Role of Market Share In Payer-Provider Reimbursement Negotiations

Private payers pay nearly double the amount that Medicare pays for certain services and a hospital’s market share play a significant role in the positive margin, a recent literature review conducted by Kaiser Family Foundation (KFF) experts discovered.

The literature review compared 19 studies spanning reimbursements for inpatient and outpatient hospital services and physician services to see how much more private payers were paying compared to Medicare reimbursement rates.

In every case, private payers were paying substantially higher rates. Overall hospital services payments from private payers were on average 199 percent of Medicare reimbursement rates, paying 189 percent of Medicare reimbursement rates for inpatient hospital services and 264 percent of Medicare reimbursement rates for outpatient hospital services. For physician services, private payers paid 143 percent of the Medicare reimbursement rate.

Although the private payer rate was consistently higher, the literature represented a broad range of just how much the private payer rate exceeded Medicare reimbursement rates.

Hospitals usually argue that they are forced to raise private payer rates because Medicare reimbursement rates are too low to cover patient expenses.

MedPAC and the American Hospital Association (AHA) articles which were included in the literature review found that hospitals had a positive margin from their private payer negotiations. But when it came to Medicare the hospitals were spending above and beyond what their Medicare reimbursement could cover, which seems to support providers’ viewpoint.

In response, payers have argued that providers should be more conscientious about their healthcare spending and should not set their rates so high.

Research from MedPAC and other literature sources has also been used to support the payer perspective, the KFF experts found, particularly regarding the effect that healthcare industry consolidation has on providers’ negotiating power.

Hospitals and health systems with large market share may negotiate higher payments from payers, yet their Medicare costs may continue to exceed their Medicare payments. The practice reveals that private payer rates are not always grounded in covering Medicare costs, but are more dependent on how much the hospital or health system can get due to its larger market share.

If private payers lowered their rates to Medicare reimbursement levels, it would apply more financial pressure for hospitals and health systems to restrain their healthcare spending, the literature review found.

“Predictions of widespread provider closures under Medicare-based reform proposals may be overstated, particularly for proposals that set rates higher than current Medicare rates,” the KFF researchers stated.

That being said, the research also indicated that even cost-efficient providers at times struggled to cover their costs on Medicare reimbursement rates, pointing to the fact that some providers may be more capable of improving their efficiency than others. Starting in 2016, providers which MedPAC deemed as “relatively efficient” began to see negative margins for Medicare.

MedPAC has been intentional about keeping the margin very close to providers’ costs

Hospital rates varied largely based on six factors, regarding:

• Whether the hospital or payer had more market power
• The type of hospital—for example, private short-term hospitals versus for-profit hospitals
• The payer mix in the study
• The type of hospital services studied for price comparison
• The type of payment data used
• Whether out-of-network claims were included and, if so, to what extent

The variables in physician rate variation were similar to these six factors.

Ultimately, however, if the hospital has a higher market share, it has the most influence on the negotiations.

The study confirmed what a RAND Corporation report found nearly a year ago, which revealed that private payers were reimbursing hospitals at 241 percent of the Medicare reimbursement rate. The RAND study concluded that reimbursement should be set at Medicare rates. AHA was not receptive to the concept at the time, but did accept that price transparency should improve.

Despite their differences, however, payers and providers are relaxing payment protocols in light of the pandemic, with both public and private payers committing to reimburse hospitals’ bills upfront to alleviate hospitals’ administrative responsibilities.