Hospital Payment Disparities Emerge Among Private Payers, Medicare

The RAND study revealed that private payers reimburse 241 percent of the hospital payments that Medicare does.

By Sara Heath

May 15, 2019 - A new report from the RAND Corporation argues that private payers should rework their contracts with hospitals to align their payment rates with those seen in Medicare plans.

The report, which looked at claims for over 4 million privately-insured patients visiting one of nearly 1,600 hospitals, revealed considerable payment disparities between private health plans and Medicare. On average, private plans pay 241 percent more to hospitals than Medicare would have paid for the same services.

This means that hospitals charge private health plans more than it pays Medicare for the same services.

The researchers looked health insurance claims for patients in 25 US states and adjusted prices into Medicare terms using rates listed in Medicare’s grouping and listing formulas, revealing the payment disparities.

The results varied by state, the researchers added. In some states, including Kentucky, Michigan, New York, and Pennsylvania, relative prices were between 150 and 200 percent of what Medicare paid hospitals.

In Colorado, Indiana, Maine, Montana, Wisconsin, and Wyoming, relative prices were as high as 250 or 300 percent of what Medicare would have paid hospitals.

These findings indicate that there is room for price negotiation within individual insurance plans, according to lead study author Chapin White, who is also an adjunct senior policy researcher at RAND.

“The widely varying prices among hospitals suggests that employers have opportunities to redesign their health plans to better align hospital prices with the value of care provided,” White said in a statement. “Employers can exert pressure on their health plans and hospitals to shift from current pricing system to one that is based on a multiple of Medicare or another similar benchmark.”

Renegotiating reimbursement rates to hospitals could generate considerable cost savings, the report added. If health plans reimbursed hospitals at Medicare rates, they would generate a cost savings of about $7 billion, or by about 50 percent.

These disparities likely occurred because of differences in how private insurance plans and Medicare each calculate their prices, the report authors explained.

Private plans typically contract with hospitals and negotiate the percentage of charges the insurer will pay. Medicare, on the other hand, has a fee scheduleby which hospitals will be reimbursed for services. Medicare makes adjustments for inflation, hospital location, severity of a patient’s condition, and other factors.

The RAND researchers recommended employers pressure their payers to adopt similar fee schedules to generate cost savings, which in turn should be passed along to the employer and the employees buying into the benefits.

“Employers can also encourage expanded price transparency by participating in existing state-based all payer claims databases and promoting development of such tools,” White said. “Transparency by itself is likely to be insufficient to control costs so employers may need state or federal policy changes to rebalance negotiating leverage between hospitals and their health plans.”

These policies could include placing limitations on payments for out-of-network care as well as providing a Medicare buy-in option for employers providing their employees with health insurance benefits.

The report is making waves in the healthcare industry, with some hospital groups pushing back against the RAND Corporation’s methodologies.

“We have a number of concerns about the report released today by RAND Corp,” Melinda Hatton, general counsel at the American Hospital Association (AHA), said in a statement. “Most notably the authors themselves point out that the study’s key limitation is its small sample size – less than 5 percent of all covered persons in about half of all states, and just 2 percent of the 181 million Americans with employer-sponsored insurance nationally.”

In addition to the study’s methods, AHA took issue with the notion that Medicare payment rates should be taken as industry standard. Medicare is known to reimburse below the cost of care, Hatton said.

“In 2017, hospitals received payment of only 87 cents for every dollar spent caring for Medicare patients,” Hatton reported. “Simply shifting to prices based on artificially low Medicare payment rates would strip vital resources from already strapped communities, seriously impeding access to care. Hospitals would not have the resources needed to keep our doors open, innovate to adapt to a rapidly changing field and maintain the services communities need and expect.”

While AHA was critical of the RAND study, it did note that improving price transparency – one of the recommendations offered in the RAND report – is a top priority, Hatton said.

“The AHA is committed to improving patients’ access to information on the price of their care. It’s important that individuals understand how much they will need to pay for their care, specifically their out-of-pocket costs,” she said. “We are encouraged by the growing ability for providers and insurers to work together to develop tools that they can use to help respond to patient pricing inquiries.”

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