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RAND: Hospital prices 254% higher than Medicare rates

The latest RAND Corporation analysis of hospital prices finds that employers and private payers paid significantly more than Medicare for the same services at the same facilities.

Jacqueline LaPointe
By
Published: 30 May 2024

UPDATED 05/30/2024: Employers and private payers pay significantly more for hospital-based services compared to Medicare, according to a new study from RAND Corporation that has hospitals riled up.

The study, funded by the Robert Wood Johnson Foundation, used claims data from 2020-2022 from over 4,000 hospitals and over 4,000 ambulatory surgery centers in all states except Maryland (which has an all-payer rate-setting model) to shed more light on hospital prices and price variations.

This year’s study found that, on average, employers and private payers paid 254% more than what Medicare would have paid for the same inpatient and outpatient services delivered at the same facilities in 2022. The price included both facility and related professional claims.

Relative prices for inpatient hospital facility services averaged 255% of Medicare prices, outpatient hospital facility services averaged 289%, and all associated professional services (inpatient and outpatient) averaged 188% of what Medicare would have paid for the same services.

Meanwhile, prices for common outpatient services performed in ambulatory surgical centers averaged 170% of Medicare prices. Although, researchers noted that the average would have been about 107% of Medicare prices if not for the differences in Medicare reimbursement systems for ambulatory surgical centers and hospital outpatient departments.

Prices paid to hospitals by these private health plans were even higher in some states, such as California, Florida, Georgia, New York, South Carolina, West Virginia, and Wisconsin, which had relative prices that were over 300% of Medicare. Other states, like Arkansas, Iowa, Massachusetts, Michigan, and Mississippi, had lower relative hospital prices under 200% of Medicare.

However, the state-level average price has remained above 200% of Medicare since RAND has analyzed medical claims for hospital price transparency. The state-level average price peaked at 254% in 2022 (the most recent data available), following an average price of 224% in 2020 and 247% in 2018.

This year’s study also analyzed prices paid to hospitals by private health plans for specialty drugs. It found that private payer prices for select administered drugs received in a hospital setting averaged 278% of the average sales price versus 106% of the average sales price paid by Medicare.

Researchers explained that high hospital prices are a major contributor to spending increases among privately insured populations. Spending on hospital services accounted for 42% of total personal healthcare spending among the privately insured, amounting to approximately $486 billion, according to CMS data.

Meanwhile, premiums for employer-sponsored insurance plans have increased by about 50% over the past decade. The total premium for a family coverage employer-sponsored insurance plan increased from $16,350 in 2013 to almost $24,000 in 2023, according to the Kaiser Family Foundation’s latest “Employer Health Benefits Survey.”

“The utility of this work is that it gives employers important tools they can use to become better-informed purchasers of health care services,” Peter S. Hussey, director of RAND Health Care, said in a statement. “Hospitals account for the largest share of health care spending in the United States so this report also provides valuable information that may aid policymakers interested in curbing health care costs.”

However, the American Hospital Association (AHA) said in response that the study “oversells and underwhelms.”

“In benchmarking against woefully inadequate Medicare payments, RAND makes an apples-to-oranges comparison that presents an inflated impression of what hospitals are actually getting paid for delivering care while facing continued financial and other operational challenges,” Molly Smith, group vice president for public policy at AHA, said in a statement.

AHA also said the study represented less than 2% of overall hospital spending despite data expansions that RAND said represent about 6% of US commercial insurance hospital spending. The hospital association also alleged the study is “suspiciously silent on the hidden influence of commercial insurers in driving up health care costs for patients,” such as recent payer use of technology to cut payments to providers.

AHA: What the analysis gets wrong

Each year RAND puts out a hospital pricing analysis, AHA seeks to clarify the data and explain the methodology behind seemingly higher prices. This year, Aaron Wesolowski, vice president of research strategy and policy communications and John Allison, senior associate director of health analytics and policy, explain in a blog post the “shortcomings” of the latest hospital pricing analysis.

First, Wesolowski and Allison criticized RAND’s use of Medicare rates as a benchmark for commercial prices. Previously released data from AHA shows that Medicare paid hospitals 82 cents for every dollar of care rendered to Medicare beneficiaries in 2022, resulting in almost $100 billion in underpayments to hospitals. They also pointed out that general economic inflation from 2021-2023 has increased over twice as much as Medicare rate increases.

Therefore, using Medicare rates as a benchmark “continues to distort and generate artificial eye-popping numbers that grab headlines and generate clicks but don’t tell an accurate story,” according to Wesolowski and Allison.

Second, Wesolowski and Allison found issues with the analysis sample, which they say does not represent national, state or individual-level hospital data. They claimed the dataset represents less than 2% of the nation’s spending on hospital care from 2020-2022 and it produced price estimates for individual hospitals with less than a dozen inpatient or outpatient claims represented in the analysis.

“The inpatient prices in RAND’s analysis for the entire state of Hawaii, for example, is based on just 73 inpatient stays over a three-year period. To put this into broader context, in more than 40% of the hospitals included in RAND’s analysis, the total inpatient and outpatient payments that were included represented less than 1% of those hospitals’ total net patient revenues. When you then consider the fact that RAND reveals nothing about which employers chose to participate in the analysis — we have no line of sight into how more or less representative these employers are of the broader population,” Wesolowski and Allison wrote.

Additionally, they criticized the analysis time period, which included substantial shifts in hospital care during the COVID-19 pandemic. They also highlighted the lack of discussion around the role of private payers and third-party administrators in “driving up costs for employers,” citing the recent allegations against Multiplan.

“Despite these and other flaws, RAND and its collaborators promote this tool as a legitimate mechanism to lower the costs of hospital care,” concluded Wesolowski and Allison. “Employers and policymakers should be aware that this tool can’t be relied upon to tell you much more beyond the fact that Medicare prices don’t cover the costs of providing care and are far too low. Giving it credit for anything more risks doing very real harm to hospitals and the patients and communities that rely on them each day. It also does nothing to address the real challenge of rising costs of health care in this country.”

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