Covid-19 Gives Hospitals Upper Hand in Payment Rate Talks

April 13, 2020, 1:18 PM

Insurers will have a tough time negotiating for lower payment rates from hospitals and other health-care providers on the front lines of the coronavirus fight.

Hospitals and doctors around the country have been working to battle Covid-19, oftentimes without adequate equipment and protective gear. They’re also facing financial hardships from canceling elective surgeries and other medical procedures to free up capacity for Covid-19 patients.

Those factors give providers more leverage as they negotiate deals over the prices they charge insurance companies for medical services, analysts say. That means employers that pay for their workers’ health coverage likely won’t be seeing reduced health-care costs anytime soon.

“As we come out of this with the weaknesses that have been shown in the health-care system, it’s going to be difficult, I think both realistically and politically, to demand significant price concessions in the near-term from provider organizations, given the risk that they’ve taken on,” George Hill, managing director of Deutsche Bank Securities Inc. who follows managed care companies, said.

Employers have struggled to rein in health-care costs, which have grown faster than inflation—more than 18% between 2014 and 2018 to an all-time high of $5,900 per person—and are driven largely by higher prices for services rather than increased use of those services.

The $1.2 trillion in hospital spending in 2018 made up the largest share of health-care costs at 33%, followed by physician and clinical services at 20% with $725.6 billion, according to the Centers for Medicare & Medicaid Services.

“It’s bad news probably for employers and everybody else who pays for health care,” Hill said. When it comes to swallowing higher rates by insurers and employers, “I think there’s going to be some nose-holding that goes on,” he said.

Employers, Insurers Feel Brunt

Large employers that fund their own health plans could see health benefit costs jump as high as 7% in 2020, as a result of increased coverage costs for Covid-19 testing and treatments, consulting firm Willis Tower Watson estimates. Employers had previously projected their costs to rise by 5%.

Most employers that fund their own plans use health insurers to negotiate contracts with hospitals and doctors and to set up networks that their employees can use to save money. The employers ultimately pay for the claims, but health insurers will be on the front line of negotiating rates for 2021.

Insurers also manage their own plans in the individual and group markets, and the industry estimates its Covid-19 costs could range from $56 billion to $556 billion over the next two years.

“With so many businesses at risk, more companies and more workers are struggling to afford their current coverage,” Kristine Grow, spokeswoman for America’s Health Insurance Plans, said in an email.

“When you combine unexpected costs with intense pressure from businesses, workers, and state government, there is serious and significant financial strain on many health insurance providers across the country,” she said.

Employers Push Back

Some employer groups advocating for lower rates say hospitals won’t be losing money from Covid-19 in the long run.

Hospitals will lose money on canceled elective surgeries in the short-term, but they will make that money back after the pandemic is over, Robert Smith, president and CEO of the Colorado Purchasing Alliance (CPA), said in an interview. The CPA represents a group of 11 public sector employers and a union health plan.

“The hospitals will spin it as what’s being lost” during the crisis, Smith said. “My guess is most of those elective surgeries are going to come back. Most of that revenue will be realized later this year.”

In addition, the number of patients hospitals are treating is rising due to Covid-19,
and much of that care will be reimbursed at commercial rates, Smith said. Commercial rates are generally higher than Medicare rates.

The CPA is negotiating multi-year contracts directly with hospitals that will begin in 2021. The rates negotiated by the CPA could be used by other companies and union health plans in Colorado, as well as health insurers that sell in the individual and group markets.

The CPA’s goal is to peg hospital contract rates to Medicare rates, plus an additional percentage, Smith said. A 2019 study by the RAND Corp. found that hospitals charge commercial insurers prices averaging 241% of Medicare rates.

The release of an updated version of the study, called RAND 3.0, was slated for May but is being delayed until September out of concerns that the timing isn’t right to issue a study critical of hospital rates, Smith said.

The American Hospital Association didn’t provide a direct comment on the issue, but it referred to a fact sheet that says payment rates for Medicare and Medicaid are generally “set by law” and are “currently set below the costs of providing care, resulting in underpayment.”

Reducing the Burden

Employers looking to cut costs are likely to turn to alternative methods of health-care delivery, said Jeff Dobro, health and benefits strategy and innovation leader at HR consulting firm Mercer LLC.

But the challenge will be encouraging employees to use those methods, he said.

Telemedicine is emerging as a popular choice for employees. Hill said telemedicine visits with primary care providers cost about $45 to $50, compared with $100 for face-to-face visits.

Other strategies include reference-based pricing arrangements, in which employers cap fees relative to Medicare payments, Dobro said.

Companies also are looking at sending employees to “centers of excellence,” which offer high quality care at reasonable rates, for high-cost procedures, Dobro said. They’re also negotiating bundled rates that include all payments for procedures, he said.

Meanwhile, employer groups like the CPA are talking to hospitals and health systems to advocate for lower rates.

“Some of the hospitals have said we’d love to talk about how can the employers and our hospital work together more collaboratively on behalf of our community,” Smith said.

“We think that these folks are trying to do the right thing, and it may or may not affect the rates,” he said.

To contact the reporter on this story: Sara Hansard in Washington at shansard@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Alexis Kramer at akramer@bloomberglaw.com

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