Private insurers pay 240% of what Medicare pays for hospital services

The prices that employers pay for hospital care are both highly variable across states, health systems and sites of care, and are on average 240% more than what Medicare pays for the same services, according to a RAND Corporation report on private health plan healthcare prices. 

The difference in price from what Medicare pays for hospital services indicates that if the private health plans included in the study had paid hospitals using Medicare's payment formula, they could have saved 58% or $19.7 billion.

The American Hospital Association criticized the report as making broad claims about pricing based on a cherry-picked and limited data set.

Tom Nickels, executive vice president of the American Hospital Association said, "For example, the study again perpetuates erroneous suggestions that Medicare payments should be used as a benchmark for private insurers, in spite of Medicare reimbursing well below the cost of providing care."

Nickels said that the authors also rely on research short-cuts. This includes a hand-picked sample of employers and insurers whose claims represent just 0.7% of inpatient admissions and 1.8% of outpatients visits over the study period, as well as measuring quality through Leapfrog data that may be old or imprecise, he said.

"These concerns are compounded by a global pandemic that represents the greatest financial threat in history for hospitals and health systems," he said.
 
To gather the results, RAND examined claims results between 2016 and 2018 from willing self-insured employers, state-based all-payer claims databases from Delaware, Colorado, Connecticut, Maine, New Hampshire and Rhode Island, and health plans that chose to participate. All together, the report included data from 3,112 hospitals in every U.S. state except Maryland and had $33.8 billion in spending. 

Over the period of the report, the difference in what employers and private insurers paid compared to Medicare increased each year. In 2016, they paid 224% more in 2016; 230% in 2017; and 247% in 2018. In the most recent year studied, the relative price for inpatient services averaged 231% of Medicare and 267% of Medicare for outpatient services. 

Prices shifted across states as well. Some states, like Arkansas, Michigan and Rhode Island, had relative prices under 200% of Medicare. Others like Florida, Tennessee, Alaska, West Virginia, and South Carolina, had relative prices that were above 325% of Medicare.

Prices within states varied more than across states, the data showed. Moving from a hospital in the 75th percentile to the 25th percentile of hospital prices compared to those paid by Medicare within a state resulted in more savings than making the same move from state to state. 

Even within a single hospital system, prices varied significantly. Within the average hospital system, the hospital with the 75th price percentile had relative prices that were 32% higher than the system's 25th percentile price, according to the data.

WHY THIS MATTERS

The research indicates that high-value hospitals, those with low prices and high quality ratings, do exist, according to the report. More than 90% of lower-priced hospitals received three stars or more in quality rating. Seventeen percent of higher-priced hospitals received one or two stars, compared with 10% for lower-priced hospitals. 

In addition to providing these figures, the RAND report listed a few strategies that employers can use to address high hospital prices. Some of which include using narrower networks to steer patients to more affordable providers and using cost-sharing incentives to move patient care outside the hospital. 

Additionally, the report suggests that employers support state and federal policies that shift the  balance of negotiating leverage in their favor without restricting networks. Employers can also promote competition in healthcare markets by opposing consolidation among existing providers and advocating for the entry of new lower-priced providers, it said. 

THE LARGER TREND

In 2018, more than 153 million Americans, or 57% of the nonelderly U.S. population, received health insurance through an employer and accounted for about 34% ($1.2 trillion) of U.S. health care spending, the report said.

RAND said the report was created to provide hospital care price transparency for employers to give them more information when they're purchasing health benefits for their employees. 

The Centers for Medicare and Medicaid Services has issued rules on price transparency. 

The finalized CMS rule requires hospitals to make their standard charges public, including the negotiated rates with payers. Hospitals have asked for more time due to the burden of the COVID-19 pandemic.

Stakeholders are skeptical that the disclosures will lead to lower costs or would benefit consumers, because the disclosed charges would not represent patients' actual out-of-pocket costs. 

ON THE RECORD

"Moving patient volume to lower-priced hospitals that offer better value is an opportunity for employers, their employees, and society to reduce health care spending, and also helps the market to reward the most efficient hospitals," the report said. "This process may require employers to think more judiciously about the prices that are being negotiated on their behalf, rather than outsourcing much of the work to brokers and TPAs. As illustrated in this report, there are large potential savings at stake."

Twitter: @HackettMallory
Email the writer: mhackett@himss.org