Employers Paying Hospitals More Than Double Medicare Prices (1)

Employers and health insurers paid hospitals more than double what Medicare would have paid in 2020, according to a RAND report released Tuesday.

Prices paid to hospitals during 2020 by employers and private insurers for inpatient and outpatient services averaged 224% of what Medicare would have paid, the RAND Corp. said in the fourth report it has issued comparing private insurance payments to health-care providers to Medicare rates.

The RAND report is an important benchmark for employers and insurers to compare whether they are paying fair prices to hospitals. Employers, which covered more than 50% of the U.S. population, or nearly 164 million Americans in 2020, have been pushing back against the high rates they pay to hospitals as they try to rein in their costs.

The study is based on information from more than 4,000 hospitals in 49 states and the District of Columbia—the largest number of hospitals yet studied— as well as more than 4,000 ambulatory surgical centers for the first time.

Prices for Covid-19 hospitalization were similar to prices for overall inpatient admissions, averaging 241% of what was paid for Medicare patients.

In 2019, spending on hospital services accounted for 37% of total personal health-care spending for the privately insured, about $434 billion, the report said, citing 2020 data from the Centers for Medicare & Medicare Services. “Hospital price increases are key drivers of growth in per capita spending among the privately insured,” it said.

Prices vary widely among states, the report said. Hawaii, Arkansas, and Washington had prices under 175% of Medicare, while Florida, West Virginia, and South Carolina had prices at or above 310% of Medicare.

The hospital with the highest rates compared with Medicare was John Muir Health in Walnut Creek, Calif., at nearly 456% of Medicare rates, lead author Christopher Whaley said in an interview.

American Hospital Association president and CEO Rick Pollack responded to the study Tuesday, saying the report “jumps to unfounded conclusions based on incomplete data” since it looks at claims for only 2.2% of overall hospital spending. The cost of delivering services varies among different hospitals, such as rural critical access hospitals and large academic medical centers, he said.

“The results highlight what even the Medicare Payment Advisory Commission (MedPAC) acknowledges,” Pollack said. “Medicare does not fully cover the cost of providing care to Medicare beneficiaries. Pinning commercial prices to inadequate Medicare rates would cause even more financial strain to hospitals already facing tremendous challenges as a result of the ongooing COVID-19 pandemic and rising inflation.”

Transparency Initiatives

Recent price transparency initiatives have increased information available to patients, but employers—who provide most private insurance—typically don’t have usable information about the prices that are negotiated for them by their insurers, RAND said.

Medicare prices are designed to provide modest profit margins for efficient hospitals, the report said.

“A common theory raised by hospitals is the economic need to charge commercial payers higher prices to offset underpayments by public payers and losses because of uncompensated care,” it said.

However, it said, “the absence of a strong correlation between hospital prices and payer composition does not support the hypothesis that higher hospital prices are in place to offset underpayments by public payers or hospital expenses on uncompensated care.”

Prices for common outpatient services performed in ambulatory surgical centers averaged 162% of Medicare payments, the report said. If the services had been paid using Medicare payment rates for hospital outpatient departments, they would have averaged 117% of Medicare payments, it said.