1.04.2013

Rise of the Healthcare Pricing Tools

The notion "you get what you pay for" almost always holds true for general merchandise like clothing and related accessories. The high-end brands are usually expensive because their quality is directly proportional to the price of the product. Comparatively in case of healthcare, the price variances can be a little tricky and are tied to more than just the quality of the procedures.


Healthcare cost differentials

The cost of different kinds of treatments in a given area, city or state can vary substantially because they are dependent on fee schedules, demographics, and physician overhead.

A procedure like Lasik surgery can cost up to $4500 in New York while the exact same procedure runs for about $2800 in Ohio. Both of these treatments are about the same if judged on the scale of quality, procedure implementation, physician experience and time and yet there is a huge difference in cost.

Why the rise of the pricing tools?

Come 2014 the Affordable Care Act (ACA) will require everyone to get insured or face a penalty. This combined with the elimination of the pre-existing condition clause and the defined contribution model will put financial pressure on the whole industry and will create a consumer driven healthcare.

To stay afloat, the insurance companies will underwrite all subscribers as being under the same umbrella which will tie all participants together with an invisible financial thread. This thread will cause all participants to suffer equally for someone else not being able to pay their bills.

To ensure no one defaults on their payments and can afford the care, both the insurance companies and the consumers will demand to know the estimated cost of the treatments before they begin. This demand will give rise to the pricing tools.

Aspects that will matter

Pricing tools will be more than just a mere quoting system. Other facets like hospital versus private facilities, satisfaction ratings, availability and physician experience will equally count.

The consumer driven healthcare model will depend on:
  • How is the reputation of the hospital or a physician's office?
  • What kinds of deals are available inside or outside the plan network?
  • Is the physician willing to offer discount rates to individual customers?
  • What kind of satisfaction ratings did the physician receive?
  • What percentages of outcomes were successful?
  • Is there a price difference between a doctor's facility and a hospital?
  • Are there any payment plans available?

Different types of pricing tools

There are three primary ways of implementing the quoting system: the bluebook approach, the insurance average and the true cost quoting. All of these systems will have an Expedia-like feel with some even offering online shopping through a cart system.

Bluebook approach

Bluebook models already exist in the market but they tend to have a higher chance of deviation from the true estimates. They gather the pricing information from data bank companies like Vitals and then calculate the estimate by taking the averages.

The reason the bluebook approach is not realistic is because it does not take different, more-detailed possibilities into account, remove outliers or have access to different fee schedules. For example: A dental implant surgery can have the possibility of including a bone graft if the jawbone is too small. This is something that bluebook pricing would have trouble representing properly.

Insurance average

In this approach the pricing statistics are created by mining the claims data from different insurance companies. During the calculations the resultant information is further refined for accuracy by removing the outliers from the source costs.

Systems that offer cost information by mining claims data are usually more accurate than their counterparts. The weakness of this system comes from the absence of individual data like copays and deductibles.

True cost quoting

True cost systems are designed to offer more realistic estimates and are geared towards churning out individual estimates. The costs for different treatments are calculated using the same methodology as the insurance average models and then individual deductibles, copays and out-of-pockets are applied. The end result varies from user to user depending on their standing in their plan.

Opportunities and Challenges

The employer contribution model, ACA and consumer driven healthcare will force employers, hospitals, insurance companies and physicians to change their business models. Information and data availability will be at the center of this change.

Hospitals will have to rethink the patient exit surveys, feedback management and the way they charge their patients. Hospitals and doctor offices will be in a state of covert competition which will bring down prices for certain types of treatments.

Price comparison tools are already available in the market but they are not effective enough if they cannot utilize one's copay or deductible in the equation. Insurance companies will have to connect and offer data to their pricing tool vendors so that real-time quote calculations can be made.

Web presence for doctors will not just be "good to have" anymore - consumers will expect doctors to maintain a website. There is a vast opportunity present for software development houses to offer some kind of IT services to doctors because due to the ever increasing costs and overheads as it will be hard for physicians to hire IT staff directly.

Other reasons to maintain a solid web base are so that the physician can contact his/her patients electronically and get their feedback personally. We should not forget that the majority of the consumers leaving feedback on the public pricing tools will be the unhappy campers. Physician websites will allow physicians to showcase their good cases tilting the negative bias towards a positive one from the public areas.

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