Hospital Prices for Private Payers 241% Higher than Medicare Rates

May 13, 2019 - Hospital prices for private payers were 241 percent of what Medicare would have paid for the same services, according to a new RAND Corporation study.

The study of claims data from 1,598 hospitals in 25 states conducted in conjunction with the Employers’ Forum of Indiana finds that prices paid to hospitals by private payers significantly outpaced the reimbursement rates set by Medicare from 2015 to 2017, with some states seeing greater variation in hospital prices than others.

Private payers in states like Kentucky, Michigan, New York, and Pennsylvania paid average relative prices that were 150 to 200 percent of what Medicare paid, while other states including Colorado, Indiana, Maine, Montana, Wisconsin, and Wyoming had average relative prices that were between 250 and 300 percent of what Medicare would have paid.

“The widely varying prices among hospitals suggests that employers have opportunities to redesign their health plans to better align hospital prices with the value of care provided,” Chapin White, the study's lead author and an adjunct senior policy researcher at RAND, states in a press release.

In fact, the study shows that employers included in the study could have saved $7 billion if they or their health plans had paid hospitals using Medicare’s payment formula. The savings represent a decline of more than 50 percent.

READ MORE: Going Above and Beyond the CMS Hospital Price Transparency Rule

“Employers can exert pressure on their health plans and hospitals to shift from current pricing system to one that is based on a multiple of Medicare or another similar benchmark,” White says.

Medicare sets reimbursement rates for hospitals every year using the same formula that multiplies a base rate by a case mix adjustment and a hospital type adjustment then adding the outlier payments.

Private payers, on the other hand, must negotiate hospital prices with providers, and the process is quite complex. Hospitals are increasingly looking to expand their bargaining power, too. The rapid rate of consolidation in the healthcare industry is making more hospitals part of health systems, which allows hospitals to jointly negotiate prices.

Some health systems are also using “all-or-nothing” clauses in contracts with private payers, which require all hospitals in a system to be included in a plan’s network. Gag clauses are also frequently used to limit price transparency efforts that aim to publicize negotiated prices.

The current state makes it difficult for employers to lower healthcare costs for their employees, the study explains. To lower costs, employers need to know price trends and require the ability to assess which hospitals in their market are lower or higher priced for certain services.

READ MORE: Hospital Prices Increased Faster Than Physician Prices, Study Finds

Yet determining hospital prices is nearly impossible for employers, and some hospital-payer contracts prevent stakeholders from sharing pricing information with employers and patients.

The lack of hospital price transparency limits the ability of employers to track the prices negotiated on their behalf, implement innovative insurance benefit designs, and ensure that payers are negotiating favorable prices, the study states.

“The purpose of this hospital price transparency study is to enable employers to be better shoppers of healthcare on behalf of their employees,” Gloria Sachdev, president and CEO of the Employers' Forum of Indiana, says in the press release. "We all want to know which hospitals provide the best value (best quality at best cost). Numerous studies have found that rising healthcare costs are due to high prices, not because we are using more healthcare services.”

Hospital prices are particularly impacting individuals with employer-sponsored insurance, the Health Care Cost Institute (HCCI) reports. Average annual spending on the individuals grew 4.2 percent from 2016 to 2017, while utilization was relatively stable during the period. With utilization showing little change, researchers blame prices for the growth in healthcare spending.

Hospital price transparency is key to lowering costs for patients and employers, the RAND Corporation study states. Researchers advise employers and private payers to shift away from discounted charge contracting for hospital services to contracting based on a percent of Medicare or another fixed price arrangement.

READ MORE: 4 Strategies for Providers to Improve Hospital Price Transparency

“Employers can also encourage expanded price transparency by participating in existing state-based all payer claims databases and promoting development of such tools,” White adds. “Transparency by itself is likely to be insufficient to control costs so employers may need state or federal policy changes to rebalance negotiating leverage between hospitals and their health plans.”

Legislative changes that could benefit employers include limiting payments for out-of-network hospital care and permitting employers to buy into Medicare or another public option that reimburses providers based on Medicare rates, the study states.

But paying hospitals based on Medicare rates could have serious, negative consequences, the American Hospital Association (AHA) states in response to the study.

“Medicare payment rates, which reimburse below the cost of care, should not be held as a standard benchmark for hospital prices. In 2017, hospitals received payment of only 87 cents for every dollar spent caring for Medicare patients,” says Melinda Hatton, AHA general counsel.

“Simply shifting to prices based on artificially low Medicare payment rates would strip vital resources from already strapped communities, seriously impeding access to care. 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.”

The AHA reassures stakeholders that the association is committed to improving patient access to hospital pricing information. But providers and payers need to collaborate more to establish effective hospital price transparency.

“It’s important that individuals understand how much they will need to pay for their care, specifically their out-of-pocket costs. Yet hospitals, health systems and other providers do not always have access to detailed data on health plan benefit and beneficiary cost-sharing amounts; rather, insurers hold this information,” Hatton concludes. “We are encouraged by the growing ability for providers and insurers to work together to develop tools that they can use to help respond to patient pricing inquiries.”