August, several of California’s best-known healthcare providers — including Cedars-Sinai Medical Center, the UCLA Health System and Hoag Memorial Hospital Presbyterian in Newport Beach — will begin charging lump-sum fees for hip and knee replacements.

That’s a radical departure from the traditional practice of hospitals and doctors charging separately for their services, a fragmented system that drives up costs while leaving no one to coordinate decisions about patient care.

Leading experts say the California experiment and others like it nationwide offer a glimpse into the future of healthcare spending.

The federal government already is testing similar “bundled” payments for its Medicare program in Colorado, Texas, New Mexico and Oklahoma. And President Obama’s new healthcare law calls for exploring additional arrangements for surgical services for the elderly and the poor.

Advocates believe that greater cooperation among healthcare providers will ultimately slow the rise of spending and drive down insurance premiums.

“The idea is to provide an incentive for doctors and hospitals to sit down together to figure out the best way to care for their patients,” said Weslie Kary of the nonprofit Integrated Healthcare Assn., which is heading up the California experiment.

Kary said the lumped charges for hospitals and doctors have not yet been set but are expected to cover most aspects of medical treatment from surgery through 90 days of recovery.

Doctor bills, X-rays, artificial joints, tests and hospital care are among the fees that will be wrapped together for commercially insured patients who would otherwise be charged for each service. The single charge will vary from hospital to hospital based on the fee each negotiates.

Under the new approach, hospitals and doctors say they expect to share in savings when patients recover promptly, while bearing the risk of additional expenses when complications arise.

“We want to innovate,” said Dr. Richard Afable, chief executive of Orange County’s Hoag Memorial. “This is not about making money. It’s about how we align financial arrangements so we can get the best outcomes for patients while reducing costs for all involved.”

But even advocates of the bundled approach say it alone cannot solve the conundrum of rising healthcare costs.

Bundled payments may work for procedures with defined outcomes such as joint replacements, but healthcare officials wonder how the fixed fees will apply to chronic conditions such as diabetes that require ongoing care.

New billing systems also will not deter doctors and hospitals from performing extra tests and surgeries that generate revenue but do not necessarily improve medical outcomes, physicians acknowledge. And bundling will not stem the rising expenses of labor and prescription drugs, two of medicine’s biggest cost drivers.

“The bundled payment is a step in the right direction … but it’s no panacea,” said Dr. Thomas Rosenthal, chief medical officer of the UCLA Hospital System. “We’re taking baby steps in rethinking how these payment methodologies can provide the right kinds of incentives.”

Some healthcare economists believe the bundling approach won’t save a dime. They argue that it could actually drive up healthcare costs and insurance premiums by giving hospitals and doctors greater influence over price negotiations with insurers.

Analysts say that large insurance companies exert their own leverage over prices, particularly with smaller hospitals that have limited bargaining power.

Insurers say bundling can control escalating medical spending, which in turn can reduce overhead.

So far, four California insurance companies have signed up for the new experiment — Aetna, Blue Shield of California, CIGNA and HealthNet.

“There is the potential to take out unnecessary administrative costs that burden us and providers,” said David Joyner, a Blue Shield senior vice president.

Everyone involved acknowledges that medical costs can be mystifying.

As in Northern California, charges are all over the map in the Southland. The hospital cost alone for hip-replacement surgery typically runs about $85,000 at Cedars-Sinai, according to figures reported to the state. The charge is about $41,000 at Hemet Valley Medical Center in Riverside County, whereas it’s around $103,000 at UC Irvine Medical Center.

The variation is influenced by myriad factors.

Facilities that offer expensive specialty services such as trauma centers, burn units or transplant programs tend to charge more for care.

Meanwhile, hospitals often charge privately insured patients more to make up for what they lose on uninsured patients and relatively low reimbursement rates from Medicare.

Caregivers and hospitals point out that they receive only a fraction of charges they submit, whether to private insurers or the federal government. Like the patients they serve, they, too, welcome more predictability.

“Doctors and hospitals are keenly aware that it’s in their interest to provide high-quality care in as efficient a way as possible,” Cedars-Sinai Chief Executive Thomas M. Priselac said. “This is an opportunity to examine whether there is a different way to achieve those goals.”