An idea whose time has gone: Healthcare provider networks

Contracts between hospitals and providers create price discrimination and harm consumers

Above all else, the internet age has made one thing clear -- if your business sits between consumers and what they actually value, it will be quickly displaced. Travel agents and stockbrokers are nearly gone.We buy cars online, and TV networks will soon be dethroned by direct-to-consumer streaming services.

But in the healthcare industry, which now consumes close to 20 percent of GDP, networks interposed between patients and their doctors are still going strong.That too will change.

Whatever value healthcare provider networks might once have offered has long since been eclipsed by the financial hit suffered by patients when an out-of-network provider is unavoidable. The sheer frustration of trying to determine who's in- and who's out-of-network, alongside the lack of any assurance of quality or affordability that being 'in-network' was once supposed to provide, reveals that networks do very little to really help consumers.

Healthcare provider networks are, however, good at one thing: permitting hospitals to negotiate different prices for different categories of customers, a practice also known as price discrimination. Providing special discounts to purchasers who buy in bulk is not an uncommon business practice, but the ill effects -- and potentially illegal effects -- of hospital price discrimination outweigh their purported benefits.It's time to change the rules and curtail this practice.

In the healthcare marketplace, insurance companies function as wholesale purchasers of hospital procedures.But when some companies receive volume discounts, this creates a less competitive market 'downstream' where employers and individuals purchase insurance.The insurance companies would suggest this is acceptable since the gains from volume discounts incentivize economies of scale and result in lower premiums for consumers.Spoiler alert: big insurers and their provider networks have utterly failed to control rising costs, premiums, or deductibles for the 160 million individuals and families who receive health insurance from their employers or unions.Prices for all of these have far outpaced inflation over the past decade.

Let's not overlook the magnitude of the issue: this is a problem for nearly half the population of the US.

The harm to competition resulting from hospital price discrimination shows up in ways that are practically impossible for a buyer of health insurance to detect.For example, if an insured worker under an Anthem PPO plan needed a cardiac catheterization last year, the largest hospital in Los Angeles would have charged a facility fee negotiated with Anthem in the amount of $15,570.But if that employee was unlucky enough to have an employer that only offered Aetna's PPO plan, the hospital would have charged the fee it negotiated with Aetna of $32,680.Employees are completely unaware of these astounding differences when they make their enrollment decisions.

This phenomenon is not limited to high-priced coastal cities.If you visited one of the leading hospitals in Ft. Wayne, Ind., for a hip or knee replacement under a commercial plan from United Healthcare, the inpatient facility fee negotiated for the United plan is just over $30,000.Had you been under a commercial plan from Anthem, the fee negotiated for your plan would be 150 percent higher, at just over $85,000.

These examples show that we consumers are flying blind when making purchase decisions about health plans because data on deductibles, premiums and other plan metrics are insufficient for making informed choices.While price differences between hospitals are to be expected, we cannot have a functional healthcare market when each commercial plan within the same hospital has wildly differing prices of which purchasers of insurance are unaware.Price discrimination by hospitals in the form of exclusive contracts with insurer networks doesn't reduce the skyrocketing cost of healthcare, and its destructive impact on competition is harming individuals, families and employers who are unable to make informed purchasing choices.In the absence of a clear benefit to consumers, sellers should treat all customers equally.

To reduce the anti-competitive effects of hospital price discrimination, state and federal legislation should limit hospitals' fee-for-service contracts to one set of prices for all commercial third-party payers. (Programs such as Medicare and Medicaid would remain unchanged).Simply put, everyone who comes into a hospital with commercial coverage should face a level playing field with the same price for the same services.Consumers would tolerate nothing less in any other context.Our legislators and regulators shouldn't either.

A common-sense rule that each hospital establish one set of rates for its fee-for-service commercial purchasers of healthcare will bring simplicity and transparency -- both of which are necessary for a more competitive marketplace in hospital services.

Make no mistake, this suggestion goes against decades of business practices in healthcare.The notion that an insurer guaranteeing large patient volume to a hospital should not receive a discount for doing so will be met with great resistance.But in the context of healthcare, patient volume at hospitals should be a function of the hospital's quality, level of services, patient experience, and prices that apply equally to everyone.Insurance companies herding patients like sheep into hospitals where they have achieved confidential preferential pricing deals is one of the worst effects of hospital price discrimination and a practice that we should end.

But there's more.Hospital price discrimination has the additional insidious effect of harming many of those who are most vulnerable.Patients with 'bad insurance' that pays less than other plans are sometimes offered appointments less quickly or at less favorable times than those with 'good insurance' that pays higher prices.And the uninsured, who pay cash, are often quoted the highest prices of any customer -- precisely the opposite of what occurs in nearly every other area of economic activity.

Although insurers claim that provider networks and individual hospital contracts are beneficial because they result in discounted prices that get passed on to employers and individuals in the form of lower premiums, they’re wrong.Their 'discounts' apply to the inflated 'gross prices' that virtually no one pays.Worse, the medical loss ratio rule that the Affordable Care Act put in place limiting insurers' profits to a percentage (15%-20%) of total premiums collected (the remainder needs to go to pay claims) has driven up costs. The more the plans pay out in claims, the more they can charge in premiums, and the greater their profits. America's steady rise in medical expenses, claims costs and insurers' profits leave little doubt about this.

The proposal offered here — that hospitals offer one set of prices for all commercial purchasers— will not eliminate provider networks, but it will end the process of each plan contracting fee-for-service rates privately and individually with each hospital.Hospitals will then be incentivized to focus on offering quality at fair prices instead of engaging in the gamesmanship of trying to extract the highest price from each payer and plan that they meet at the negotiating table. Purchasers of healthcare, employers and individuals, will be able to more clearly compare the value offered by different providers.

American employers and families deserve transparency, fair prices and level playing fields when their healthcare services are bought and sold.It's time we give it to them.

Jim Jusko is an attorney, and Founder and CEO of FireLight Health LLC, a firm that provides research, analysis, and pricing data on U.S. hospitals. His firm provided independent validation for a recent PatientRightsAdvocate.org report, which has gained national attention. The report found that only 14.3 percent of hospitals nationwide were complying with the federal hospital price transparency rule that took effect in January 2021.