Out-of-Network Payment Cap Would Cut Hospital Spending by $124B

March 13, 2020 - Capping out-of-network payments to hospitals at 125 percent of Medicare rates could yield up to $124 billion in savings nationwide, making this a viable policy alternative to Medicare-for-All, according to a new analysis from the RAND Corporation.

“Among the many bold proposals to contain the cost of hospital care, limiting out-of-network payments arguably is less heavy-handed as it does not impose rates on all providers or shift the source of health insurance coverage for a large share of the nation's population,” Erin L. Duffy, the study's lead author and an adjunct researcher at RAND, said in a press release.

“While cost containment can benefit patients who face rising health costs, such changes also would disrupt hospital revenues,” Duffy said. “A policy that reduces revenue so much that hospitals close or the quality of care is disrupted would not be in the best interests of patients.”

RAND researchers analyzed the potential impact of four proposals for out-of-network payment caps: 125 percent of Medicare payment rates (a strict limit), 200 percent of Medicare payment rates (a moderate limit), the average of payments made by private payers in a state (a moderate limit), and 80 percent of average billed charges in a state (a loose limit).

Researchers used data from the 2017 CMS Hospital Cost Report Information System to estimate status-quo hospital operating expenses, Medicare payments, payments by private payers, and hospital charges.

The analysis found that the strict limit option would substantially reduce negotiated hospital prices by 31 to 40 percent, resulting in the largest potential savings of $108 billion to $124 billion.

Meanwhile, more moderate out-of-network payment caps at 200 percent of Medicare rates and the state average private payments would reduce hospital prices by 8 to 23 percent and 16 to 30 percent, respectively. These options would produce savings between $56 billion and $70 billion.

Finally, the loose limit would either have moderate hospital prices (4 percent) of decreases (-3 percent) depending on the estimation approach, yielding between $13 billion in increased hospital spending or $7 billion in decreased spending.

The estimates confirm that out-of-network payment limits on hospital care could lower healthcare costs similar to more across-the-board reform proposals like Medicare for All.

“Under the strict and moderate scenarios, the cost savings created by placing limits on out-of-network hospital bills creates savings that are similar to ideas such as Medicare for All, statewide rate setting and creating global health care budgets, without the particular potential disruption that could come from implementing these plans, although the limits would admittedly create some as-yet unknown level of disruption of their own,” said Christopher Whaley, co-author of the report and a policy researcher at RAND.

Medicare for All would implement a single-payer healthcare system in the US. Several policymakers have proposed Medicare for All reforms, including presidential hopeful Bernie Sanders.

A study recently published in PLOS Medicine found that single-payer proposals like Medicare for All would lower healthcare costs in the US, with the majority of the analyses reviewed estimating a 3.5 percent reduction in total national healthcare spending.

“There is near-consensus in these analyses that single-payer would reduce health expenditures while providing high-quality insurance to all US residents,” the study stated.

The American College of Physicians also recently endorsed a single-payer healthcare system in its 2020 policy plan, saying it or a public option would improve care accessibility and affordability.

However, many others have opposed the proposals. Chief among the critics are insurance companies and the Trump administration. HHS Secretary Alex Azar has called Medicare for All proposals “Medicare for none,” while CMS Administrator Seema Verma has described the proposal as “scary.”

In addition to curbing surprise medical billing, capping out-of-network payments for hospital care could be an alternative route for cost containment, the RAND analysis indicated. However, policymakers could be putting hospital operations in jeopardy, researchers warned.

“Although cost containment can benefit patients facing rising health costs, such changes are disruptive to hospital revenues. A policy that reduces hospital revenues to an extent that results in hospital closures or lower quality of care would not be in the best interest of patients,” Duff and Whaley wrote in the analysis.

“Therefore, an out-of-network payment limit must be selected and implemented carefully to yield cost containment without negatively affecting access to hospital services and patient outcomes. This report can inform policymakers of the relative magnitudes and potential impacts of a variety of out-of-network payment limits as they consider potential out-of-network payment limit policies,” they concluded.