Yes, Cash Pay Surgery is a "Thing"

Cash Pay Surgery is a growing trend around the USA. It is an alternative to "insurance-paid" pricing.

Insurance-paid pricing has many additional transactional costs, including but not limited to:

• revenue management costs (e.g., insurance billing, follow up, denied claims appeals of eligibility disputes, coverage disputes, bill audit costs, payor contract analysis and negotiating costs, billing software, and billing, contracting and collections staffing and training costs), benefits verification, eligibility checking, pre-certification and pre-authorization costs)
• costs associated with payment delays (the time value of money)
• doing things (reporting, complying with endless duplicate, triplicate and quadruplicate costs to submit copies of medical records) in compliance of each contract you execute in your portfolio.

I often remark to my managed care contracting seminar and Master Class workshop participants that, "in managed care contracts, verbs cost money" (e.g, shall maintain, shall provide, shall comply, shall provide, shall coordinate, shall cooperate, shall participate, shall not bill, shall submit, and the like).

The requirements and duties beyond direct patient care erode margins or advantages associated with the maximum negotiated fees. In some cases, the performance requirements to get the money you've earned taking care of patients can turn the value of the contract upside down.

The activity-based costs associated with "doing" stuff beyond direct patient care makes the reimbursement rates "insufficient" and results in payment that is less than break even. Heck, why bother?

In the USA, given the more than 22 different third-party payment sources that make up the sphere of healthcare reimbursement, most pricing is calculated with the assumption that costs I listed above must be absorbed by the provider in order to sell their "product(s)".

Providers (hospitals, diagnostic testing centers, home care agencies, physicians, ASCs, rehab facilities, and the like) are expected to negotiate contacts with each payor type listed above -- not on their seller's terms but on the buyers' terms and conditions - none of which are exactly the same. That variable is the most daunting because one cannot compare apples to apples in terms of the "verbs that cost money and the payors' interpretations of the verbs.

This past week, I was consulting to an investor and a software developer who were not from the USA. They wanted to understand the nature of pricing in U.S. healthcare.

Here's how I explained the difference between cash- and insurance-based pricing

How cash pay pricing is different

With cash pay pricing, the provider makes one assumption about costs and is in control of the terms and conditions of the sale.

The assumption is that the providers' "products" have value.

They sell a service, treatment or surgical procedure that a patient desires to purchase out of medical necessity, or desire (cosmetic or other non-medically necessary services). The patient cannot produce this themselves.

The basis of the competition is fourfold:

a) supplier brand awareness (Do I know you exist/can I find you?);

b) trust in quality and safety (Are you licensed and credentialed?);

c) location and ease of access (Can I get to you and can I get an appointment when I want it?); and

d) price or affordability (Can I afford the price you ask?)

In cash pay pricing, the cost basis should not be the same as the insurance-based price because the products are different:

• The insurance-based product includes a calculation of a price for its product that includes all the embedded costs for labor intensity, software, training and development, staffing, physical plant and technologies to support the workers, their associated human resource benefits and employer costs, and payment delays of as much as 30-210+ days on average. Non-payment on an account for at least 30 days is a very different cost than that which is associated with the time value of money to wait as long as 210+ days or the risk of never being paid due to disputes about coverage and eligibility and rules associated with mandates that they obtain pre-certification and pre-authorization in order to receive payment.
• The cash pay price requires that the seller calculate a price for its product that includes the services of a cashier present to collect the cash and deposit it in the bank.

The very idea that the seller would charge the insurance-based price the same as the price they charge to submit to an insurer or third-party payor as not only offensive, it is wrong.

Let's assume I need a hip replacement surgery.

The local hospital bills insurance, Medicare and all those other 21 payor types above $50,000 (the insurance based price.) That price loads in all the embedded costs of the insurance based product as I described above. It is assumed industry wide, that a 40% discount will be negotiated with payers so the third party payors end up paying $30,000, minus a $6500 deductible and a 20% copay amount.

If they charge me the same $50,000 price, and I use a credit card that charges 18% interest for 3 years, my payments will be $1807 a month and I will pay an additional $15,100 in interest for a total of $65,100 for the hip replacement surgery. Is it fair that because I am not a member of one of these payor's health plans and I must use a credit card or a finance company that I should have to pay more than double what the insurance plan pays, all in?

First, the product I am buying as a cash pay patient should not have all the embedded costs that the insurer product includes. I don't require them. They are irrelevant to my unique needs. I am paying cash. Why should my price be $50,000?

Second, the $50,000 price charged to those other payors, assumes that there will be a negotiated discount of about $20,000. How come I am not offered at least the price net of the "usual and customary" discount? That's not fair. I am being charged the retail price of $50,000 and not getting the average discount that the payors will all get, and I am paying the bill with my credit card. Yes, the provider will pay a small percentage for the transaction fee, but the price is for a totally different product! If I pay off my credit card over 36 months, I would pay $9045 in interest for a total of 39,045. not $65,000!

Cash pay surgery is a "product" that has stripped out all those extra cost assumptions that influence the price calculation.

Cash pay surgery sellers can sell a hip replacement at a price of about $20,000 that will cost them about $13,000 (facility fee, surgeon, anesthesia cost, and prosthesis). At a $20,000 price paid on the day of the surgery or in advance, will net about a 30% profit margin.

