Part 1: Hospital Prices — Why Medical Claims Keep Climbing

If employers want to understand why healthcare costs keep rising, I think one of the first places they should look is hospital pricing.

Hospitals are not the only reason healthcare is expensive, and this is not an argument against hospitals. They provide essential care, employ thousands of people, invest heavily in technology, and take care of patients during some of the most difficult moments of their lives. But employers are also spending an enormous amount of money on hospital care, and I think it is fair to ask a very basic question: **What are we actually paying, and is the price reasonable?**

That sounds easy to answer. In healthcare, it usually isn't.

For years, employers have been trained to think about hospital pricing in terms of network discounts. A carrier tells you that its network negotiated a 50%, 60%, or maybe even a 70% discount with a hospital system, and on the surface that sounds pretty impressive. The problem is that the discount means very little if you do not know what price it was discounted from.

If a hospital bills $50,000 for a procedure and your network reduces that bill to $20,000, you may be told you received a 60% discount. That sounds like a win until you find out another facility may provide the same procedure for $8,000. At that point, you did not necessarily save $30,000. You may have overpaid by $12,000.

That is a very different conversation.

I think this is one of the biggest problems with the way employers have historically been taught to evaluate healthcare. We focus on the size of the discount instead of the actual price being paid. In almost any other part of a business, that would sound ridiculous. If a vendor told you a piece of equipment had a list price of $100,000 but offered you a 60% discount, you would not immediately celebrate the $60,000 savings. You would want to know what the equipment was actually worth, what competitors were charging, and whether $40,000 was a fair price.

Healthcare should not be different.

The challenge is that hospital pricing does not operate like most normal markets. Medicare may pay one amount for a service, Medicaid another, one commercial network may negotiate one rate, and a competing network may negotiate something completely different. Two patients can walk into the same hospital, receive essentially the same care, and generate dramatically different payments simply because they carry different insurance cards.

For employers paying those claims, that should matter.

Another issue is that we tend to blame medical cost increases almost entirely on utilization. When an employer has a bad renewal, the explanation is often that employees used more healthcare, there were several surgeries, emergency room utilization increased, or a few large claims hit the plan. All of those things can absolutely drive cost, but they do not tell the whole story.

You also have to look at what the plan paid every time someone used the system.

Ten MRIs at $600 each create a very different financial result than ten MRIs at $3,000 each. The utilization is exactly the same, but the cost to the employer is dramatically different. The same is true for surgeries, imaging, infusions, emergency room visits, outpatient procedures, and almost everything else in healthcare.

That is why I think employers need to get better at separating **price from utilization**.

If your health plan spent $5 million last year and costs increased 12%, how much of that increase came from employees receiving more care and how much came from paying more for the same care? That is a question every employer should be able to answer. In many cases, they cannot.

Hospital consolidation has made this even more important. Across the country, large health systems have acquired hospitals, physician practices, imaging centers, outpatient facilities, specialty clinics, and surgery centers. In some markets, employees may feel like they have dozens of choices when many of those choices ultimately roll up to the same health system.

That concentration creates negotiating leverage.

If one health system controls a large percentage of the hospitals, specialists, outpatient facilities, and physician practices in a market, the insurance carrier needs access to that system to maintain a competitive network. The health system knows that. The carrier knows that. And somewhere in the middle of that negotiation sits the employer who ultimately funds the plan.

That does not mean consolidation is always bad. Integrated health systems can create efficiencies, improve coordination, expand access, and bring services into communities that need them. But consolidation can also reduce competition, and when competition decreases, pricing power usually goes up.

Healthcare is not immune to basic economics.

Facility fees are another area employers need to understand. We see situations where an independent physician office, clinic, or outpatient facility becomes owned by a hospital system. The building may look the same. The physician may be the same. The patient may receive essentially the same service. But the billing can change.

Once hospital ownership enters the picture, services may be billed differently, sometimes with additional facility charges that were not there before. From the employee's perspective, almost nothing changed. From the employer's perspective, the claim can be much more expensive.

This is where the site of care becomes incredibly important.

