Commercial reimbursement is poised for a fade-out and corporate giants may ramp up their demands and scrutiny. Are hospitals and health systems ready?
Hospitals and health systems rely on commercial reimbursement to supplement the money they lose from governmental payers. Private insurers paid nearly double Medicare rates for all hospital services, on average, according to a KFF analysis of 19 studies comparing Medicare and commercial payment rates. Medicaid fee-for-service payments for physician services are even lower — nearly 30 percent — than those from Medicare.
This isn't to say that working with commercial payers is anything close to utopia. Their reimbursement rates to providers may be higher than those of their governmental counterparts, but the cost-control tactics they deploy when making payments are disruptive. Throughout the first three months of 2023, about one-third of inpatient and outpatient claims submitted by providers to commercial payers went unpaid for more than 90 days, according to an analysis from Crowe.
The provider-commercial payer relationship, albeit flawed, allows for the cross-subsidization that determines the financial sustainability of most hospitals and health systems. It is essential. And now, as employers brace for rising healthcare costs, the provider-commercial relationship is also increasingly volatile.
"The strong U.S. economy and a general labor shortage have collectively served as a great buffer for payers and providers, but in recent conversations with employers and their advisors, we hear that employers' ability to continue to invest in rising healthcare costs is fraying (one advisor described employers as approaching a 'benefits cliff') and they are willing to consider healthcare cost management options they had not seriously considered in the past," Joyjit Saha Choudhury, managing director with Kaufman Hall, wrote in an Oct. 10 analysis.
Nearly half of Americans receive health insurance through an employer. Average costs for U.S. employers that pay for employees' healthcare will increase 8.5 percent in 2024 to more than $15,000 per employee, according to a projection from Aon. The increase is nearly double the 4.5 percent bump to healthcare budgets that employers experienced from 2022 to 2023.
This forecast builds on recent cost increases: The annual premium for family coverage in 2022 averaged $22,463, with the worker contributing $6,106 annually — an increase of 20% over the previous five years and 43% over the previous 10 years.
There are a few ways commercial reimbursement could weaken, some familiar and some intensified by employers' growing cost burden, according to Mr. Choudhury. Employers may shift more costs to employees via premiums, deductibles, copays and coinsurance or turn to narrow networks. Health plans may ramp up reference based pricing, in which the payment amount for a service is capped regardless of the provider's usual unit cost for that service. Or employers may negotiate "best price" clauses into their contracts with insurers. Most extreme, employers could drop coverage altogether, which has been playing out over the past decade with small businesses with 47% of companies with three-49 employees offering health insurance in 2022, according to KFF.
Although employers have a menu of cost containment strategies for healthcare costs, they have been slow to use them so far due to fierce competition for talent. Shifting healthcare costs to employees doesn't make for the most alluring benefits package when competing to attract and retain top talent.
But if and when employers turn up the dial on healthcare cost containment or quality control, providers will feel a variety of impacts either directly or indirectly. Spillover effects include: increased competition and rate concessions if payers narrow network participation; shifts in revenue and volumes if enrollees move from commercial group markets to individual or exchange markets; more cash price-seeking patients; and increased scrutiny or measurement toward quality of care, which varies widely for covered employees.
An analysis from JP Morgan released in August shared specific examples of the variation in care delivery for employees, finding that in a sample of 809 Ohio cardiologists, among the top 10% of providers, an average of 73% of their patients are taking statins regularly. Among the bottom 10% of providers, about half as many patients adhere to statins. Among 3,121 Texas obstetricians, the instance of a woman with an uncomplicated pregnancy undergoing a C-section ranges from 14% for 10th percentile to 61% for the 90th percentile, depending on the obstetrician who delivers the baby.
Although the clinical variation is stark, managing it is difficult. Neither employers nor employees can reliably learn which physicians are low- or high-performing without provider-level quality data.
"Even though employers do not often interface directly with health care providers, employers can shift their health plans toward accountable care models, where physicians manage cost and quality across the spectrum of care delivered to their patient panels," JP Morgan wrote in its analysis. "Within these arrangements, provider quality data can be leveraged to both improve a provider's own clinical practices and to facilitate high-quality specialty referrals."
If employers and payers lean more heavily on providers to demonstrate appropriate, high-quality care, it will have been a long time coming. While "value-based care" has been in the zeitgeist for years, fewer employers by name have publicly stepped up to command greater control over the cost and quality of care. This pursuit may have been the stuff of closed-door rate negotiations or health plan network design. But in a time when employers are miscalculating union tactics and demands while seeking stabilized talent, it would make sense if large corporations looked outward and turned up the heat as healthcare purchasers.
Walmart is one of the few and early major employers to recognize and act on the variation it experienced in employee healthcare. After establishing its Centers of Excellence program in 2013, in which it partners with vetted health systems for defined episodes of care, the retail giant learned of the complete lapses in quality that employees had previously received from healthcare providers that Walmart did not vet or approve.
Lisa Woods, vice president of physical and emotional wellbeing with Walmart, said in 2019 that 10% of employees who received a cancer evaluation at Mayo Clinic in Rochester, Minn., learned that they, in fact, do not have cancer. They receive a different diagnosis entirely; 55 percent receive a different treatment plan. Some Walmart associates learned that their cancer diagnoses were based on biopsies that were never completed at their local hospitals or medical groups. Another 54 percent of Walmart associates were told they need spine surgery locally, only to visit a COE to learn they could avoid surgery in their treatment.
Ms. Woods said pre-pandemic that the deficiencies and variation in care — from misdiagnoses to inappropriate care — are not limited to one region. "Unfortunately, it is all over the country. It's everywhere," she said.