Reference Pricing plus Rebates
The way in which healthcare benefits are paid crucially affects the affordability of healthcare, the ability of patients to freely choose their own physicians, and the incentives providers have to deliver quality care. It is apparent that our current methods of paying for benefits have fallen short. Healthcare is much too costly, and a large number of consumers have lost their right to freely choose their doctors. While the quality of our healthcare system is relatively high, still many choices could be improved and serious errors avoided.
We will present a new way of paying for healthcare benefits which, combined with other features of the RE·MEDI system, will significantly reduce healthcare costs, let patients choose virtually any licensed doctor or hospital in the world for their treatment with no reduction in their benefits, and elevate the quality of care.
Current Payment Methods Fall Short
Health plans fall into two broad categories: traditional indemnity plans and managed care plans. Indemnity plans indemnify the plan member for a large fraction of the charges paid by the plan, usually after a deductible requirement has been met. They customarily pay 80 percent or more of covered medical charges.
Under an indemnity plan, the treating physician may prescribe and then perform whatever treatments he deems appropriate. Often, he is required to justify his treatments to the insurer, whereupon he is reimbursed for "reasonable and customary" charges for covered treatments. The more treatments that a provider is able to justify, the more is he able to increase his income. Thus, he has a strong incentive to overtreat his patients. It is widely believed that this bias toward overtreatment has contributed significantly to the increase in healthcare costs.
Whether a treatment is justified and whether the charge is "reasonable and customary" often become contentious issues and create animosity between provider and insurer. It is therefore not surprising that considerable resources can be expended on the adjudication of claims.
Because of the higher costs associated with indemnity plans, employers have made it more costly for their employees to choose this type of plan, and consequently fewer than 30 percent of Americans with employer-sponsored health benefits are currently covered under a traditional indemnity health plan. Most of those who remain in an indemnity plan do so because they have no restrictions on their choice of doctors or other providers.
With the continued rise in healthcare costs, companies have found it increasingly difficult to meet their employees' expectation of unchanging healthcare benefits. Some companies began requiring their workers to accept larger deductibles and to pay a larger share of their medical expenses. But an increasing number began offering their employees other types of healthcare plans based on "managed care." The key feature of most of these managed care plans is that for a fixed monthly payment per employee, the plan agrees to treat the employee for all covered medical conditions. This means that the health plan itself assumes the financial risk if the employee requires more costly medical care than they anticipated.
To control costs, managed care plans typically require members to receive treatment from a provider who is on a list of providers that have agreed to offer their services to plan members at a discount. Moreover, most of these plans carefully control the treatments that members receive. Thus, members are limited not only in their choice of doctors, but they are likely to receive less treatment than they would have under an indemnity plan. The more the managed care plan can limit treatment, the more profits the plan makes. (However, the plan would not be motivated to limit current costs, if it causes the patient's illness to worsen and thereby increase future treatment costs.) Thus, while indemnity plans have a bias toward overtreatment, managed care plans are biased toward undertreatment.
Obviously, perverse incentives are at play here. If these same incentives were to pervade other activities in our lives, similar problems could be expected. For example, assume that an employer offers a new indemnity plan for dining out, whereby the company pays 85% of meal costs at any restaurant in town. This benefit will motivate employees to dine out more often and to dine at more expensive restaurants. If this dining benefit were extended to a large number of the town's employees, restaurateurs would respond by upscaling their restaurants and increasing the meal prices on their menus. The result would be a sharp increase in the total amount spent on dining out, a result not unlike what is found in our current healthcare system.
While seeking medical treatment is not as "elective" as dining out, the fact remains that many decisions to seek medical care, as well as the choices of specific doctors, hospitals and treatments, are heavily influenced by the fact that most of the cost is paid by a third party. Without healthcare coverage, there would be fewer doctor visits and considerably more sensitivity to the cost of treatment, as confirmed by a major RAND study published in 1987.
Now consider managed care in the context of the dining example. Under managed care, the choice of providers is restricted, and the plan itself determines the treatments that are administered. Under the comparable dining plan, only selected restaurants would be in the plan, with each serving a fixed menu. Moreover, because the employer selects the dining plan, based at least in part on cost, the quality of the food and service is likely to be limited.
All of this raises a fundamental question: Why would employees choose to pay for a healthcare plan that limits their choice of doctors, their treatments, and consigns them all to similar quality care? One reason is that there are economies to be had by purchasing healthcare as a group rather than as single individuals; but the more important reason is that only employer-provided healthcare benefits are excluded from all federal and most state taxation. Indeed, a careful analysis—which is beyond the scope of the current discussion—shows that this tax exclusion is the root cause of most of the problems associated with healthcare today.
