Insurers Pay Hospitals Twice as Much for Commercial Plans than Medicare Advantage

New findings reflect the differences in negotiating dynamics and financial incentives in the two markets.

Hospital prices for commercial health plans are, on average, two to three times higher than Medicare Advantage (MA) plans prices in the same location for the same service when negotiated by the same insurer, according to a new study published in Health Affairs.

With the cost of health insurance in the commercial insurance market increasing over the past decade, the research highlights how the commercial and MA markets face different financial incentives and regulations.

Using 2022 price information given by hospitals in compliance with the price transparency rule, the researchers examined the ratio of commercial-to-MA prices negotiated by the same insurer, in the same hospital, and for the same services.

The results showed that median commercial prices ranged between 1.8 and 2.7 times more expensive than MA prices across all services. In dollar terms, commercial prices were between $660 and $707 more expensive than MA prices, on average.

Within the same hospital, the median commercial-to-MA price ratio varied, from 1.8 for surgery and medicine services, to 2.2 for laboratory tests and emergency departments visits, and 2.4 for imaging services.

The price ratio is higher at larger, teaching, and system-affiliated hospitals, and is higher for larger national payers with a major presence in both the MA and commercial markets.

"High commercial prices are ultimately passed on to employees and their dependents in the form of lower wages, higher premiums, and higher out-of-pocket expenditures," the authors wrote. "The large price gap between commercial and MA prices within an insurer reveals the pricing consequences of differing incentives across markets."

Why would insurers knowingly negotiate commercial prices so much higher than MA? The study highlights that out-of-network prices for MA plans are set at 100% of Medicare fee-for-service rates, which means that hospitals receive Medicare fee-for-service prices from MA insurers if they don't join their network. This allows insurers more negotiating power for their MA plans.

Another explanation the authors posit is that insurers bear more risk for their MA plans than for their commercial plans.

"All else being equal, insurers may accept higher prices for their commercial plans if it allows them to remain competitive in the MA market, where gross margins are nearly twice as high per enrollee," researchers wrote. 

The study's findings have implications for policymakers and stakeholders interested in containing commercial hospital prices, the authors said.

"Because insurers respond to differing incentives by negotiating substantially different prices across markets, policy and practice efforts that alter incentives for insurers may have the potential to lower commercial pricing."