Cleverley + Associates Looks at the Link Between Value and Hospital Price Transparency

On January 18th of this year Money Magazine released its list of Best US hospitals. They provided 5 overall metrics for each of the top US hospitals: Overall Grade (A+ to B), Top Specialty, Price Transparency (A+ to D-), Top Service, and Federal rating. They explained their methodology for determining the overall rank as follows:

“Our first step to whittling down 6,000-plus hospitals across the country was to consider only facilities that received 4 or 5 star ratings for quality from the Centers for Medicare & Medicaid Services (CMS). According to CMS, fewer than 1,300 hospitals have a 4-star rating or higher. Next, we leverage a novel way that Denniston Data measures quality care: by identifying high-performing doctors and other providers based on their level of experience with certain procedures. We then reward hospitals for their staffs’ collective experience.”

They pointed out that the “Price Transparency” grade was not used in defining the overall grade, but they believed that it was important to know in advance what a procedure or visit will cost is vital to avoiding surprises and accurately planning the financial impact of a hospitalization. While their methodology is not entirely clear it does appear that it is linked to the relationship between charges and actual payment:

“The lower a hospital’s grade on this measure, the wider the gap between its list prices and what patients have actually paid; the higher the grade, the smaller the difference between the facility’s public prices and the actual bills it issues.”

We decided to review the Price Transparency grades to attempt to answer three questions:

1. What is the basis for the Price Transparency grade assignment by Money Magazine?

2. Are there categories of hospitals that could be penalized with the Price Transparency grade methodology?

3. Will the Price Transparency grades be of value to patients?

What is the basis for the Price Transparency grade assignment?

To discover what underlying factors were driving the Price Transparency grade, we extracted 2022 data for 100 of the 115 hospitals listed in the Money Magazine article where data was available. The distribution of those hospitals is shown below.

To determine if the Price Transparency grade was correlated with high hospital charges and large payment discounts, we used the following two metrics:

1. Hospital Charge Index^TM which is our firm’s measure of a hospital’s prices  after adjusting for cost of living and case mix differences.
2. Deduction Percentage ratio which is defined as the ratio of gross patient revenue less net patient revenue divided by gross patient revenue (a measure of discounts and allowances).

The table below shows values for the two metrics for each of the four Price Transparency grades. There is clear support for the ranking methodology defined by Money Magazine in their Price Transparency grade assignment. Hospitals with higher overall prices after adjusting for case mix and cost of living have a lower Price Transparency grade and these same hospitals also have larger write offs of their gross charges. There is nothing in these results that was not expected. Our primary purpose was to determine if the Money Magazine stated methodology for the assigned  Price Transparency grades was used and this appears to be true.

Are there categories of hospitals that could be penalized with the Price Transparency grade methodology?

The next step was to see if there could be a systematic bias in the Price Transparency grade assignment. To determine which factors were most significant in driving hospital prices, we performed multiple regression analysis using a number of price determinants. We found that three variables (Percentage of Charity Care, Cost per Equivalent Discharge, and the Percentage of Non-Government Payers) explained 93% of the variance in the Price Transparency grades. Values for those three metrics are shown below for each of the four Price Transparency grades. Except for the D rank, the values all move in the right direction. There were only 4 hospitals in the Price Transparency D rank and 3 of those 4 were proprietary with an average Hospital Charge Index of 260.

The results are not surprising, and it suggests that hospitals with heavy percentage of Medicare and Medicaid patients and large charity care write offs will be more likely to have higher prices with larger discounts. This is logical because operating losses from governmental and charity care patients must be shifted to those patients who remain. While the Price Transparency grade assignment may be reflective of high prices and steep discounts, there does appear to be systemic bias against hospitals with a poor payer mix.  The ultimate question is whether insured patients should be required to subsidize government and charity patients, and if so to what extent?

Will the Price Transparency grades be of value to patients?

The Price Transparency grades developed by Money Magazine do appear to identify hospitals with higher charges and steeper discounts, but it is not clear if these rankings are of value. To have value, two conditions must be met. First, there must be an actual use of the Price Transparency grades by consumers of health care services e.g.  patients or their payers. Secondly, the ranking must improve the actual decision-making process.

Let’s take a hypothetical case of a patient who resides in Houston and is researching hospitals for a future elective procedure.  The patient has just reviewed the Money Magazine grades and has found that Houston Methodist Hospital received an overall ranking of A and was ranked 13^th in the Money list of top US hospitals. Since Money Magazine only rated 28 US hospitals with an A rating the patient’s decision might be done assuming the overall grade is a true reflection of patient care quality. Unless the patient has some significant patient responsibility amounts, the Price Transparency ranking may not even be considered. For this case, let’s assume that our patient does have a large patient responsibility amount and sees the C+ Price Transparency rating.  This may suggest the patient should seek another hospital.  Money Magazine was careful to state the following:

“The price transparency grade does not necessarily mean that a hospital with a B+ is cheaper than the hospital with a C. Rather, it means its publicly listed prices are more accurate, which can better help you financially prepare.”

So, the question becomes does the Price Transparency rank really help make a better decision. In the Houston marketplace there was only one ranked hospital— Houston Methodist Hospital. Unless the patient was interested in seeking care outside of the Houston market, the Price Transparency ranking might be irrelevant. However, the Price Transparency rank does paint Houston Methodist Hospital as a high charge hospital and could prove to be a bargaining point with third party payers or even individual patients. This observation brings to the surface a serious flaw in the Price Transparency rankings; the Price Transparency grade is assigned based upon a national sample. Price Transparency grades are therefore relative to a national set of hospitals and not a regional or local set. Often hospital pricing is affected by local or regional situations. For example, state Medicaid plans may pay significantly less in some states relative to others. Specific markets may have higher percentages of elderly patients on Medicare or there may be higher percentage of uninsured patients. For whatever reason, there often are large regional pricing variations. Let’s examine the Houston market in our example.  Houston Methodist Hospital has a high Hospital Charge Index^TM  of 202 but the market average is very high as well at 193. Their prices may be high relative to a US market, but they are similar to those in the Houston market.

Conclusion

So, are the Money Magazine Price Transparency rankings of value or not? In most cases we believe the Price Transparency grades will be of little use to patients seeking information regarding hospital selection. The economics of health care payment shield most patients from significant patient responsibility because their payment  is not related to actual hospital sticker prices. Perceived quality of care as evidenced by Money Magazine’s overall grades should be of far greater importance in the eyes of prospective patients. In those situations where patients may have a financial interest in actual prices, the Price Transparency grade will be of little value because it is not relevant to the patient’s local market, and in fact can be misleading. There is also an inherent bias in the designation of these Price Transparency grades because hospitals who treat more governmental and charity patients will be more likely to receive poor Price Transparency because of their need to cost shift to those patients who do pay.