A Better Way
To return to the dining example, employers could improve the way they provide dining benefits. What if the employer were simply to give each employee a fixed daily meal allowance of, say, $25 per day? If the employee spent less, he could pocket the difference; but he could choose to spend more by paying the rest from his own pocket. He could eat anywhere he wanted because his restaurant choice has no effect at all on the employer's fixed cost of $25 per day. Clearly, employees would not throng to eat at the more expensive restaurants, so restaurant owners would have no reason to upscale their establishments and raise their menu prices. This would keep meals affordable. Because choice of restaurant is not limited in any way, many restaurants would compete for the employees' business, and market competition would keep prices low, variety abundant, and quality of service as high as possible for the price. Moreover, offering a lower or higher daily meal allowance would not materially alter these results.
This same method of paying for dining benefits can be applied to healthcare, and with comparable results. Whenever a patient receives a treatment plan from a Diagnostician in the RE·MEDI system, healthcare benefits are payed by a method called Reference Pricing plus Rebates. Under Reference Pricing plus Rebates, a fixed dollar benefit is established for each medical procedure, each illness and each pharmaceutical. This benefit amount is what the insurer pays-no more and no less. If the patient goes to a provider who charges more than the benefit amount, the patient must pay the difference from his own pocket. But by going to a provider who charges less, the patient receives a cash rebate for the full amount saved; or the patient can have his employer make an equivalent deposit to his health savings account, thereby avoiding an income tax liability.
As an example, say that a Diagnostician determines that his patient requires a new pacemaker to replace one that has become defective, and that the benefit amount for this procedure is $25,000, including the cost of the device. If the patient selects a doctor/hospital who charge $30,000, then she will be required to pay the extra $5,000 from her own resources. But if, instead, she chooses a doctor/hospital charging $21,000, she will receive a rebate of $4,000.
There is an important principle that underlies Reference Pricing plus Rebates: the patient bears the full cost difference of her healthcare choices. Those with training in economics will recognize this principle as a necessary condition for achieving efficiency within any market in which prices reflect the marginal cost of supply. And most would agree that achieving efficiency in healthcare markets would be a good thing.
With Reference Pricing plus Rebates, the rebate itself is automatic, meaning that no action is required on the part of the patient to receive it, and it is sent to the patient (or credited to her health savings account) within 24 hours of the completion of treatment. Moreover, nowhere in the process does the patient have paperwork to complete or claims to submit.
Employees will be better off with RE·MEDI—unless: a) their current insurance pays for nearly all of their healthcare; b) they have been receiving decent wage increases; c) and they expect this situation to continue indefinitely. However, it is much more likely that over the past several years employee wage increases have been depressed because of rapidly increasing healthcare costs, and that they have been made to bear a larger share of their healthcare costs.
Competition induced by RE·MEDI will reverse these increases in healthcare costs, so employees can anticipate larger wage and salary increases, smaller payroll deductions for health insurance premiums, lower co-pays and deductibles and lower medical costs. Moreover, the quality of healthcare will be made more transparent to them by The Doctor Shopper, so they can have greater confidence in their medical outcome, which competition will also tend to improve.
Employers gain directly from lowered benefit payments and from higher employee morale. Because employers purchase healthcare for their employees, and because both employers and their employees can expect substantial benefits from the RE·MEDI system, employers are likely to embrace this win-win solution.
Before leaving this discussion of Reference Pricing plus Rebates, it is useful to describe how benefits are actually determined in the RE·MEDI system. Given an employer's current healthcare budget and a recent record of medical transactions of his employees, a benefit level can be established that will usually bring future healthcare spending in line with the employer's budget plan. The benefit level refers to the percentage of providers of a covered medical treatment who offer the treatment at or below the benefit amount. For example, a benefit level set at 65 percent means that 65 percent of the providers of a specific treatment charge no more than the benefit amount for that treatment, while the other 35 percent of providers charge a price higher than the benefit amount. The benefit level concept ensures that a certain percentage of local providers can provide a treatment to a member without an out-of-pocket outlay from the member. This technique also simplifies making adjustments to a healthcare budget simply by adjusting the benefit level.
We make RE·MEDI members the world's smartest healthcare shoppers. The first step is to motivate them to become smart shoppers, and Reference Pricing plus Rebates accomplishes this. The next step is to provide them with outstanding information, to make this information easy to obtain, and to make it timely. To learn how this is accomplished, please select our next article, which discusses The Doctor Shopper.