Private Payers Pay Hospitals 247% of Medicare Reimbursement Rate

Private payers are paying hospitals 2.5 times more than the Medicare reimbursement rate and employers have a role to play in rectifying the negotiating process, a recent RAND Corporation (RAND) study revealed.

The contract negotiation process between private payers and hospitals is complex. It can be risky for members who may lose their coverage if the payer and provider cannot agree.

Over the past few years, this intricate and tense process has resulted in a widening gap between what private payers pay for hospital healthcare services and what Medicare pays for the same services.

“The rising gap between public and private hospital prices is a cause for concern and raises questions about the efficiency of the employer market,” said Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation, the study’s sponsor.

“The goal of this work is to arm employers with data so they can negotiate more effectively. Curbing excessive spending on employer health insurance is in the public interest.”

Researchers discovered that, for the same services at the same locations, private payers and employers paid hospitals 247 percent of the Medicare reimbursement levels. This is an increase of 23 percentage points from 2016 (224 percent) and 17 percentage points from 2017 (230 percent).

There was some variation in price difference based on whether the services were inpatient or outpatient. For inpatient services, private payers and employers paid relative prices that were 231 percent of Medicare reimbursement, while for outpatient these entities paid 267 percent of Medicare reimbursement.

Geography was also a factor in the price difference. For Arkansas, Michigan, and Rhode Island, for example, relative prices were less than 200 percent of the Medicare reimbursement rates. However, for Florida, Tennessee, Alaska, West Virginia, and South Carolina, relative prices were 325 percent of Medicare reimbursement. This is somewhat consistent with previous studies.

Furthermore, high-priced hospitals tended to have higher star ratings. Twenty percent of the highest-priced hospital groups had five stars. However, only two percent of the low-cost hospitals received five stars.

Despite these statistics which might seem to challenge value-based care efforts, the researchers insisted that high-value providers do exist. A little more than nine in ten of the lower priced hospitals received three stars or above, they pointed out.

There are a couple of possible explanations for the price difference between private and public payers including the possibility that hospitals are shifting costs from Medicare to private payers (which the RAND study does not support) or that hospitals may leverage the fact that payers depend on them to gain higher reimbursement. Consolidation can also give hospitals negotiating power.

But these are not concerns for employers.

“As purchasers of health care services, the more concrete question for employers is whether it is reasonable and necessary for employers to be paying prices that are nearly 2.5 times as much as Medicare rates, especially when there are hospitals with similar quality scores that have lower prices,” the researchers argued.

For employers, discovering such a broad difference in reimbursement may push them to evaluate how their contracts are being negotiated. The researchers recommended that employers shift away from discounted-charge contracts, which leave employers exposed to list-price inflation.

This data may also empower them to leverage network and benefit design to direct patients to lower-cost, higher-value care.

“Employers can exert pressure on their health plans and hospitals to shift from discounted charge contracts to contracts based on a multiple of Medicare reimbursement rates, bundled payments, reference-based pricing, or other forms of contracting that limit price variability,” the researchers explained.

Narrow networks, tiered networks, and reference pricing may help employers and their health plans to incentivize employees to use low-cost, high-quality providers. Most measures that motivate patients to seek in-network care outside of the hospital setting can decrease healthcare spending.

Some employers also negotiate their own contracts with hospitals to bypass payer-provider tensions. If a hospital expects the employer to send a high volume of patients its direction, the hospital may decrease its prices so that they are no longer 2.5 times the Medicare rate.

Payers and employers may also engage in case-mix-adjustment systems that use multiples of Medicare rates to set prices.

While many have recognized the need for price transparency around the negotiation process and have advocated for this as a solution to helping employees choose appropriate, lower cost providers, RAND researchers found that price transparency alone would not be enough to equalize private and public payer reimbursement.

“In some cases, employers may need state or federal policy interventions to rebalance negotiating leverage between hospitals and their health plans,” the researchers indicated.

“Such interventions could include addressing noncompetitive health care markets, placing limits on payments for out-of-network hospital care, or allowing employers to buy into a public option that pays providers prices based on Medicare.”

Payers and employers can support anti-consolidation efforts, promote lower-priced providers, and advocate for state and federal reforms such as restrictions on total payments for out-of-network care and all-payer or global budget programs, the researchers recommended.