One Example of Why US Healthcare Costs are Rising — An Executive’s View

A Simplified US Claims Process Diagram

As healthcare costs continue to increase there is an ever growing battle going on between healthcare providers and insurers. Healthcare providers want paid for the services that they deem necessary while the insurance companies want to drive down the cost of healthcare. The insurance companies have several tactics that they employ to try to accomplish these cost cutting measures. The tactic that has been the most prevalent of late in the hospital industry is the use of the observation stay. Insurers are more and more frequently deeming a stay not worthy of inpatient status opting instead for an outpatient observation status. This shifts the coverage from inpatient based coverage to a patient’s outpatient insurance coverage.

Changing the classification of a stay to an observation stay from a standard inpatient admission has several ramifications. The biggest one for the hospital is that it receives significantly less money than it would for an inpatient stay. In addition to the hospital receiving less money, the patient experiences significant financial ramifications as well. Instead of the stay being an all-inclusive it is now paid on an outpatient basis. The implication of which is that there are certain things for which the patient becomes responsible. The biggest being co-pays which do not typically exist on the inpatient side. So often times the patient gets hit with bills that they were not expecting because the hospital and the doctor both were of the opinion that the stay should have been classified as an inpatient stay.

On the hospital side the loss of revenue could amount to $3,000 or more during a typical hospital stay. And the cost to the patient could vary from $100 to $500 per day that the patient remains in the hospital under an observation stay. Please note the financial impact can vary greatly dependent upon the insurance provider and the patient’s condition.

So why doesn’t someone write a set of clearly defined rules that determine when a condition is an inpatient stay versus when it should be an observation stay? Someone has. The most commonly used version of these rules is called the Interqual criteria. The problem is that not all insurers subscribe to this criteria. Some insurers say they subscribe to the Interqual criteria, but then deny claims for not being medically necessary, even though they clearly meet the stated criteria. Some insurers write their own proprietary criteria which they do not share with providers, leaving the provider to base a decision on their own clinical criteria. The provider is then forced to argue with the insurer to attempt to convince the insurer that a stay required hospitalization. Some take the extreme approach of denying most inpatient stays outright, or sending them to observation status, and forcing the provider to appeal the decision in order to get a full hospitalization approved. The goal here is to force the provider to give up and accept less money thus saving the insurance company money. Granted, some of this behavior was born out of the fact that many providers in the late 1970’s through the 1990’s performed a great deal of unnecessary procedures to maximize their revenue.

It is the years of abuse by both sides has caused the level of distrust to be so significant. Providers do not trust the insurance company to pay them appropriately and insurance companies do not trust the providers to only provide the most cost effective treatments. That is why both the providers and insurers spend billions of dollars on redundant systems whose sole purpose is to verify that the other side is abiding by the rules of the game and the ultimate losers are the healthcare consumers.