Skip to main content

Analysis

Employers and Private Insurers Paid Hospitals 247% of What Medicare Would Have

By Jack O'Brien  
   September 18, 2020

RAND 3.0 found that reducing hospital prices to Medicare rates would have resulted in $19.7 billion in savings for employers.

Private insurers and employers paid 247% more than what Medicare would have for hospital services in 2018, according to a RAND Corporation report released Friday morning.

The report, nicknamed 'RAND 3.0,' is an expansion of 'RAND 2.0,' a study released in May 2019 that examined prices paid to hospitals by private insurers across 25 states.

The new study analyzed nearly $34 billion in hospital claims data from 49 states and the District of Columbia, excluding Maryland, during the three-year period.

In 2016, private insurers and employers paid 224% more than what Medicare would have for hospital services, including professional and facility fees, while that difference increased to 230% in 2017.

RAND 3.0 found that reducing hospital prices to Medicare rates would have resulted in $19.7 billion in savings for employers during the research period, a reduction of 58%.

The study also analyzed the differences between prices for inpatient services and outpatient services. In 2018, relative prices for hospital inpatient services were 231% of Medicare while relative prices for hospital outpatient services were 267% of Medicare.

Related: Private Insurers Paid Hospitals 241% of What Medicare Would Have

Christopher Whaley, associate policy researcher at RAND Corporation, told HealthLeaders that the findings are relevant for both employers and provider organizations as it relates to the issue of high prices in healthcare.

"There's a tremendous amount of variation in prices and if you look at it now, the smart employers are thinking pretty strategically about prices and moving benefits to lower-priced and high-quality providers," Whaley said. "From the provider standpoint, I think if they're willing to go in that direction, there's certainly a receptive market of employers who are thinking more about prices and value." 

Whaley said one example of the variation across the spectrum came in the form of labor and delivery costs, which range from 83% of the Medicare rate, ($7,700), to 837% of Medicare, ($52,700). 

Related: Lower Income Households Spend One-Third of Income on Healthcare

As it did with the 2019 report, RAND collaborated on its analysis with the Employers’ Forum of Indiana (EFI), an employer-led healthcare coalition. Additionally, the Robert Wood Johnson Foundation and self-funded employers funded the report.

Gloria Sachdev, president and CEO of EFI, told HealthLeaders that while Indiana was among the top states for highest hospital-associated prices and facility prices, the state was among the lowest in professional fees, which are "fees paid to practitioners such as physicians."

Sachdev said that while hospital prices haven't fallen much since RAND 2.0 came out last year, these reports have helped employers and providers take steps "in the right direction."

"From the hospital and health system perspective, they are interested in doing direct contracting with employers and employers are interested in direct contracts with them because the insurers sit between them and have negotiated these high prices with the hospitals," Sachdev said. 

She added that when hospitals engage in direct contracting with employers, they can refer to RAND 3.0 and compare negotiated rates to the public average in the states they operate in.

"[The study's findings] allow employers and hospitals a rational place to negotiate for direct contracting," Sachdev said.

Related: Capping Out-of-Network Payments Could Save as Much as Medicare-for-All

The American Hospital Association (AHA) issued a statement responding to RAND's study Friday morning, stating that the findings "make broad claims about pricing based on a cherry-picked and limited data set."

"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," Tom Nickels, executive vice president of the AHA, said in a statement. "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."

Nickels added that arguing for a reduction in financial resources to hospitals amid the ongoing coronavirus disease 2019 (COVID-19) pandemic is "beyond reckless."

Related: Private Insurance Rates up to 2.5x Higher Than Medicare Rates

In addition to serving as an update to last year's findings, RAND 3.0 is the latest insight into what private insurers are paying provider organizations compared to Medicare rates. 

In early July, a brief published by the Kaiser Family Foundation (KFF) found that private insurance rates were up to 2.5 times higher than Medicare rates across 10 DRGs.

The KFF research indicated that private insurance rates "varied more widely" than Medicare rates and that the average private insurance rates for diagnoses related to COVID-19 rose up to 22% between 2014 to 2017.

Editor's note: This article has been updated to include commentary from the American Hospital Association.

Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.


KEY TAKEAWAYS

In 2016, private insurers and employers paid 224% more than what Medicare would have for hospital services, including professional and facility fees, while that difference increased to 230% in 2017.

In 2018, relative prices for hospital inpatient services were 231% of Medicare while relative prices for hospital outpatient services were 267% of Medicare.

"From the provider standpoint, I think if they're willing to go in that direction, there's certainly a receptive market of employers who are thinking more about prices and value," said Christopher Whaley, associate policy researcher at RAND Corporation.


Get the latest on healthcare leadership in your inbox.