Again, the basis of the competition is:

1. Can I find you? (Marketing and advertising costs)
2. Do I trust you? (Brand creation costs)
3. Can I get to you and get an appointment when I want it?; and (location and availability)
4. Can I afford the price you ask? (Yes or no)

If the patient doesn't ask the seller to spread out the payments over time, and they manage their financial issues themselves, the seller can sell the case at a cash price of $20,000 (or less) and earns a handsome margin. No delay, no contracts to analyze and negotiate. Print a receipt and deposit the cash in the bank. If the seller is a not-for-profit operator, the margin supports mission. If the seller is a for-profit operator the seller is entitled to the margin as profit to return to shareholders and fund growth through expansion to make more operating rooms available for more volume, brand creation and promotion and buyer experience, and situating itself in a more prestigious location. Or none of the above.

The seller has a choice in how they manage their "product", its price, and what it does with the margins. They can also compete on the margin spread by lowering the price to narrow the margin if they want. No outsider dictates this choice. No outsider drafts a contract they must accept with onerous and costly terms and conditions or price limitations. No outsider dictates the margins, the staffing and technology requirements, seller compliance with "shall anything".

We are all buyers. We can empathize with a cash pay buyer. If you were the buyer, which would you prefer? Cash-based pricing sellers or insurance-based pricing sellers?

How large is the market of cash pay surgery buyers in the USA?

 In 2017, the number of working-age adults without health insurance increased to 28.0 million, up from 27.3 million the year before. They tended to be 19 to 64 years old, male, have less than a high school education and/or have lower incomes. 

To find out more about the uninsured population, such as employment characteristics, disability status, nativity and residence, or about the uninsured population in smaller geographic areas (states, counties and zip codes), see Table S2702 in American FactFinder. (“Selected Characteristics of the Uninsured in the United States”).

But there are also a large number of affluent individuals who could write a check to buy the surgery center if they so desired. And, they are prudent buyers. They may decide to purchase catastrophic insurance only and pay cash for the services they want or need for the first $10,000 or more. Or they may just choose to not pay any insurance premiums at all and just self-fund - because they can. The fine associated with the individual mandate under the ACA was repealed by the Trump Administration through the Tax Cuts and Jobs Act (TCJA).

As of 2019, there is no penalty for not having ACA coverage so healthiest people with be enrolling in short-term plans that are cheaper and offer larger networks that will destabilize the marketplace in 2020.

Then, there is also the marketplace of cash pay buyers from international locations. Many fly but there are Canadians who can drive to cash pay surgery locations in the USA. By some estimates, more than one million Canadians 55 years of age and older spend at least 31 days in the U.S. during the year. A large number stay three to six months. The majority of these winter escapees, known collectively as snowbirds, flock to Florida and Arizona, but California and Texas are also popular destinations.

Forty per cent of Canadian buyers purchased real estate in Florida, 23 per cent in Arizona, and 10 per cent in California. Approximately 86 percent of Canadian buyers paid cash for U.S. properties. Forty-eight percent expected to use the property for three to six months during the year, 21% intended to stay for one to two months and 13% for less than one month. Slightly more than half of Canadians bought a single-family detached home and about one third purchased a condominium/apartment. The reason that I include this bit of information about buyers of property is that a seller of cash pay surgery might not register them as "Canadian" or from someplace else because they may register with a U.S. address. But they are not included in the 28 million head count above.

Florida is one of the major U.S. destinations of international residential real estate buyers, according to the National Association of Realtors?/Florida Realtors? Profile of International Home Buyers in Florida. Canadian buyers account for the largest share of international buyers (32 %).

Almost 90% of Canadian buyers paid cash for their Florida home. They can afford to pay cash for their surgery too. Pain is a great motivator to pay cash for hip and knee surgeries. Fear as in cancer surgery is another great motivator. Vision problems are another.

The Canadians are followed by the United Kingdom home 2nd home buyers (7%). Brazilians and Venezuelan buyers have also come to Florida accounting for a combined nine percent of foreign buyers in the Sunshine State. Buyers from China are increasingly purchasing property in Florida, mainly for investment purposes. Affluent Chinese also buy lots of healthcare from western medicine providers and they pay cash when they do. The same goes for affluent Brazilians, Brits, Venezuelans and Argentinians.

Most Canadian buyers (61%) intended to use the property three to six months during the year, 13% for one to two months and 11% for less than one month. But when it comes to surgery, while they may be insured in Canada, they may wait months or years for access to care. So they come to the USA for surgery to accelerate access to care. And by definition, these are not "medical tourists" because they didn't come to the USA specifically to access care. They came because they have other reasons for coming. Surgery is merely "incidental to" their expat vacation residency.

So there you have it.

• The explanation.
• The rationale.
• The market size estimate.

Did this article change your perspective?

#cashpaysurgery #retailhealth #ASC #surgery #medicaltourism #healthtourism #bundledcaserate

About the author

Maria Todd is a prominent, international healthcare industry consultant, trainer and author of 19 commercially-published healthcare business administration professional book titles and the Director of Business Development at St George Surgery Center in St George, Utah (SGSC). SGSC offers cash pay pricing for over 200 surgical procedures to individual consumers, benefits consultants and TPAs who source cost containment options for self-funded employers and help mitigate claims exposure risk for fraud, abuse, and waste in healthcare spend. She also contracts directly with more than 90 self-funded employer-sponsored health benefit plans, nationwide. You can reach her at (435) 233 7125.