Reimbursing at Medicare Rates to Cut Healthcare Spending by $352B

March 02, 2021 - Healthcare spending would be about $352 billion lower in 2021 if private payers reimbursed providers at Medicare rates, according to a new analysis from Kaiser Family Foundation.

The analysis of data from MarketScan and FAIR Health showed that total healthcare spending for the privately insured population would decrease by 41 percent from the current projected total of $859 billion this year.

Additionally, employer contributions toward employee premiums and patient out-of-pocketing spending would decrease by hundreds of billions of dollars each—$194 billion and $116 billion, respectively—under the scenario.

However, the move would be a detriment to hospital and other provider revenue, researchers stated.

“Reducing the prices private insurers pay for health care services could help alleviate the financial burden of health care for employers and individuals with private insurance. However, doing so would reduce revenue for hospitals and other health care providers, with uncertain effects on patient care,” they wrote in the analysis.

Researchers attributed about half (45 percent) of the reduction in healthcare spending to lower reimbursements for hospital outpatient services, where the difference in reimbursement rates among private payers and Medicare is the largest.

Meanwhile, they projected reimbursements for hospital inpatient services to account for 27 percent of the total decrease in healthcare spending and reimbursements for physician office visits 14 percent.

Healthcare spending in the US is nearly twice as much per person compared to similar countries, with much of the increase driven by higher reimbursement rates hospitals and other providers negotiate with private payers.

And the difference between private payer and Medicare reimbursement rates has continued to grow over the years. Research has shown that Medicare per capita spending increased significantly slower than private payer spending from 2010 through 2019, increasing at an average annual rate of 1.7 percent during the period versus 3.9 percent.

Increased spending has led to higher premiums and deductibles for employer-sponsored health coverage, KFF researchers stated.

The latest data on employer health benefits from KFF recently shows that family premiums rose by 55 percent to a high of $21,342 between 2010 and 2020. About 83 percent of covered workers also had a deductible last year, with the average single deductible up from $917 in 2019 to $1,644 in 2020.

Reducing private payer reimbursement to Medicare rates has been found to be the most effective way to reduce healthcare spending compared to existing policies such as price transparency.

“Improving markets through increased price transparency and competition could help reduce prices, but would not reduce hospital spending to the extent that aggressively regulating prices could,” Jodi Liu, a policy researcher at RAND, said last month in a similar study on reducing healthcare spending through private payer rate regulation.

The study found that setting or capping prices for all commercial payers would reduce hospital spending—the largest healthcare spending category at $1.2 trillion last year—by $61.9 billion to $236.6 billion when rates are 100 to 150 percent of Medicare rates.

In contrast, price transparency efforts would cut hospital spending between $8.7 billion to $26.6 billion a year, while policies designed to increase hospital competition would reduce spending between $6.2 billion to $68.9 billion per year, the study found.

“Direct price regulation could have the largest impact on hospital spending, but this approach faces the biggest political challenges,” Liu, the study’s lead author stated.

The American Hospital Association (AHA) has pushed back on the study, arguing that the findings fail to account for the role hospitals and health systems play and that regulating prices is based on flawed data.

“Despite claims otherwise, it is widely acknowledged that Medicare and Medicaid – the two largest public programs – pay below the cost of delivering care. Price-setting would only enrich commercial health insurers at the expense of innovations in care that truly benefit patients,” Rick Pollack, AHA president and CEO, said in a statement.

Most recently though, proposals that would pull private payer reimbursement closer to Medicare rates, such as Medicare-For-All and other public option ideas, have gained steam. During the pandemic, CMS has also implemented a program that reimburses providers at Medicare rates for the treatment of uninsured patients for coronavirus-related care.

Critics of the strategy have also expressed concerns about supply of healthcare, including potential hospital closures.

The latest KFF analysis did not project the likely impact reducing private payer reimbursement would have on service utilization or the indirect impact on government revenues or spending.