Where Healthcare Prices Come From: (Part 4)
The previous post covered the two most frequently used contract negotiation terms between providers and insurance networks: Case Rate and Percent of Charge Contracts. Now we will turn to two more complex negotiation terms: Carve Outs and Provider Stop-Loss.
1. Carve Outs—the billed charges have a specific line-item for a device or medication that has a separate negotiated price. This contract term is most frequently applied to (1) implants like pacemakers, cardiac stents or orthopedic artificial joints/rods/screws and (2) infusion medications like chemotherapy or treatments for Crohn’s Disease and ulcerative colitis. A carve out is typically used in conjunction with another contract term, so a provider may have a fixed case rate for a certain service, but will charge for carve outs in addition to that case rate on the final bill. Let’s use spine surgery as an example.
Hospital A has billed charges on the surgery of $10,000 and negotiated a case rate of $5,000 for that surgery. However, Hospital A also has a specific carve out for each of the screws used in the procedure. Hospital A charges $1,000 for each screw and 10 screws are used, so there is an additional $10,000 charge for the carve out. Hospital A has negotiated 100% reimbursement for those screws with the insurance network, so the provider will be paid $10,000 in addition to the $5,000 case rate. The final allowed amount is a combination of the case rate and the carve out and adds up to $15,000 total ($5,000 case + $10,000 carve out).
Hospital B has not negotiated a specific carve out for screws used in spine surgery. Hospital B has total billed charges for the spine surgery including the screws of $12,000 and has negotiated a case rate of $7,500 for the entire procedure—including screws.
Now which hospital has a ‘lower’ negotiated rate? If you were comparing case rates only, it would lead you to believe Hospital A has a lower negotiated rate (case rate of $5,000 vs. $7,500). However, you must dive deeper to find that Hospital A’s overall cost is actually higher because of the carve out.
2. Stop-Loss Clause—the final allowed amount is set at a case rate up to a certain amount of billed charges, above which the allowed amount changes from a case rate to a percent of charge. This contract term is most frequently applied to more major surgeries. Let’s use cardiac surgery as an example (e.g. valve replacement/repair or coronary artery bypass graft—CABG).
Hospital A has billed charges for that cardiac surgery of $20,000 and has negotiated a case rate of $10,000 with the insurance network. The final allowed amount is then equal to that case rate of $10,000.
Hospital B has negotiated a case rate of $10,000 for the cardiac surgery as well. However, Hospital B has also negotiated an additional stop-loss clause stating that if billed charges exceed $40,000, then the reimbursement with change—or ‘flip’—from a set case rate of $10,000 to 75% of billed charges. In this situation, as soon as billed charges reach $40,001, the allowed amount increased from the case rate of $10,000 to $30,000 (75% of $40,001). That allowed amount continues to rise as billed charges rise, so if billed charges are $80,000, then the allowed amount would be $60,000 (75% of $80,000).
Again, which hospital has a ‘lower’ negotiated rate? If you were comparing case rates only, it would lead you to believe that both hospitals are the same—they have the same $10,000 case rate. However, when you dive deeper, you would find that Hospital B typically costs more because of the additional stop-loss clause that they had negotiated.
These contracting complexities—(1) case rates, (2) percent of charge, (3) carve outs and (4) stop-loss clauses—result in the final price or allowed amount for a medical service to be challenging to calculate. However, this complexity does NOT preclude you from obtaining a reasonably good estimate of what a medical service will cost in advance and comparing those costs among providers. Prices can be calculated and prices can be made transparent, but that price-transparency requires an explanation to the patient in addition to ‘just a dollar amount.’
Compass delivers its price-transparency via a healthcare consumer advocate (not a web-portal) to walk our members through this complexity. Compass has found that, given the proper context, members understand the price differences among providers and are able to make more informed healthcare decisions.
This concludes the series of posts on ‘Where Healthcare Prices Come From.’
To view the previous posts in this series on Where Healthcare Prices Come From follow the links below:
Click below to access the Compass Overview YouTube Video: