Employers are paying on average 254% of what Medicare pays…

May 16, 2024

A recent RAND report highlights a striking disparity in the amounts private insurers pay hospitals compared to what Medicare reimburses for the same services. In 2022, private insurers paid hospitals on average 254% more than Medicare. In some states, the difference was even more pronounced, with private insurers paying three times the Medicare rate.

The Need for Employers to Act

Price transparency alone is insufficient to drive change. Employers must use this pricing information to restructure their health plans to align hospital prices with the actual value of care provided. Brian Briscombe, the principal investigator of the report, emphasized the significant variation in hospital prices, suggesting that there is ample opportunity for strategic purchasing.

State and Market Variations

The report identified substantial price variations across different states. For instance, states like Arkansas, Iowa, Massachusetts, Michigan, and Mississippi had hospital prices below 200% of Medicare rates. Conversely, California, Florida, Georgia, New York, South Carolina, West Virginia, and Wisconsin saw prices exceeding 300% of Medicare rates. Even within the same market, price disparities were noted, with some hospitals charging private insurers three times the Medicare rate while others charged only twice as much for the same quality of care.

Greater market consolidation correlated with higher prices, with market share accounting for 18% of the price variation. This suggests that more concentrated markets tend to drive up costs.

Drug Pricing Discrepancies

The study also found significant differences in the prices paid for administered drugs in a hospital setting. Commercial insurance prices averaged 278% of the average sales price, compared to 106% for Medicare.

Impact on Healthcare Spending

Hospital services represented 42% of the total personal healthcare spending for privately insured individuals in 2022. The increase in hospital prices is a major factor driving the growth in per capita spending among the 160 million Americans with private insurance.

Peter S. Hussey, director of RAND Health Care, stated that the report provides employers with essential tools to become more informed purchasers of healthcare services. Given that hospitals account for the largest share of healthcare spending in the U.S., the findings could also aid policymakers focused on reducing healthcare costs.

Differing Perspectives

The American Hospital Association (AHA) had a different interpretation of the findings. Molly Smith, the AHA’s vice president for policy, argued that the study highlights the chronic underpayment of hospitals for Medicare services, suggesting that conclusions drawn beyond this should be viewed skeptically.

Compliance and Transparency Issues

Federal policies mandate that hospitals post prices for at least 300 “shoppable” services and that insurers disclose their full set of negotiated rates. However, compliance has been inconsistent. Many hospitals have not adhered to these requirements, and insurer-posted data often includes duplicative information, resulting in files so large that they become impractical to use.

Employers Can Drive Change

The good news is that employers are not powerless in this situation. By leveraging the available pricing data, employers can take decisive actions to redesign their health plans. This approach can help ensure that hospital prices are more closely aligned with the value of care provided, thereby curbing excessive costs. Through strategic planning and informed purchasing, employers can play a crucial role in mitigating the financial burden on their organizations and employees, promoting a more equitable healthcare system.

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