Finding the Real Culprit

If you take a balloon and squeeze one end, the other end gets larger. That analogy is frequently cited to explain why healthcare costs are greater in some geographic areas than in others. But it doesn’t quite tell the whole story.

Data show wide variation in the cost of healthcare from state to state—both for workers comp and general medical care. New Hampshire residents, for example, pay significantly higher rates than patients in other states for the same medical procedures. Workers comp surgical procedures in New Hampshire are 83% higher than in other states in New England and are twice the national average, according to the National Council on Compensation Insurance. Doctor visits are 36% more expensive than elsewhere in the region and 47% more than the national average, the NCCI says.

Rising healthcare costs are a particular challenge in workers compensation cases because claims are not subject to deductibles and co-payments the way general medical claims are. That means the higher cost of care is borne by the payer when the financing mechanism is workers comp. Illnesses and injuries are treated in the same healthcare system, though, and costs are going up for both workers comp and general medical cases.

From 2002 to 2013, prices were on a steady climb, according to the Workers Compensation Research Institute’s annual Medical Price Index for Workers Compensation. The institute analyzed data from 25 states, representing 80% of workers comp benefits paid in the United States.

The study shows wide ranges in overall workers comp treatment costs from state to state. For example, California’s index number is 77, meaning workers comp medical costs are 77% of those of the median state. Indiana, by contrast, comes in at 163—its costs are 63% higher than the median.

Similar variations are seen in federal data on general medical costs. The Centers for Medicare & Medicaid Services showed that an acute myocardial infarction with major complications and co-morbidities where the patient was discharged alive (translation: a heart attack that didn’t kill the patient) would cost $100,343 at the University of Chicago Medical Center, while just a few miles west, at Chicago’s Rush University Medical Center, it would cost $71,905. Hahnemann University Hospital in Philadelphia charged $160,520, while Massachusetts General Hospital in Boston charged $54,873. At Cedars-Sinai Medical Center in Los Angeles, the same diagnosis resulted in charges of $171,873.

To be sure, the average total payment—including deductibles and patient co-payments— was a mere fraction of those numbers.

Why does treating a heart attack cost so much more in Los Angeles than in Chicago? Why is Indiana so much more expensive on workers comp treatments than California? The short answer: there is no short answer.

A Silly Game

William Slocum, director of business development for ELAP Services, which specializes in medical bill audits for self-funded employers, says don’t confuse costs with billings. Hospitals routinely increase their billed charges to accommodate growing demands for discounts from commercial payers, such as Blue Cross & Blue Shield.

“Hospitals increase their billed charges to account for the discount,” Slocum says. Much like hospital charges themselves, discounts vary from hospital to hospital. “This could explain why a specific procedure or surgery could be billed at $20,000 at one hospital and $80,000 at a hospital in the same town,” he says.

Hospitals annually report their actual costs for healthcare procedures to the Centers for Medicare & Medicaid Services, Slocum says. The cost-to-charge ratios indicate a hospital’s cost on the service. “For example, I know of one hospital whose cost-to-charge ratio is an average of 6.27%. That means if they bill $10,000, their average cost of the services provided is $627, which is a markup of 1,595%,” Slocum says. “In our system today, a PPO contract would yield a payment, with a 50% discount, of $5,000. This is not a good deal for the employer or the employee.”

ELAP represents employers in auditing hospital bills and provides a hospital with a reasonable profit margin, Slocum says.

“We say business owners should be able to buy medical services in the same manner as they buy other services,” he says.

Provider markup of billed charges, he adds, “is a silly game, and employers are losing. They’re hemorrhaging money, and the employees have to shoulder the increases.”

It’s no secret that healthcare insurance rates keep rising. The only real variable is by how much each year. According to data provided by the Workers Compensation Research Institute, the medical piece of workers comp is also a perennial increase. What is less obvious, however, is why the underlying cost of medical care also keeps rising.

Michael Brewer, president of Lockton Benefit Group, a division of Lockton Companies, says several factors are driving healthcare costs.

“There are situational drivers of healthcare costs, such as lack of care coordination, inconsistent treatment, duplication of efforts and defensive medicine,” Brewer says. “The cost of medical professional liability is not so much in the amounts awarded; the issue is really the behavior that liability is causing.”

Physicians and hospitals worried about lawsuits often order a greater number of tests, a behavior that might not necessarily improve the patient’s treatment but which does increase overall costs, he explains.

“But the most dynamic cost driver of the last 30 to 40 years has been cost-shifting from public plans,” Brewer says. “Because hospitals know they have to make money somewhere else, costs are going to escalate wherever they can.” Think of the bulging balloon.

Other factors are at play, too, notes Dr. Eric Justin, vice president and chief medical officer at Lockton Companies.

“Advances in technology are one factor,” Justin says. “Unlike in other businesses, where the costs decrease, in medicine it’s done the opposite. Treatment charges go up as new forms of expensive diagnostic equipment become available.”

Another factor, Justin says, is the “inappropriate” use of diagnostic tests, drugs and other therapies.

“Some is attributable to defensive medicine,” he says. “Some is personal interest—a doctor may order more of something in which they hold a financial interest.”

In workers comp, a big issue is finding medical providers to accept cases, Justin says. “Reimbursement is determined by each state and may be low or even very low, so some providers opt not to take workers comp cases,” he says. “As a result, a workers comp claimant may not get all of the appropriate care he or she needs. Inevitably, cost goes up due to delays in treatment.”

Generally speaking, the longer a workers compensation claim stays open, the more it costs. With workers comp claims, Brewer says, it’s sometimes hard to tell whether an underlying medical condition contributed to the injury or illness.

