Employer health plans pay hospitals 224% of Medicare

Employers continue to pay hospitals more than double what Medicare would pay for the same services, according to a new study.

Private, employer-sponsored health plans paid hospitals 224% of Medicare prices, on average, according to an updated analysis from RAND Corp. claims from 4,000 hospitals in every state except Maryland. Hospitals with higher market shares tend to have higher prices, according to the study, which supports previous research.

According to the researchers, a 10% increase in hospital market share was associated with a 0.5% increase in a hospital’s price compared to Medicare. Still, some researchers have noted that a 0.5% increase for a significant 10% increase in market share is relatively small.

“No one expects prices to go down year over year given the consolidation in most hospital markets,” said Glenn Melnick, health economist and professor of policy at the University of Southern California. , whose work shows that prices tend to rise as hospitals grow. “My prediction is that once the study is updated again, prices will skyrocket. The wage push and cost pressure on these facilities is huge, so they will pass that on.”

Private insurers paid 222% of Medicare prices in 2018 and 235% in 2019. The 224% total for 2020 was lower than the 247% figure reported for 2018 because the sample size increased with data from States like Washington, Oregon and Utah where hospitals tend to have lower prices, the researchers noted.

The decline was telling, said Rick Pollack, president and CEO of the American Hospital Association.

“It suggests what we have long suspected: you simply cannot draw credible conclusions from such a limited and biased set of claims,” he said in a statement.

Hospitals also claim that Medicare does not fully cover the cost of care for Medicare beneficiaries. Relying solely on Medicare rates would likely cause hospitals to cut services, which would reduce access to care, Pollack said.

This involves hospitals shifting costs, meaning they charge higher rates to their commercially insured patients to offset the relatively lower pay for care provided to Medicare and Medicaid beneficiaries and the uninsured. But the RAND researchers found no evidence to support the cost shifting premise.

Medicare partly bases its payment levels on hospital labor costs. Medicare could raise rates in 2022 and 2023 to account for the 13% average increase in hospital payroll and social spending from October 2020 to October 2021, industry watchers said.

“We know that Medicare rates haven’t gone up much, and like my Brookings Institution colleagues have pointed out, they could increase in 2022 or 2023,” said Paul Ginsburg, professor of health policy at USC and principal investigator at the USC Schaeffer Center for Health Policy and Economics. “This could be a temporary change allowing for higher factor wages in Medicare entry price data. »

Hospitals also argue that their prices are higher because they offer fewer cost-effective services like behavioral health care that are not otherwise available in their markets or because they are of higher quality. At least for the latter, the RAND researchers found no direct correlation between price and quality.

Mid-priced hospitals, for example, had the highest share of five-star rated hospitals, study found.

In addition to market share, hospital reputation and branding influenced prices, said Dr David Blumenthal, chairman of the Commonwealth Fund.

In eastern Massachusetts, for example, employers and their workers demanded that Mass Gen. Brigham be included in their health plans, he said.

“Often the most powerful market force isn’t just bed control, it’s reputation,” Blumenthal said. “If you dismantle these institutions, their market power may not disappear.”

Part of the price transparency rule took effect last year, requiring hospitals to post their payer-negotiated rates on their website in a readable format. While most experts didn’t expect the law, as it stands, to significantly curb hospital prices, employers can still use the data to shape their benefit design, they said. .

The previous iteration of the RAND study found that Parkview Health System in Fort Wayne, Indiana had among the highest prices in the nation when measured against Medicare rates. According to the study, several employers in the Fort Wayne area used this information to pressure suppliers into negotiating a new contract at lower prices. More and more employers have established close networks, encouraging the use of cheap and high-quality hospitals.

Other pressure from employers and policymakers in Indiana led the Indiana University Health System to announce price reduction plans, researchers said.

“This data is really good for buyers, who are now thinking about benefit design innovations and negotiated prices on their behalf,” said Christopher Whaley, RAND policy researcher and lead author of the study. “In a sense, this is a trillion-dollar market without any level of price information that we are used to in all other markets.”

It’s up to employers to use the data to inform their network design and give them more leverage in negotiations with hospitals, Ginsburg said.

There is no debate over whether market power drives prices higher, said Duke University law professor Barak Richman. The more difficult question is what payers can do to limit this effect, he said.

“I think there’s still a lot of promise for tight networks, centers of excellence, and outpatient surgery centers or independent physician practices, especially those that can bear some kind of risk,” Richman said. .

Other states could use related data to set benchmarks for cost growth, similar to Massachusetts and Oregon, among other regulations, experts said.

“This is a very important study and the data it presents will be extremely important in the debate about hospital competition and price transparency,” said Richard Scheffler, professor of economics and politics at health at the University of California at Berkeley.