AHA Contests Study on High Hospital Prices for Privately Insured

September 22, 2020 - The American Hospital Association (AHA) is speaking out against a new RAND Corporation study that found private health plans pay 247 percent more, on average, than what Medicare would pay for the same services, and those hospital prices have increased significantly over the last couple of years.

The difference between hospital prices paid by private plans and Medicare increased from an average of 224 percent of Medicare costs in 2016 and 230 percent of Medicare costs in 2017, the study revealed using 2016 to 2018 data from more than half of US community hospitals.

The findings point to a growing need for alternative hospital pricing strategies, such as reference pricing, which would have saved $19.7 billion if employers and health plans had paid hospitals using Medicare’s payment formula, the authors of the report stated.

“The rising gap between public and private hospital prices is a cause for concern and raises questions about the efficiency of the employer market,” said Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation, which sponsored the project. “The goal of this work is to arm employers with data so they can negotiate more effectively. Curbing excessive spending on employer health insurance is in the public interest.”

The AHA, however, is saying that advancing that approach in the middle of a global pandemic is “beyond reckless.”

READ MORE: HCCI: Physician Prices 122% of Medicare Rates on Average

“It is unfortunate that RAND continues to make broad claims about pricing based on a cherry-picked and limited data set,” Tom Nickels, executive vice president of the hospital group said in a statement. “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.”

According to the AHA’s Annual Survey of Hospitals, Medicare reimbursements rates were nearly $57 billion short of the actual costs hospitals incurred for treating beneficiaries in 2018, the most recent year for which the AHA had complete data.

Industry stakeholders have argued that hospital prices for the privately insured are much higher compared to Medicare because low Medicare reimbursement rates compel hospitals to charge higher prices to remain financially viable. The practice is widely known as cost-shifting.

But the study found a “very weak relationship between hospital prices and the share of patients treated by that hospital who are covered by either Medicaid or Medicare.”

The hospital-level portion of private prices explained by the share of Medicare and Medicaid patients was 0.3 percent, the data showed.

READ MORE: Preparing for Hospital Price Transparency Rule Compliance

Additionally, the study found little evidence supporting the argument that higher priced hospitals provide better quality care. Researchers used CMS star ratings and LeapFrog patient safety scores as quality measures.

The AHA also contested this finding, arguing that the authors of the report relied on “research short-cuts.” The short-cuts included a “hand-picked” sample of employers and plans whose claims accounted for just 0.7 percent of inpatient admissions and 1.8 percent of outpatient visits. Leapfrog data may also be old or imprecise, the Association stated.

“These concerns are compounded by a global pandemic that represents the greatest financial threat in history for hospitals and health systems. The case for pulling resources from care providers was weak from the start,” Nickels said.

The AHA projects hospitals to lose at least $323 billion by the end of 2020 because of the COVID-19 pandemic. Furthermore, a recent analysis from consulting firm Kaufman Hall found that half of US hospitals will operate in the red by the year’s end, with the average margin sinking to -7 percent.

Hospitals are asking Congress for more financial support on top of the $175 billion allocated by policymakers to healthcare providers through the CARES Act.

READ MORE: Providers Price Gouging Out-of-Network COVID-19 Tests, AHIP Says

But many employers are also in desperate need of financial aid after the pandemic.

“This analysis provides the most-detailed picture ever of what privately insured individuals pay for hospital-based care relative to what the government pays for people insured through Medicare,” said Christopher Whaley, the study's lead author and a policy researcher at RAND. “Especially during the COVID-19 pandemic, employers need transparent information on the prices that they and their employees are paying for health care services.”

Employers provided healthcare coverage for over 53 million Americans in 2018, making them among the “most important” purchasers in the healthcare system, according to the RAND report.

The authors of the report advised 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 other third-party administrators.

They also encouraged policymakers to consider policies and regulations that oppose hospital consolidation that can lead to price increases and establish limits on total payments for out-of-network care. The latter has been shown to reduce in-network prices by up to 40 percent.

Hospitals, including those in the AHA, have also raised concerns about policies that establish benchmark rates for out-of-network care. They contend that this policy incents payers to keep providers out of network to pay the lower rate for care.