“Of the 2 million or so people covered in benefit plans sponsored by Lockton’s clients, the No. 1 ailment is back pain,” Justin says. “And 50% of them have neck pain, too. Another 5% to 7% of those suffer from joint pain. In workers comp, overexertion can cause problems—the pain may be work-related or it may not be.”

Increasing use of the healthcare system is frequently cited as a leading cause of medical cost inflation. More people using the system means more staff resources being expended and more expensive technology being deployed, leading to greater healthcare spending.

The effects of the Affordable Care Act on overall healthcare spending are still unknown. At least 10 million people without prior health insurance enrolled in ACA plans in the past year, and eventually another 20 million could become insured under the healthcare reform law. What might that increased population in the healthcare system do to costs?

“Carriers are trying to figure out how to measure and project this impact,” says Ken Ambos, senior vice president of employee benefits in the New York office of William Gallagher Associates. “Is the ACA enrollment process going to drive an uptick in overall utilization and cost trends that result? It’s too early to say. There could well be lagging claims escalation if these new ACA-driven enrollees turn out to be higher utilizers of healthcare. We just don’t know with any certainty yet.”

Utilization is part of the story, but there are other factors, too.

Indeed, among the conclusions the Institute of Medicine reached in a 2013 report exploring the regional variations in healthcare spending: “Variation in spending in the commercial insurance market is mainly due to differences in price markups by providers rather than to differences in the utilization of health care services.”

Inside the Numbers

“At a unit-cost level, however, a somewhat different story emerges,” explains Kimberly George, senior vice president and senior healthcare advisor at Sedgwick Claims Management Services. “The main driver of cost at the unit level is the fee schedule.”

States determine healthcare fee schedules; therefore, they vary. “The cost of a doctor visit in one state might be 50% to 80% less than in another state. For example, the unit cost of physical therapy in Illinois is higher than it is in California.

“The growth of different types of healthcare facilities means that we’re now seeing ambulatory surgery centers with their own fee schedules,” George says. “That’s something new.”

Unit-level costs are generally highest in states that do not have fee schedules, George says. “New Hampshire is one of five states with a usual and customary payment system, not a fee schedule, so doctors there can bill what they want to bill,” she says. “Generally, payers will pay 80% of usual and customary charges for medical care.”

In Sedgwick’s data, the three states that are consistently among the top 10 most expensive states, based on the average cost per medical claim, are New Hampshire, New Jersey and Indiana. Some of the others in the top 10 are expensive due to higher fee schedules, among them Illinois, Louisiana and Wisconsin.

A factor in the cost of medical claims is the bill review fees imposed by preferred provider organizations, George says. “Employers, insurers and third-party administrators pay to have medical bills repriced for PPO discounts, which vary from state to state. For example, New Jersey has a lot of PPO claims, which leads to a big discount on bill review fees for payers and TPAs.”

What Clients Can Do

With healthcare costs and insurance rates on the rise, employers continue to get squeezed. Think of more hands on that bulging balloon. So what can employers do to stop the squeeze at their end?

Agents and brokers have to “get past the idea that discounts are going to serve your client,” says ELAP’s Slocum, a former insurance broker. “As an industry, we have tried diligently to reduce utilization via wellness and other strategies,” he says. “It is time we start dealing with the real culprit—the unit cost.

“The other thing to consider is, if your client’s healthcare network is doing such a great job, why does the client keep getting 10% to 20% rate increases every year? With deductibles already so high, there is little an employer can do to mitigate the continuous onslaught of rate increases.”

What do most employers want?

“Employers want two primary things: one, to reduce their annual healthcare spend, and two, they want to increase the benefit plans they provide for their employees,” Slocum says.

“Employers have been battered by the Affordable Care Act,” says Lockton’s Brewer. “They’re shell-shocked. Some employers are diligently trying to find ways to provide benefits at lower cost. People are making spot bets on accountable care organizations, patient-centered medical homes, narrow networks. They’re pulling every lever they can think of to cut costs and negotiate the best deal they can.”

As healthcare costs keep rising, Brewer says, cost shifting to employees is likely to continue.

“I think the last great cost shift for benefit plans is for employers to offer high-deductible health plans with health savings accounts,” Brewer says.

In an effort to contain costs, employers have tried to contract directly with providers for family care or primary care, Justin says. “They may contract directly with a group of providers or physicians and pay a per-employee, per-month fee. This basic model is starting to crop up all over the country.”

Shift Toward Quality

Some experts say a broad movement toward accountable healthcare organizations and value-based purchasing, which is occurring now in healthcare, will shift the focus of payers and providers to the quality of care rather than the price.

The idea in workers comp and general medical care is simple: payers put their money on good outcomes because the faster a patient is restored to health and function, without readmission or retreatment, the cheaper in the long run for all involved.

“Managed care doesn’t necessarily mean quality care, but quality care will improve expenses,” says Sedgwick’s George. “The quality of the physicians is where your total savings are.”

Some states are showing signs of progress on this front. “California has a few things going for it, such as evidence-based guidelines and caps on therapy and certain other services,” George says. “When the utilization review process is tied to evidence-based guidelines, it helps us manage utilization in a meaningful way.”

Brewer and Justin see knowledge sharing as a way for employers and brokers to get better care at lower overall cost.

“Healthcare delivery is going to get more localized again,” Brewer says. “Local healthcare knowledge is going to get more important. We’ve got to do a better job of collaborating and ferreting out opportunities to find the best network in a given area. The technology available today makes it easier.”

“Connected health, or telehealth, is the Hamburger Helper of medicine. It will allow local medical knowledge to be shared,” Justin adds.

George says: “If people want to think about how they’re going to save money, ultimately, the costs come down to which provider they use.”