The Patient Protection and Affordable Care Act, perhaps better known as Obamacare, is certainly one of the most controversial pieces of legislation to come out of the Obama administration. Designed to reform our current health-care system by mandating individuals carry health insurance, and capping insurers medical loss ratios at 80% to ensure patients get the quality of care they expect when they need it, Obamacare's favorable ratings fell in a Kaiser Family Foundation poll last month to their second-lowest level since the bill passed in 2010.
The bill is polarizing, without question. But, with its implementation less than seven months away, Obamacare received a big boost earlier this week with the release of a study on hospital costs by the Centers for Medicare and Medicaid Services, or CMS. In this study, the CMS looked at more than 3,000 hospitals nationwide that accept government-sponsored Medicare and examined the cost for the 100 most frequently billed treatments and procedures. The results of the study were downright frightening and would definitely support the need for accountability, transparency, and some form of regulation with regard to hospital costs.
Obamacare's big boost
Without going into too much detail behind the figures, the cost of many of the procedures -- surprisingly even within the same town -- often varied by a wide margin in the CMS' study. The Washington Post fittingly covered hospitals in the Washington D.C. area, noting that the cost for a permanent pacemaker implant at two hospitals that are less than 1,000 feet apart varied by an astounding and disappointing $61,000 -- or practically 100% for the same procedure! Admittedly, not all of these costs are covered by insurance, which requires the patient to kick in a significant portion in certain cases, but this is a big, big problem any way you look at it -- and all the more reason why Obamacare's reforms could be a much needed knock-out punch for runaway health care costs.
One of the main goals of the PPACA is to curb the rising costs of health care premiums, and one of the easiest ways to accomplish this is by creating as much transparency as possible. Most people have focused on the health insurance exchanges as the easiest way to accomplish this by making premiums visible and requiring insurers to compete against one another in a public venue to inspire competitive pricing, which is ultimately good for the consumer. Yet a more immediate and effective impact to patient premiums could be felt from the exposure of hospital pricing practices to the public eye.
Price transparency could be welcome news for hospitals and insurers
Believe it or not, price transparency among hospitals wouldn't actually be all bad news.
The nation's largest hospital providers, HCA Holdings (NYSE:HCA) and Tenet Healthcare (NYSE:THC) already expected to benefit in a big way because the individual mandate will help reduce a good chunk of their annual bad debt expenses. In 2012, HCA Holdings wrote off $3.77 billion, or 10.25%, of its revenue to doubtful accounts, with Tenet chiming in with $785 million of writedowns of its own -- nearly 8% of its annual revenue. Adding pricing transparency on top of the benefits to come from the individual mandate could help these two large hospitals improve their public image with patients and shareholders by making elective procedure costs accessible at the click of a button.
Pricing transparency would also be good news for the consumer because it would make costs visible and allow hospitals to compete with one another in order to gain procedures. While you're not likely to drive 400 miles to treat a broken arm, you may be willing to do so if it means saving $10,000 or more on another elective treatment or procedure.
This would also be a big, big gain for insurers! Most insurers understand that hospital pricing across the country can vary widely and currently have a sort of one-size-fits-all pricing policy to cover those variances (beyond individual qualifying factors). By making prices more transparent and holding hospitals accountable for those prices, insurers would have good recourse to lower premiums for individuals and businesses with much of that pricing uncertainty removed.
Aetna (NYSE:AET) is one of the few insurers currently helping its members out by providing payment estimates on more than 550 services with its proprietary Member Payment Estimator. This tool helps patients determine the often-confusing out-of-pocket costs associated with hospital fees and professional fees. Last year, UnitedHealth Group (NYSE:UNH), the nation's largest health-benefits provider, followed suit by launching myHealthcare Cost Estimator to ballpark the costs of more than 100 common treatments for its 14 million-plus members.
Before you get too excited...
Remember to keep in mind that there's another side to this story.
For one, hospitals' public image may be greatly improved, and, if they happen to be the low-cost leader in their town, they could see a big boost in business from greater pricing visibility. Then again, a lack of transparency is what makes hospitals so incredibly profitable at the moment. Without an easily accessible database that allows consumers to price and compare procedures from multiple hospitals at once, most patients in need of medical care simply choose the hospital closest to them. Hospitals might be dissuaded from changing what is now a perfectly profitable practice.
It's also not a slam-dunk win for insurers, either. Transparent pricing would eliminate a lot of the uncertainty they now deal with across the U.S. with regard to pricing, but there's absolutely no way these insurers can take into account the ongoing difficulty in predicting the future care needs of their members with any real accuracy. The medical uncertainty of their members alone could prevent premiums from dropping in any meaningful manner even if transparent pricing were introduced.
Finally, there's the question of whether consumers would use pricing transparency to their benefit. Sure, there are plenty of coupon clippers in our society looking for a good deal, but in the Kaiser Family Foundation's March poll we learned that 48% of the Americans who were polled has heard "nothing at all" about the status of whether an insurance exchange was being set up in their respective state. The information might be out there, but it's either difficult to get or consumers are too indifferent to seek it out.
The push for reform
Just as we've seen from the beginning with Obamacare, it's filled with a mish-mosh of positives and negatives. While I wouldn't discard the negatives discussed above by any means, consumer sentiment surrounding outrageous medical care costs has existed for decades; so, if anything, the CMS' report is only bound to give supporters of the PPACA, and those who demand health-care reform, a big boost. It still remains to be seen if this bill has all the necessary tools capable of keeping health-care inflation costs under control, but it appears that the CMS' cost report has firmly lit a fire under the need for ongoing health-care reform and has given Obamacare added momentum as we track closer to implementation on Jan. 1.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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