Study claims private health plans pay hospitals 241% of what Medicare would pay

An examination of U.S. hospital prices covering 25 states shows that in 2017, the prices paid to hospitals for privately insured patients averaged 241 percent of what Medicare would have paid, with wide variation in prices among states, according to a new RAND Corporation study.

In a new release, RAND said some states (Kentucky, Michigan, New York, and Pennsylvania) had average relative prices that were 150 percent to 200 percent of what Medicare paid, while other states (Colorado, Indiana, Maine, Montana, Wisconsin, and Wyoming) had average relative prices that were 250 percent to 300 percent of what Medicare would have paid. The report, “Prices Paid to Hospitals by Private Health Plans are High Relative to Medicare and Vary Widely: Findings from an Employer-Led Transparency Initiative,” which covers 1,598 hospitals, is a broad-based study of prices paid by private health plans to hospitals and is unique in presenting price information about a larger number of hospitals across many states.

Researchers analyzed healthcare claims for more than 4 million people, with information coming from self-insured employers, two state all payer claims databases and records from health insurance plans that chose to participate. For each private claim, researchers re-priced the service using Medicare's grouping and pricing formulas.

The analysis was done in collaboration between RAND and the Employers' Forum of Indiana, an employer-led healthcare coalition. The Forum participated in study design and recruitment, while the analysis was done by RAND researchers.

“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,” said Chapin White, the study's lead author and an adjunct senior policy researcher at RAND. “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.”

If employers and health plans participating in the study had paid hospitals using Medicare's payment formulas, total payments over the 2015-2017 period would have been reduced by $7 billion - a decline of more than 50 percent.

The RAND study found that hospital prices relative to Medicare increased rapidly from 2015 to 2017 in Colorado and Indiana, while they fell in Michigan over the same period. Prices also vary widely among hospital systems, ranging from 150 percent of Medicare prices at the low end to 400 percent of Medicare prices at the high end.

A large portion of private health insurance contracting for hospitals is done on a discounted-charge basis where the insurer agrees to pay a percentage of billed charges. By contrast, Medicare issues a fee schedule that determines the price it will pay for each service, with adjustments for inflation, hospital location, the severity of a patient's illness and other factors.

RAND researchers recommend that private insurers move away from discounted-charge contracting for hospital services and shift to contracting based on a percent of Medicare or another similar fixed-price arrangement.

“Employers can also encourage expanded price transparency by participating in existing state-based all payer claims databases and promoting development of such tools,” White said. “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.”

Such legislative interventions might include placing limits on payments for out-of-network hospital care or allowing employers to buy into Medicare or another public option that pays providers based on a multiple of Medicare rates.

The American Hospital Association took issue with the report. AHA General Counsel Melinda Hatton, in response to the study, said “We have a number of concerns about the report released by RAND Corp. Most notably the authors themselves point out that the study’s key limitation is its small sample size – less than 5 percent of all covered persons in about half of all states, and just 2 percent of the 181 million Americans with employer-sponsored insurance nationally.

“Further, 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. 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.

“Recent data from the National Health Expenditure report released by the Centers for Medicare and Medicaid Services in December 2018 show that price growth for hospital services was just 1.7 percent in 2017. Similarly, a report from the Altarum Center for Value in Health Care found hospital-spending growth in 2018 was lower than all other categories of services, including physician and clinical services and prescription drugs.