Indigent Care or Wallet Biopsy?

Pay for performance, standardized billing could help

The provision of charity care or a sliding-scale discount for patients deemed bad debtors is not a requirement for hospital tax exemption at the federal level, Harvard Business School professor Nancy Kane told the House Ways and Means Committee's Subcommittee on Oversight in a June 22 hearing.

Some state and local taxing authorities have challenged hospitals that fail to provide a reasonable level of charity care to patients, but most states have been reluctant to specify a quantity of charity care that hospitals must provide to retain their state and local tax exemption.

Ms. Kane said that research she and others conducted in the mid-1990s indicated that the quantifiable value of hospital tax exemptions far exceeded the average cost of charity care provided. She said that transparency in hospital pricing would be a useful supplement to stronger policies that reinforce the safety net for the uninsured. One such policy, she said, could be to strengthen the tie between hospital tax exemption and provision of medical services to the uninsured.

"Hospitals could be required to demonstrate how they earn the value of their tax exemption with higher priority, safety-net activities counting for more than those activities that primarily benefit insured populations, the hospital’s competitive position, or the general public," she said. "Incentives for hospitals to provide preventive, primary, and chronic care to vulnerable uninsured populations could both save money and greatly reduce human suffering."

According to Commonwealth Fund president Karen Davis, hospital care is not like other goods and services because of a lack of information, lack of choice, the complexity and life-critical importance of health care treatment decisions, physicians’ decision-making role in health care, and the need for insurance to protect financial security.

Ms. Davis said that while other countries have accepted an activist role for government in health care financing, the United States has had only sporadic, short-lived attempts to shape the health care sector through governmental policy. She reviewed many of the federal and state attempts for the committee, and said the basic lesson to be learned from the historical experience is that government leadership matters.

Fragmented financing system

"When government establishes a payment framework for purchasers — whether Medicare, Medicaid, or employer health plans — and uses that collective purchasing power to set or negotiate prices from providers," she declared, "the rise in hospital costs is slowed, there is greater equity by income of patients and across different sources of coverage, and better access to care for the uninsured.

Large purchasers — Medicare, national managed care plans, large employers — also can obtain good deals on their own, but they are less effective both in controlling overall cost increases and in ensuring equitable payment and access. A fragmented financing system, with each payer setting its own rules, also inflicts a toll in the form of higher administrative costs.

On the flip side, if purchasers join together to exact steep discounts, this system may undermine the financial stability of the hospital sector, dampen investment in innovation such as information technology, and undermine important social missions."

Changes that could work

Ms. Davis contended the greatest promise lies in a combination of improved information on quality and efficiency, pay-for-performance purchasing by private and public insurers, and investment in the capacity to modernize the health care system. She also argued in favor of transparency in price, not necessarily in terms of prices of individual hospital or physician services, but rather information on the total cost of care over an episode of illness or period of time.

"If a patient goes to a hospital where he or she will be seen by 10 different physicians and spend a long time in the intensive care unit, it is the total bill for hospital, physician, and other services that is of concern to the patient, not the daily room rate or the charge for a day of intensive care," she said.

Ms. Davis said one of the difficulties in providing this kind of information is the absence of a multipayer claims database with unique provider identification, and one important step would be for Medicare to lead in forging collaboration among Medicare, Medicaid, and private insurers to assemble such a database and make it widely available to researchers and providers.

Ms. Davis also supports a pay-for-performance philosophy in which purchasers reward high performance hospitals that demonstrate better quality and efficiency, as well as high-performance integrated health systems and accountable physician group practices. Purchasers are in a far better position to promote better quality and efficiency than are individual patients, she said.

Addressing pricing guidelines, Ms. Davis said the current system of hospital pricing is inequitable and administratively inefficient. She said a major effort should be mounted to identify ways of reducing provider administrative costs and simplifying payer rules and pricing practices.

To deal with the wide disparities in prices faced by different sets of patients, she suggested consideration of limits or bands on how much prices can vary depending on payer source. And given urgent concerns about the financial burdens on uninsured and low-income underinsured Americans, she said, net charges (after discounts) to such patients certainly should not be higher than those charged insured patients.

"In the current environment," Ms. Davis explained, "nonprofit hospitals that provide uncompensated care to the uninsured and fulfill other vital social missions should be preserved and strengthened. It would be reckless to undo tax preferences for nonprofit hospitals. They are a major source of uncompensated care and community benefit.

"It may be reasonable to refine expectations about what nonprofit hospitals should contribute to their community. It is reasonable to ask that the uninsured not be charged more than other patients, and that hospitals work out feasible repayment plans and not employ unreasonable collection tactics," she added.