Hospital - Insurance Contracting Part 1: Case Rates and Per Diems Explained

This video provides an in-depth exploration of hospital-insurance contracting, specifically focusing on the methodologies of case rates and per diems. Dr. Eric Bricker, the presenter, begins by establishing the context of how hospital systems and health insurance carriers negotiate prices for various medical services. The presentation aims to demystify these contractual terms, which are fundamental to understanding healthcare finance and the true cost of medical care.

The core of the discussion revolves around two primary contracting methodologies: case rates and per diems. Case rates are explained as fixed payments for specific services or procedures, often applied to outpatient imaging like MRIs, CT scans, or mammograms, and certain surgeries. Per diems, on the other hand, represent a fixed payment per day of hospitalization, typically used for inpatient medical stays such as pneumonia or acute renal failure. Dr. Bricker emphasizes that in both scenarios, the hospital's initial "bill charges" become largely irrelevant once a contract is in place; what truly matters is the "allowed amount" that has been negotiated.

Through illustrative examples comparing two hypothetical hospitals with different bill charges and negotiated rates for an MRI, the video highlights a critical insight: the perceived "discount" from a hospital's bill charges is a misleading metric. Instead, the actual "allowed amount" is the true indicator of cost-effectiveness. The discussion then extends to the complex negotiation process itself, revealing that insurance carriers typically lead these negotiations, which can be an extensive 18-month process for contracts lasting three to five years. A significant point of contention and a major driver of healthcare cost inflation, according to Dr. Bricker, is the inclusion of "Evergreen inflators"—pre-agreed annual percentage increases (e.g., 6-8%) in reimbursement rates that hospitals secure, even when overall inflation is low. This mechanism, he argues, has historically caused healthcare cost inflation to outpace general inflation by two to three times. The video concludes by clarifying that these specific commercial contracting methods primarily apply to employer-sponsored plans and not to Medicare Advantage, where rates are more closely tied to Medicare.

Key Takeaways:

• Case Rates Defined: A case rate is a fixed, pre-negotiated payment for a specific medical service or procedure, regardless of the hospital's initial bill charges. This methodology is commonly applied to outpatient services like MRI scans, CT scans, mammograms, and certain surgical procedures.
• Per Diems Defined: A per diem is a fixed, pre-negotiated payment for each day a patient is hospitalized, typically used for inpatient medical stays such as treatment for pneumonia or acute renal failure. Like case rates, it supersedes the hospital's daily bill charges.
• Irrelevance of Bill Charges: The hospital's initial "bill charges" or list prices are largely irrelevant in the context of negotiated contracts between hospitals and insurance carriers. The actual amount paid is the "allowed amount," which is the negotiated case rate or per diem.
• Focus on Allowed Amount, Not Discount: When evaluating the value of an insurance contract with a hospital system, the critical metric is the "allowed amount" (the actual payment), not the "discount" or "savings" relative to the hospital's inflated bill charges. A higher discount from a higher bill charge can still result in a higher allowed amount.
• Hospital Price Transparency: Hospitals are legally mandated to post their prices, and these posted prices should ideally reflect the "allowed amounts" or negotiated rates, offering greater transparency to consumers and self-funded plans.
• Insurance Carriers Lead Negotiations: The negotiation of these contracts is primarily led by health insurance carriers or insurance networks (e.g., United Healthcare's head of contracting) on behalf of employer-sponsored plans.
• Protracted Negotiation Process: Hospital-insurance contracts are typically negotiated over a lengthy period, often taking around 18 months to finalize, and are designed to last for three to five years to avoid frequent renegotiations.
• Evergreen Inflators Drive Costs: A significant factor contributing to healthcare cost inflation is the inclusion of "Evergreen inflators" in these long-term contracts. These are pre-agreed annual percentage increases (e.g., 6-8%) in reimbursement rates that hospitals secure, irrespective of broader economic inflation.
• Healthcare Inflation vs. General Inflation: Due to these contractual inflators, healthcare cost inflation has historically been two to three times higher than overall general inflation, even during periods of low CPI.
• Commercial vs. Medicare Advantage Distinction: The contracting methodologies discussed (case rates and per diems with significant inflators) primarily apply to employer-sponsored commercial health plans. Medicare Advantage plans typically have contracted rates that are much closer to, or a small percentage above or below, standard Medicare rates.
• Value for Self-Funded Employers: Self-funded employer groups should actively analyze their claims data to understand the "allowed amounts" paid to different hospitals, as this data can inform strategies for directing employees to more cost-effective providers.

Key Concepts:

• Case Rate: A fixed payment for a specific medical service or procedure.
• Per Diem: A fixed payment per day of hospitalization.
• Allowed Amount: The negotiated rate that an insurance carrier will pay for a service, regardless of the hospital's initial bill charges.
• Bill Charges: The initial, often inflated, price a hospital lists for a service before any insurance negotiations or discounts.
• Evergreen Inflators: Pre-determined annual percentage increases built into long-term hospital-insurance contracts, leading to automatic increases in reimbursement rates.
• Self-Funded Plan: An employer-sponsored health plan where the employer directly assumes the financial risk for providing healthcare benefits to its employees, rather than purchasing a fully insured plan from an insurance carrier.
• Medicare Advantage: Private health insurance plans that contract with Medicare to provide Medicare benefits, often with different cost structures than traditional commercial plans.