Hospitals Charge Employer Plans Double What Medicare Pays

May 18, 2019

A new RAND study uncovers significant differences between healthcare costs paid by privately insured patients and those paid out by Medicare.

Any Intro to Economics class highlights the importance of price transparency to a well-functioning market. Yet, over the past few years, multiple stakeholders have decried the lack of information regarding the true cost of healthcare services across the country-preventing healthcare markets from operating more efficiently and staunching unnecessary spend.

While it’s clear that there exists a lot of price variation for healthcare services, it has been hard to pinpoint the forces behind it, says Christopher Whaley, an associate policy researcher at the RAND Corporation.

“The thing that we haven’t known, for a variety of reasons, is which hospitals are most expensive versus which are not,” he says. “Certainly, with calls for more transparency, we are now seeing policies allowing patients to look at how much an MRI costs at one hospital versus another in order to make a decision on where to get care. And that’s important. But this study focuses on a dimension of price transparency that’s been left out of the conversation thus far. Because, despite spending billions of dollars on hospital care, many payers don’t really have a good sense if the hospitals in their network are high-priced or low-priced, or the variation in prices that different plans may be paying.”

The result is a new research report, “Prices Paid to Hospitals by Private Health Plans are High Relative to Medicare and Vary Widely: Findings from an Employer-Led Transparency Initiative.” In it, Whaley, and adjunct senior policy researcher, Chapin White, highlight the large differences in prices paid to hospitals from privately insured patients as compared to Medicare across 1,598 hospitals in 25 states. By analyzing health claims for more than 4 million patients, the researchers discovered that average relative prices paid by private insurance plans were often 150% to even 400% higher than those charged to Medicare.

“On average, we found that employer-sponsored plans and private insurance plans are paying 240% of what Medicare pays for the same hospital services,” says Whaley. “But there was wide variation even across different states. For example, if we look at Michigan, the ratio was about 156%. But then if we look over at Indiana, which in many ways, is a relatively similar state, the ratio was over 300%.”

Reasons for variation

While this study was not able to delve into the specific reasons for such variation, Whaley says one factor was likely the consolidation of health systems. As hospital systems have grown, though ongoing mergers and acquisitions, it has strengthened their negotiating power with payer organizations, which can lead to higher rates for services. In addition, the researchers found there is a lot of variation in how contracts between hospitals and insurance companies are structured.

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“Some insurer contracts use what’s called a discounted charge, where, essentially, the hospital says, ‘This is our price,’ and then the insurer takes a portion of that price, only paying a percentage of the billed charges,” he says. “This type of arrangement really leaves the hospital in the drivers’ seat for setting prices because they have the power to set that initial number.”

That’s why one of the study’s recommendations is for employer-sponsored health plans to move away from this type of discounted-charge basis. If they were able to pay similar fees to Medicare, which issues a fee schedule for each service, they could have saved billions of dollars over the past few years. The report also suggests that some legislative interventions could also help even out pricing. For example, policies that place limits on out-of-network hospital care or allowing employers to buy into Medicare may help facilitate less variation and-over time-lead to lower healthcare costs.

For his part, Whaley says that he hopes that employers, as big purchasers of healthcare, will use this detailed information about pricing to better educate themselves about what’s appropriate and sustainable, moving toward solutions that can lead to lower hospital prices.

“One strategy that some employers and purchasing groups have had some success with recently is using the underlying Medicare schedules to establish better prices for the commercial population,” he says. “Medicare has already done the hard work of deciding that academic medical centers and rural hospitals should get bumps in payment, things like that-so private plans could use that underlying framework and say they will pay those hospitals X% of Medicare and negotiate with hospitals on just what that X should be. That can offer a more straightforward and more transparent way of setting prices and help save some of these employers more money down the line.”

Kayt Sukel is a science and health writer based outside Houston.