When are higher prices justified?

With all the media attention to health care reform you get the idea that raising hospital prices is never justified. But until the unique healthcare economy is completely recalibrated, it is one of the consistently fastest growing cost drivers in the American economy. Hospital costs seem to be driven up relentlessly year after year by the unholy three: labor costs, pharmaceutical costs, and the cost of innovative clinical technology. Obamacare addresses these obliquely, if at all.

In my experience, hospitals seek improved healthcare rates from health plans because they need them. They need to fund the continuation of their mission to serve the healthcare needs of their community. Increased rates generally lag increased costs, unless an organization is farsighted and takes preemptive action to anticipate those costs in its managed-care negotiating strategy. This is especially true if an organization is trying to smooth its revenue stream over a multi-year period of time rather than endure ups and downs in bottom line results.

For nonprofit organizations the availability of additional funds results in no pay out of profits to individuals or investors. Instead additional revenue helps sustain clinical programs, fund research and development of new and better treatments, and is it often invested in better clinical technology and facilities. To a public demanding the best of care for themselves and their loved ones, these uses are essential and sound public policy. Otherwise how can the hospital stay abreast of the relentless development and improvement in clinical services that its patients expect?

For better or worse Obamacare will not eliminate the need for improving services to the public. This will cost everyone. Perhaps the best thing that can be said about this new regime is that under the ACA every adult American will have some financial skin in the game. So instead of the current situation of massive cost shifting from those without insurance coverage to those with private health insurance, every American will contribute some amount however small or large to the cost of care. And therefore every American has a stake in rising hospital prices.

Hospitals will need to be prepared to be transparent about their pricing and the obligations they have taken on to provide the public with the best quality care. Hospitals and providers will need to justify their costs and take steps to reduce the per capita cost of care. An engaged public will expect hospitals to both explain and justify their prices, especially any increases.

Author Neil Godbey is President of The Godbey Group, Irving, Texas. Since 1999 The Godbey Group had been helping leading hospitals and healthcare systems negotiate favorable managed care and value-based contracts that help sustain those organizations’ mission of improving the healthcare of the communities they serve.