Healthcare’s In-Network Pricing Problem
The economist Friedrich Hayek argued that price is the primary mechanism by which communication occurs in a functioning free marketplace. Our healthcare system is excessively costly because it does not function as a real marketplace. The central problem revolves around pricing. Most people mistakenly believe the problem is that contracted healthcare rates are not widely known and transparent. This is not, however, the main problem.
In most market-based systems, people generally aren’t aware of most of the prices involved. The issue isn’t so much that contracted rates aren’t transparent as the fact that they aren’t real. The contracted – or in-network rates – for hospital “technical” services are far above what hospitals are actually paid. On the flip side, the in-network rates for physician “professional” services are far below what physicians are actually paid.
Stark Law, first introduced in 1988, is a set of federal laws that bar physician self-referral. These laws called for hospitals to pay fair market value for physician services. In reality, hospitals pay physicians for hospital referrals, not based on physician’s collections. As such, hospitals collude with insurers and government payers. Hospitals “negotiate” for contracts that pay minimal amounts for physician services in exchange for dramatically higher payments for hospital technical services. Hospitals then kick back some of this money to the physicians. This partial “bundling” of fees has been driving private doctors out of business and forcing them to join hospitals. This shift of employer dramatically increases consolidation and overall cost. Private physicians cannot agree to the same artificially low in-network rates that hospital employees can because they don’t get the technical fee kickbacks.
The winners of this collusion are the giant insurance companies and huge hospital systems. They effectively create regional monopolies where any given area has only one or two hospitals and one or two insurance providers. The result? They just need to negotiate with each other. Thousands of regional doctors are unable to function in the marketplace because the insurance and hospital monopolies have artificially reduced real physician prices.
This issue is also at the heart of proposals to resolve surprise medical bills. The correct answer is a system like that devised by New York State. In New York’s system, insurers pay doctors roughly based on whether their charges are consistent with what other doctors in the area are charging and being paid for those non-contracted services. Unfortunately, Big Health Insurance is pushing hard for a “solution” that would dramatically worsen the situation. These proposals would essentially outlaw all physician charges, and let the insurer pay an amount of its choosing – the “in-network” rate. Health insurers want this because they know that the in-network rates aren’t real and are significantly below rates that doctors are actually paid.
A real solution to most of these problems is simple. By modifying the defects in the current Stark Law regulations, the right fix would emerge. Hospitals must pay doctors based on doctor collections (with exceptions obviously permitted for hospitals in which most patients have Medicaid or no insurance). Only then will hospitals negotiate in good faith with Medicare, Medicaid, and the private payers for physician rates that are real. This is turn will allow private physicians to stay in business. If not, the trend towards insurer-hospital collusion and over-consolidation will only continue.
Andrew Langer is President of the Institute for Liberty
