Medical Claims

Specialty Drugs

Evidence Based Medicine

Medical Claims

Medical Claims

Despite the many advances made in healthcare transparency and improvements in efficiency, cost shifting to Private / Commercial Payers is alive and well. As the John Hopkins research report indicates, the Nationwide Average Charge to Cost ratio on Medical Claims is around 3.5, with the top 50 most aggressive hospitals charging over 10 times the cost. To visualize what this national average looks like, for every $100 in cost to a Hospital Facilities to perform a service (after supplies, payroll, rent, etc.), they charge Private and Commercial (Non-Exchange) Payers $350.

Researcher: "What other industry can you think of that marks up their prices by 1,000 percent and remains in business?"

Cost shifting on medical Claims is not a new phenomenon; it has been going on for decades. However, it is made worse by the ACA because insurers are losing money on exchange plans. To survive, facilities make up the losses in non-exchange business. We aggressively support Referenced Based Reimbursement (RBR) models which virtually eliminates cost shifting.

PPOs – the Illusion of Savings

A typical PPO could save the payer about 30% off this $350 charge = $245 net payable. While a 30% discount sounds good, this discount fails to offset the average 350% markup. In this example, that $245 is still 245% over cost. This type of repricing has a hyper-inflationary effect on healthcare costs. Healthcare facilities increase profits under the PPO model increasing charges significantly. They showed a great discount, but the sky is the limit on what they charge. PPO contracts ties payer's hands and makes them hostages to inflated facility charges.

Reference Based Reimbursement

In our RBR models we manage the cost of Medical Claims by starting with the cost of services and we work our way up, the same way that Medicare works in their Fee for Service model. By having the actual cost of the procedures, we can then apply a reasonable profit that is more than what Medicare pays (an average of 140% of Medicare) but far less than what would be paid on with any PPO contract. Does a hospital ever push back on this approach? Yes. Do they ever threaten to sue? But there’s always a number that makes sense for all parties and it averages 140-150% of Medicare allowed charge. This model is scalable and Western Skies carriers aggressively support this approach. It is a great way to maintain a year over year trend in the low single digits.

Call Western Skies today to see if RBR pricing is a great fit for your client!

The $350 charge referenced above is a $100 cost to the facility. Under Western Skies RBR model, Medicare would pay $120 (20% over cost). If we pay the Medicare allowed amaount + 40% = $168. Western Skies RBR saves $77 or 31% off the PPO negotiated amount. This is a proven model for controlling the cost of Medical Claims.

Specialty Drugs

Specialty drugs are high-cost prescription medications used to treat complex chronic conditions like cancer, rheumatoid arthritis, multiple sclerosis, and in addition to a very rare condition like “Orphan” Diseases (i.e. “Bubble Boy” disease). Specialty drugs often require special handling (like refrigeration during shipping) and administration (such as injection or infusion). Patients using a specialty drug must often be monitored closely to determine if the therapy is working and to watch for side effects.

Specialty drugs can be covered through either the members medical or prescription drug benefits. If the patient takes a pill or self-injects the drug at home, it is more likely to be covered through their prescription drug benefit (managed by the PBM). If the patient receives the drug at a doctor's office or an outpatient clinic, it’s more likely to be covered through the medical benefit (managed by the Medical Management Vendor).

What everyone agrees upon

Specialty drugs are very expensive – $1,000 or more per month – and spending on them is growing 15- 20% a year. Some are very expensive, with the Hep C treatments hitting the market at $94,000 per treatment. Orphan drugs are worse with one example being a $500,000/ year treatment for the enzyme replacement therapy also called Pegademase Bovine (PEG-ADA), a condition similar to bubble boy disease. Worse still - a new drug will be hitting the market soon that will cost $1MM per treatment.

Where there is disagreement

It is morally important to treat people if we have medications to make it happen; the question is how to pay? With limited resources how does a program manager build a model that is sustainale year over year and still offer members the benefits they need? Opinions vary and some ideas being floated around behind the scenes are too embarrassing to discuss.

The Western Skies Approach

As with Medical Claims, we have very detailed conversations with our Medical Management, Pharmacy Benefit and Specialty Drug vendors (which is easier to do when you build your own products). Looking beyond Step therapies, Split Fills and pre-authorizations, we ask questions that many other program managers don't appear to be asking. Some basic questions about a new specialty drug coming to market would include:

  • Who is the target market for this medication? Are we requiring a genetic test to ensure the candidate matches the target market?
  • What is the trigger for the use of this new medication over conventional therapies? Who decides this?
  • Where does this drug need to be administered? Where can it safely be administered?
  • When does this new specialty drug need to be added to the formulary list? How effective are existing therapies?
  • How can we provide a wide range of treatments in all therapeutic classes while keeping our specialty drug trend down to the single digits?


The specialty drug market is complex and we have no illusions about the solutions. The cost is high and we have to find a way to pay. As long as we can offer rich benefits and our specialty drug costs trend better than 80% of our competition, we will be able to offer a more compelling value proposition to our clients.

Evidence Based Medicine

Nearly 20 years ago, one of the founders of the Evidence Based Medicine (EBM) discipline, David Sackett, described EBM this way: "Evidence-based medicine is the conscientious, explicit, and judicious use of current best evidence in making decisions about the care of individual patients. The practice of evidence-based medicine means integrating individual clinical expertise with the best available external clinical evidence from systematic research." Much like apologetics used in defending religious faith, EBM is used to challenge clinical thought on patient care. This model asks care providers: Why do they want to treat a patient with any given approach when it’s contrary to the evidence? It breaks with the status quo and asks providers to defend what they believe.

Save Blood, Saves Lives

Case in point, Nature Magazine (an international weekly journal of science) wrote a great article in March 2015 titled: “Evidence Based Medicine: Save blood, saves lives”. The article discusses how transfusions are one of the most overused treatments in modern medicine, which cost billions of dollars (waste) and are a significant risk to the patient. It illustrates how a California hospital wanted to cut cost and EBM suggested fewer transfusions might be the answer. What they did was very simple and subtle, but very effective. Whenever a physician attempted to order blood and the lab results indicated that the patient should be healthy enough to get by without a transfusion, the physician would see an alert appear on their screen that gently reminded them of the guidelines and requested further justification for the order.

The results were dramatic – transfusions dropped by 24% over the subsequent four-year period. This saved $1.6MM in purchasing cost alone, but as the transfusion rates dropped, so did the mortality rates, average length of stays and the number of patients who had to be readmitted within 30 days of a transfusion.

EBM: Asking Doctors to Think Twice

This example is but one of a thousand different procedures that take place on a daily basis in healthcare. This initiative did not lower the quality of care or adversely impact the patient’s health – it improved it. In this example, like much in life, “less is more”. It subtly ask the physician to defend their belief and when they took to the time to reflect on the matter, they realized they were ordering blood out of habit rather based on medical necessity.

Improved Health – Better Outcomes – Lower Cost

As program managers, we have few opportunities to impact patient care outside of Medical Management (usually called Precertification or Utilization Review). This is the one area that we can have a meaningful impact on our block of business, just by asking our Medical Management questions: i.e. Why are we Pre-certing procedures that do not meet medical necessity standards? If care could be safely provided in a physician’s office with equally effective results, why are we approving it on an outpatient basis when it cost 50% more (chemo is a good example)?”

This is what we do – we ask questions about how can we maintain or improve care while improving outcomes and lowering cost. We have the expertise and experience to dive into the weeds of how our programs are managed while keeping our eyes on big picture of creating products and services that are practical and sustainable. Call us; let’s have a conversation.