Employers, insurers paid hospitals more than double Medicare rates, finds Rand

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Employers and health insurers paid hospitals about 224% above what Medicare would have paid in 2020, according to a new Rand Corp. report comparing private insurer payments to Medicare rates.

The data, culled from about 4,000 hospitals across 49 states from 2018 to 2020, showed variation in what certain states paid hospitals. Some states, such as Hawaii, Arkansas and Washington, had relative prices below 175% of Medicare prices, while other states – Florida, West Virginia and South Carolina among them – had relative prices that were at or above 310% of Medicare prices.

When averaged, the figure comes to 224% above Medicare rates for all employers and private insurers, and while that's high, it's a decrease from the 247% figure reported for 2018 in the previous Rand study. Authors attributed this to an increase in the volume of claims from states with prices below the previous mean price.

Prices for common outpatient services performed in ambulatory surgery centers (ASCs) averaged 162% of Medicare payments, but if paid using Medicare, payment rates for hospital outpatient departments (HOPD) would have averaged 117% of Medicare.

Although relative prices are lower for ASC claims priced according to HOPD rules, HOPD prices are higher than ASC prices.

Very little of the variation in prices is explained by each hospital's share of patients covered by Medicare or Medicaid; a larger portion of price variation is explained by hospital market power, authors found.

Prices for COVID-19 hospitalization were similar to prices for overall inpatient admissions and averaged 241% of Medicare.

WHAT'S THE IMPACT?

Citing the U.S. Department of Labor, the authors said that because employer-sponsored spending comes from employee wages and benefits, employers have a fiduciary responsibility to administer benefits "solely in the interest of participants and beneficiaries."

Employers and policymakers are unable to fulfill this obligation to their workforce without information on prices. For many employers, the prices they and their employees pay for hospital care might represent the value delivered by hospitals – in other words, the quality of care, access to specialty providers or breadth of network options. Other employers might wish to use this and other information to reduce healthcare spending.

For those employers, negotiating prices based on contextualized data presents a tangible way to reduce healthcare spending.

Where quality and convenience are comparable, employers can use network and benefit design approaches to move patient volume away from higher-priced, lower-value hospitals and hospital systems and toward lower-priced, higher-value providers. Employers can also use this information to reformulate how contracts are negotiated on their behalf.

These types of changes are not possible without usable transparent prices paid to providers. But price transparency alone won't lead to changes if employers don't act on price information, authors said. 

In some cases, employers might need state or federal policy interventions to rebalance negotiating leverage between hospitals and their health plans. Such interventions could include addressing noncompetitive healthcare markets, placing limits on payments for out-of-network hospital care, or allowing employers to buy into Medicare or another public option that pays providers prices based on Medicare rates.

THE LARGER TREND

Another potential use of the information in the report is to apply insight into the prices negotiated on behalf of employers and their workers to hold third parties accountable for prices negotiated on their behalf. 

For example, earlier versions of the report showed that the Parkview Health System in Fort Wayne, Indiana, had among the highest prices in the country when measured relative to Medicare rates. Several Fort Wayne-area employers used this information to place pressure on their third-party administrator (TPA) to negotiate a new contract with lower prices. 

Equipped with information on negotiated prices, employers were able to place pressure on a large hospital system and TPAs to achieve lower prices for their workforce. Other employer and policymaker pressures in Indiana led the Indiana University Health system to announce plans to reduce prices to the national average rate.

Other employers have used similar price transparency information to monitor prices negotiated on their behalf. One well-known example is the State of Montana Benefit Plan, which, starting in 2016, instructed its TPA to cap prices at approximately 235% of Medicare rates. 

The introduction of this price cap was followed by substantial reductions in healthcare spending and a flattening of premium and patient deductible costs. This model addresses hospital prices "upstream" from the point of decision by patients and relies on purchasers to monitor the price negotiation process, rather than relying on patients to navigate the complexities of the U.S healthcare system.

In either of these approaches, employers who view hospital prices as excessive can use price transparency information to inform benefit design choices and to have insight into the prices that are negotiated on their behalf.
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com