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Analysis

Private Insurers Paid Hospitals 241% of What Medicare Would Have

By Jack O'Brien  
   May 09, 2019

Employers can look at pushing their health plans to engage in contract arrangements with hospitals that better align prices with care rendered, according to a new study.

Private health plans paid hospitals 241% of what Medicare would have in 2017, up from 236% in 2015, according to a new study from RAND Corporation released Thursday afternoon.

RAND researchers reported on relative prices, the ratio of the private insurance allowed amount divided by the Medicare allowed amount for the same services, based on data for about 4 million covered lives.

The study found that prices paid to hospitals by private insurers vastly outpaced prices paid by Medicare, though there is wide variation across the 25 states that were examined. 

States like Kentucky and New York had average relative prices at 150% to 200% of what Medicare paid, while states like Colorado and Wisconsin had prices at 250% to 300% of the Medicare rate. 

The study found that reducing hospital prices to Medicare rates would have resulted in $7.7 billion in savings for employers from 2015 to 2017, while reducing prices from the 75th to 25th percentile would have reduced employer spending by $1.4 billion, or 40% of hospital spending, in 2017.

One of the main takeaways of the study is that employers can look at pushing their health plans to engage in contract arrangements with hospitals that better align prices with care rendered.

Chapin White, an adjunct senior policy researcher at the RAND Corporation told HealthLeaders that employers could aim to secure arrangements that are at an explicit multiple of Medicare or are part of a fixed rate payment system like what Medicare is currently doing.

Christopher Whaley, associate policy researcher at RAND Corporation, added that this information from the study provides employers the ability to go to hospitals and ask for them to lower their prices because they have the transparency regarding what they're being charged.

"Some hospitals may approve of that, some may not but for the ones that don't, employers and insurers can use this information to think about ways to move their patient populations from the higher-priced to lower-priced providers," Whaley said. "This includes things like moving towards narrow networks or direct purchasing where they send all of their business to a single, lower-priced hospital."

Related: Medicare, Medicaid Enrollment Growing Faster Than Private Coverage

While the RAND study focused on patient information gathered from 25 states, the most useful, actionable information comes from Indiana. RAND collaborated on its analysis with the Employers’ Forum of Indiana (EFI), an employer-led healthcare coalition. 

In the Hoosier State, health plans have been shifted to contracting for outpatient services through a multiple of Medicare arrangement, White said, while some employers have considered narrow networks and direct contracting options. 

According to RAND, some of the greatest price variation occurred at hospital systems, ranging from 150% to above 400% of what Medicare paid.  

Outpatient services recorded significantly higher relative prices than Medicare, 293%, than inpatient services, 204%; though eight states reported generally equal prices between the two categories.

Related: Rising Prices Lead to All-Time High Healthcare Spending

Gloria Sachdev, president and CEO of EFI, told HealthLeaders that the study points to the need for greater accountability, adding that employers have been dealing with high healthcare costs and low quality for some time.

"[Employers] are going to need to start looking at narrow networks, tiered networks, centers of excellence, and bundled payments for episodes of care, [among] other strategies, but we want all of those things to be negotiated as a percent of Medicare," Sachdev said. "The reason is, then it becomes comparable. If [an employers] gets a bundled payment, and it's all one price, [employers] don't know how that compares to what someone else might offer as a bundled payment for the same procedure."

"If everyone would just talk in that same vocabulary as a percent of Medicare, then it becomes clear and comparable."

Related: Shift to Medicare Advantage Ratchets Up Pressure on Hospitals

The study mentions that policymakers interested in promoting greater price transparency and accountability for hospital prices can benefit from the data included as they debate potential legislative fixes.

Bills targeting surprise billing, along with limiting payments for out-of-network services have gained support in recent months, according to White, both at the state and federal level. 

On Capitol Hill, White added that congressional leaders have angled for Medicare X or Medicare for All solutions that would extend the current fee schedule to all patients and financially challenge the business model for hospitals.

"The more the prices are hanging way over the Medicare level, the more [hospitals] are vulnerable to these policy proposals," White said. "The American Hospital Association (AHA)-funded study of the Medicare X proposal concluded that the proposal would reduce healthcare spending by $100 billion per year, it would expand health insurance coverage, and therefore it must be stopped. The analysis is on solid footing, but hospitals may be more and more isolated in their conclusions that anything that reduces their revenues must be bad for society."

In a statement to HealthLeaders, AHA General Counsel Melinda Hatton expressed "a number of concerns" about the RAND study, taking issue with its sample size and the usage of Medicare payment rates as the benchmark for hospital prices.

"Simply shifting to prices based on artificially low Medicare payment rates would strip vital resources from already strapped communities, seriously impeding access to care," Hatton wrote. "Hospitals would not have the resources needed to keep our doors open, innovate to adapt to a rapidly changing field and maintain the services communities need and expect."  

Related: Sen. Kamala Harris Vows to Get Rid of Private Healthcare Plans

Sachdev said that on the state level, some lawmakers in Indiana have planned a hearing with employers later this month to further discuss pain points facing their businesses and what the government can do to remedy them.

Editor's note: This story has been updated to include a response from the American Hospital Association.

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


KEY TAKEAWAYS

States like Kentucky and New York had average prices at 150% to 200% of what Medicare paid, while states like Colorado and Wisconsin had prices at 250% to 300% of the Medicare rate.

Some of the greatest price variation occurred at hospital systems, ranging from 150% to above 400% of what Medicare paid. 

However, the study states that employers now have the chance to make a change to better align the prices their health plans are paying to the care rendered.


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