An MRI performed at a hospital outpatient facility may cost several times more than the same MRI performed at an independent imaging center. An infusion administered in a hospital setting may cost dramatically more than the same drug administered in another appropriate clinical setting. The same can be true for surgeries, lab work, and many outpatient procedures.

For employers, site of care is not just a clinical issue. It is a purchasing decision.

The problem is that most employees have no idea what any of this costs. They make healthcare decisions based on where their physician sends them, which facility is close to home, which hospital system they know, or what their copay looks like. They are almost never thinking about what the employer's health plan is actually paying.

And why would they?

If an MRI costs an employee the same $200 whether the employer's plan pays $700 or $3,500, the employee has little reason to care which facility they choose. That is not an employee problem. That is a plan design problem.

If employers want employees to become better consumers of healthcare, they have to make better decisions easier. That means better navigation, better advocacy, meaningful incentives, and benefit designs that make high-quality, lower-cost care more attractive than the expensive alternative.

Simply giving employees a price transparency app and hoping they shop for their next surgery probably won't change much.

And cost cannot be the only consideration. I do not believe the goal should ever be to simply find the cheapest provider. The goal should be to find high-quality providers delivering strong outcomes at a reasonable price.

That is what healthcare value actually looks like.

A $20,000 surgery that leads to complications, readmissions, and another procedure may ultimately cost much more than a $30,000 surgery performed by a provider with better outcomes. That is why quality data, Centers of Excellence, high-performance networks, direct contracting, bundled pricing, and care navigation are becoming increasingly important.

Employers should not simply become cheaper purchasers of healthcare. They need to become smarter purchasers.

The good news is that employers have access to more pricing information than they have ever had before. Hospital price transparency requirements and health plan transparency rules have opened the door to data that was largely unavailable just a few years ago.

The data can be messy. It can be difficult to analyze. It is not always easy to compare. But it exists.

That changes the conversation.

Instead of simply asking whether a carrier has a "good network," employers can begin asking how competitive the negotiated hospital rates actually are. They can look at how those rates compare to Medicare, how one hospital compares to another, where the plan's highest-cost services are occurring, and how much spending is concentrated within one health system.

Those are much more useful questions than asking how large the network discount is.

I also think employers need to become more comfortable challenging the traditional PPO network model. That does not mean PPO networks are always bad. In many cases, they may still be the best option. But a network should not get a free pass simply because it is large or familiar.

Its value should be measured by the access and pricing it actually delivers.

For some employers, that may eventually mean exploring narrower networks, Centers of Excellence, direct provider contracts, bundled arrangements, reference-based pricing, or other alternative reimbursement strategies. None of those strategies are right for every organization, and that is exactly the point.

Healthcare strategy should be based on analysis, not habit.

One thing that has always struck me is how differently employers treat healthcare expenses compared with almost every other large business expense. A company would rarely approve a million-dollar capital purchase without understanding the vendor, the pricing, the alternatives, and the expected value. Yet a health plan can generate a million dollars in hospital claims and the explanation may be little more than, "We had a bad year."

Maybe it was a bad year. But I would still want to know what we bought.

Which providers received the money? What services were performed? What prices were paid? Were those prices competitive? Could any of that care have been delivered somewhere else? Were the outcomes good?

Those are reasonable questions, especially for a self-funded employer.

If you are taking the financial risk and funding the claims, you should understand what you are purchasing.

I think employers have more leverage than they realize. The system is complicated, the contracts are difficult, the data is fragmented, and employees value broad access. All of that is true. But employers also finance a massive portion of the commercial healthcare system.

That gives them a voice.

The first step is simply asking better questions.

Instead of asking only what the renewal increase is, ask what is driving it. Instead of asking how large the network discount is, ask what the actual allowed amounts are. Instead of assuming the largest hospital system represents the best value, look at the data. Instead of assuming healthcare pricing is too complicated to understand, start digging into it.

The employers that begin treating healthcare like a serious purchasing function are going to have far more options than employers that continue treating it as an insurance product they renegotiate once a year.

If I were an employer, the question I would take back to my broker, consultant, carrier, TPA, or analytics partner would be simple: