Jared Lane K. Maeda, PhD, MPH1 and Lyle Nelson, PhD1
This article has been cited by other articles in PMC.
Associated Data
Abstract
- What do we already know about
this topic?
- A few studies primarily based
on interviews with industry sources have reported that the hospital prices
paid by Medicare Advantage plans are similar to or slightly above Medicare
fee-for-service prices.
- How does your research
contribute to the field?
- We present new evidence on
whether Medicare Advantage prices for hospital stays, when measured
relative to Medicare fee-for-service prices, vary with market
characteristics and other factors.
- What are your research’s
implications toward theory, practice, or policy?
- Our study provides information
that may be useful for evaluating the performance of the Medicare
Advantage program and analyzing proposals to modify it.
Introduction
The prices that private insurers pay hospitals
have received considerable attention in recent years. However, most of that
literature has focused on the commercially insured population.1,2 Although nearly one-third of
Medicare beneficiaries are enrolled in a Medicare Advantage (MA) plan, little
is known about the prices paid to hospitals by the private insurers that
administer such plans. It might be expected that the prices paid to hospitals
by MA plans would be similar to Medicare fee-for-service (FFS) because the
amount that MA plans receive from the federal government is tied to local
Medicare FFS spending. However, because those same private insurers also
negotiate with hospitals over prices for their commercial enrollees, it is
possible that market forces might, to some extent, affect the prices that MA
plans pay hospitals.3
Only a few studies have examined the hospital
prices paid by MA plans. Berenson et al4 interviewed industry sources and
found that MA plans most commonly pay hospitals Medicare FFS prices, and in
most other cases pay hospitals between 1% and 5% more than FFS. Those findings
are consistent with information obtained from industry sources by the
Congressional Budget Office, which reported that the prices paid by MA plans
are similar to or slightly above Medicare FFS prices.5 However, there is limited
empirical evidence regarding the prices that MA plans pay hospitals. A recent
study by Baker et al used 2012 data from the Health Care Cost Institute (HCCI)
and found that hospital payments by MA plans were 5.6% less than Medicare FFS
prices after adjusting for the smaller network of providers in MA.6 But, for reasons discussed below,
the findings of our study differ somewhat from the findings of that article.
More information on the hospital prices paid by
MA plans would provide additional insights into whether MA prices are more
closely tied to Medicare FFS prices or commercial prices. Moreover, information
on whether the hospital prices paid by MA plans vary with such factors as
hospital and insurer market power, the share of beneficiaries enrolled in the
MA program, and MA benchmark rates would be useful for evaluating the
performance of the MA program and analyzing proposals to modify it.
In this study, we compare the prices that
private insurers pay hospitals in their MA plans and commercial plans with
Medicare FFS prices. We also present new evidence on whether MA prices vary
with market characteristics and other factors.
Methods
Data Source
We used 2013 claims data from HCCI, which
includes information from Aetna, Humana, and UnitedHealthcare on more than 50
million individuals in the group, nongroup, and MA markets. About 4.4 million
people in the HCCI data were 65 years or older and were covered by an MA plan,
and 2 of the HCCI data contributors were firms with the largest share of MA
enrollees in 2013.7 The HCCI data account for about
one-third of all beneficiaries aged 65 years and older and enrolled in MA, and
the data cover all 50 states and the District of Columbia.
Study Sample
We first identified approximately 3.5 million
inpatient stays in the 2013 HCCI database and excluded skilled nursing
facility, hospice, and other types of stays. We then restricted the sample to
stays at acute care hospitals by linking the HCCI data with the American
Hospital Association Annual Survey. The sample was also restricted to hospitals
paid under Medicare’s inpatient prospective payment system (IPPS). Applying
those exclusions resulted in about 2.5 million stays.
The sample was further restricted to stays in
metropolitan statistical areas (MSAs) so we could examine the variation in
prices across and within MSAs. We excluded stays at hospitals in Maryland and
West Virginia because those states regulate hospital prices. We also excluded
stays in Puerto Rico, stays at hospitals with fewer than 50 discharges in the
HCCI data, stays with more than 1 diagnosis-related group (DRG), and stays with
an invalid national provider identifier. Those restrictions left about 2.3
million stays (see Online Appendix Table 1).
We then constructed a sample of stays for people
65 years and older enrolled in MA plans, and a separate sample of people 18 to
64 years enrolled in commercial plans, excluding stays associated with
childbirth. The commercial sample was also restricted to people with
employment-based coverage. Those restrictions yielded about 645 000 MA stays
and 686 000 commercial stays (see Online Appendix Table 2).
(Online Appendix Table 2 identifies
a few additional restrictions that were applied to the study sample.)
Price Measures
We determined the total price for each discharge
in the MA and commercial samples as the allowed amount on the claim, which is
the amount paid to the hospital by the insurer plus patient cost sharing.
We excluded stays with zero or negative payment
amounts and stays for which the payment amount was less than 50% of the
MSA-level average Medicare FFS base rate for that DRG. We imposed the latter
restriction to exclude claims for which the insurer in the HCCI data might have
been a secondary payer. We also excluded stays with payment amounts or
durations in the top 1% of the DRG-level distribution. The HCCI data do not
include capitated claims. After applying all of those criteria, our final
analytic sample contained about 593 000 MA stays and 621 000 commercial stays
from 297 MSAs and about 1900 hospitals (see Online Appendix Table 2).
We next used the DRG on the claim and the 2013
IPPS payment rules to compute the amount that the Medicare FFS program would
have paid for each stay in our sample (including the beneficiary cost sharing
amount). With that approach, the mix of stays and hospitals is held constant in
our comparison of private payment rates with Medicare FFS rates. We multiplied
the Medicare operating and capital base rates by the DRG weight and adjusted
for the area wage index. We also calculated hospital-specific payments per
discharge for indirect medical education (IME) and disproportionate share
hospital (DSH) for the comparison with commercial rates. However, we excluded
IME payments from the FFS rates in our comparison with MA, because the Medicare
program makes IME payments directly to hospitals for MA enrollees. Our
estimates thus exclude IME payments from Medicare for both MA enrollees and FFS
enrollees.
We reduced the Medicare FFS rate by 2% on stays
that occurred on or after April 1, 2013, to account for the sequestration that
took effect on that date. We also applied an adjustment factor to account for
outlier payments in our national estimates of average Medicare FFS rates, which
was computed separately for surgical and medical DRGs. However, because of data
restrictions, we were unable to adjust the FFS rate for outlier payments in our
analysis of specific MSAs or hospitals.
In contrast to the study by Baker et al,6 our estimates of Medicare FFS
rates do not include pass-through amounts, which are lump-sum payments that
Medicare makes to many hospitals. Those payments are made primarily for the
direct costs of graduate medical education, but they also include payment for
other costs, such as Medicare beneficiaries’ bad debt.
There is considerable evidence that diagnoses
are coded more intensively on claims submitted to MA plans than on Medicare FFS
claims.8,9 That difference arises because
the risk-adjustment system for setting federal payments to MA plans depends on
enrollees’ diagnoses, which gives plans an incentive to ensure that all
diagnoses are coded on their enrollees’ claims. In contrast, the Medicare FFS
program pays many providers (such as physicians and hospital outpatient
departments) on the basis of the services provided and not on the basis of the
patient’s diagnosis, so those providers do not have an incentive to ensure that
all diagnoses are coded for Medicare FFS patients. We believe that such coding
differences between MA and FFS are much less prevalent for hospital inpatient
care, because hospitals have an incentive to code all appropriate diagnoses for
their Medicare FFS patients to ensure that they are assigned to the highest
possible DRG code. To the extent that such differences do occur and result in
some MA patients being assigned to a higher DRG than they would have been
assigned in the FFS system, the prices that hospitals receive for MA patients
would be higher than the prices they receive for FFS patients, when measured
relative to underlying health of the patients. For the reasons stated above, we
do not believe that such coding differences are common in the inpatient
setting. However, it is possible that an MA patient within a given DRG code
might be sicker than an FFS patient in the same DRG code, which we would not be
able to capture. MA plans may also make additional payments to hospitals, such
as pay-for-performance, shared savings, and other payment incentives. However,
we are not able to observe those supplemental payments, which may affect the
payment difference between private insurers and FFS.
Methods
To compare prices nationally, we computed the
mean MA, commercial, and Medicare FFS price across all DRGs, medical DRGs, and
surgical DRGs. To measure the amount of price variation across MSAs, we
identified the 20 most common DRGs separately in the MA and commercial samples
and constructed a weighted average of the prices for those DRGs in each MSA for
each sample. The weighted average provides a measure of how prices vary across
MSAs, holding constant the distribution of stays across DRGs.
Results
The average MA price per discharge across all
hospital stays was $10 667 or nearly identical to the average Medicare FFS
price for those stays of $10 716. The MA and FFS price per discharge were
similar, on average, for both surgical and medical stays (Table 1). For those
comparisons, we computed the FFS rate as the base rate plus any additional
payments for DSH and an adjustment for outlier payments but excluded IME
payments. As a sensitivity analysis, we included IME payments in the FFS rates
and found that MA rates were, on average, 5% lower than FFS across all stays
(see Online Appendix Table 3).
Table 1.
Comparison of Mean Medicare Advantage and
Medicare FFS Prices for All Stays, Medical Stays, and Surgical Stays, 2013.
|
All
MS-DRGs
|
Medical
MS-DRGs
|
Surgical
MS-DRGs
|
|
|
Medicare Advantage price
|
$10 667
|
$7281
|
$17 661
|
|
Medicare FFS base price plus DSH
and outliersa
|
$10 716
|
$7236
|
$17 932
|
|
Ratio of Medicare Advantage to
Medicare FFS pricea
|
1.00
|
1.01
|
.98
|
|
Number of stays in analysis
|
593 044
|
399 597
|
193 447
|
|
Number of MSAs in analysis
|
297
|
296
|
296
|
Source. Authors’ analysis of 2013 Health Care Cost
Institute claims data.
Note. The Medicare Advantage sample was limited to adults 65 years or
older. FFS = fee for service; MS-DRG = Medicare severity–diagnosis-related
group; DSH = disproportionate share hospital payments; MSA = metropolitan
statistical area; IME = indirect medical education payments.
aThe estimates of Medicare FFS prices in this
table include the base payment amount plus any additional payments for DSH and
an adjustment to account for outlier payments. For our preferred estimate
comparing Medicare Advantage prices with Medicare FFS prices, we excluded IME
payments from the FFS prices because Medicare makes IME payments directly to
hospitals for Medicare Advantage enrollees. Also, IME payments are excluded in
the calculation of Medicare Advantage benchmarks. The Medicare payment rules
were used to compute the amount that the Medicare FFS program would have paid
for each stay in the Medicare Advantage sample, including the base price and
payments for DSH (but not outlier payments). We estimated the average outlier
payment for admissions in each major category of DRG from a separate analysis
of Medicare claims.
Table 3.
Variation Across Metropolitan Areas in the
Weighted Average Ratio of Commercial Prices and Medicare Advantage Prices to
Medicare FFS Prices for Top 20 DRGs, 2013.
|
Weighted
average ratio of Medicare Advantage prices to Medicare FFS prices for top 20
DRGs
|
Weighted
average ratio of commercial prices to Medicare FFS prices for top 20 DRGs
|
|
|
Percentiles
|
||
|
10th
|
0.98
|
1.44
|
|
25th
|
1.00
|
1.65
|
|
50th
|
1.01
|
1.88
|
|
75th
|
1.03
|
2.16
|
|
90th
|
1.06
|
2.48
|
|
Ratios
|
||
|
10th to median
|
0.97
|
0.77
|
|
90th to median
|
1.05
|
1.32
|
|
75th to 25th
|
1.03
|
1.31
|
|
90th to 10th
|
1.08
|
1.72
|
|
Number of MSAs in analysis
|
196
|
137
|
Source. Authors’ analysis of 2013 Health Care Cost
Institute claims data.
Note. The Medicare Advantage sample was limited to adults 65 years or
older, and the commercial sample excludes maternal stays associated with
childbirth and was limited to adults 18-64 years. The analysis of variation in
Medicare Advantage prices across MSAs was restricted to the MSAs with at least
one discharge in each of the top 20 DRGs in the Medicare Advantage sample. The
analogous restriction was imposed for the analysis of variation in commercial
prices across MSAs. The 20 most common DRGs were determined separately for the
Medicare Advantage and commercial samples. For each MSA, we first computed the
mean ratio of Medicare Advantage prices to Medicare FFS prices for each DRG.
For each MSA, we then computed the weighted average ratio of Medicare Advantage
prices to Medicare FFS prices for the 20 DRGs, where each DRG was weighted by
the share of discharges in our national sample of Medicare Advantage discharges
that were assigned to that DRG. We used the same approach to compute the
weighted average ratio of commercial prices to Medicare FFS prices for each
MSA. Each MSA received an equal weight in the analysis. The Medicare payment
rules were used to compute the amount that the Medicare FFS program would have
paid for each stay in the Medicare Advantage sample and the commercial sample.
For the comparison with commercial prices, the estimates of Medicare FFS prices
include the base payment amount plus any additional payments for IME and DSH.
For the comparison with Medicare Advantage prices, Medicare FFS prices were
estimated in the same manner except that payments for IME were excluded.
Because of data restrictions, the FFS prices were not adjusted to account for
outlier payments. FFS = fee for service; DRG = diagnosis-related group; MSA =
metropolitan statistical area; IME = indirect medical education payments;
DSH=disproportionate share hospital payments.
By contrast, the average commercial price per
discharge across all hospital stays in our sample was $21 433, or 89% higher
than the Medicare FFS price for those stays ($11 354; Table 2). That estimated
FFS rate is slightly higher than the $10 716 reported above because the mix of
hospitals and DRGs differed slightly between the commercial and MA samples, and
we excluded IME payments for the comparison with MA rates. The difference between
the commercial and Medicare FFS prices was similar for surgical and medical
stays. For the above comparisons, the estimates of Medicare FFS rates include
the base rate plus any additional payments for IME and DSH and an adjustment to
account for outlier payments.
Table 2.
Comparison of Mean Commercial and Medicare FFS
Prices for All Stays, Medical Stays, and Surgical Stays, 2013.
|
All
MS-DRGs
|
Medical
MS-DRGs
|
Surgical
MS-DRGs
|
|
|
Commercial price
|
$21 433
|
$13 469
|
$30 880
|
|
Medicare FFS base price plus IME,
DSH, and outliersa
|
$11 354
|
$7 117
|
$16 454
|
|
Ratio of commercial to Medicare
FFS pricea
|
1.89
|
1.89
|
1.88
|
|
Number of stays in analysis
|
620 922
|
336 899
|
284 023
|
|
Number of MSAs in analysis
|
297
|
296
|
297
|
Source. Authors’ analysis of 2013 Health Care Cost
Institute claims data.
Note. The commercial sample excludes maternal stays associated with
childbirth and was limited to adults 18 to 64 years. FFS = fee for service;
MS-DRG = Medicare severity–diagnosis-related group; IME = indirect medical
education payments; DSH = disproportionate share hospital payments;
MSA=metropolitan statistical area.
aThe estimates of Medicare FFS prices in this
table include the base payment amount plus any additional payments for IME and
DSH and an adjustment to account for outlier payments. The Medicare payment
rules were used to compute the amount that the Medicare FFS program would have
paid for each stay in the commercial sample, including the base price and
payments for IME and DSH (but not outlier payments). We estimated the average
outlier payment for admissions in each major category of DRG from a separate
analysis of Medicare claims.
When measured relative to Medicare FFS prices,
MA prices exhibited little variation across MSAs. (The Medicare FFS prices are
adjusted to account for geographic variation in hospitals’ input prices, so by
measuring MA prices relative to Medicare FFS prices, we sought to factor out
those geographic differences in input prices.) The average MA price for the top
20 DRGs was only 6% higher than the average FFS price in the MSA at the 90th
percentile of the distribution and only 2% lower than the average FFS price in
the MSA at the 10th percentile (Table 3). Because of data
restrictions, the FFS prices in Table 3 were not
adjusted to account for outlier payments.
The ratio of commercial to Medicare FFS prices
exhibited much more variation across MSAs than the corresponding ratio for MA
prices. On average, commercial prices were 148% higher than FFS prices in the
MSA at the 90th percentile of the distribution and 44% higher than FFS prices
in the MSA at the 10th percentile.
We also examined the variation of MA and
commercial prices across hospitals within 10 MSAs with the most commercial
discharges for a common surgical DRG (DRG 470, major joint replacement) and a
common medical DRG (DRG 392, gastrointestinal disorders). To limit the
influence of stays with very high or very low payment amounts, we computed the
median payment for each hospital and DRG rather than the mean.
MA prices exhibited little variation across
hospitals in 8 of the 10 MSAs for DRG 470, with most hospitals in those 8 MSAs
having rates close to FFS. But MA rates exhibited greater variation in
Philadelphia and New York (Figure 1, left panel). In
contrast, commercial prices varied greatly across hospitals within MSAs, and price
variation was larger some in MSAs than in others. The commercial rate in 3 of
the 10 MSAs (Houston, New York, and Philadelphia) ranged from below the FFS
rate to more than 3 times that rate (Figure 1, right panel). We
found similar patterns for DRG 392, although there was less commercial price
variation across hospitals within most MSAs than for DRG 470 (Figure 2).
Variation in the ratio
of Medicare Advantage prices to Medicare FFS prices and the ratio of commercial
prices to Medicare FFS prices within metropolitan areas for DRG 470 (major
joint replacement or reattachment of lower extremity without major
complications and comorbidities), 2013.
Source. Authors’ analysis of 2013 Health Care Cost
Institute claims data.
Note. For each MSA, we computed the median ratio
of the Medicare Advantage price to the Medicare FFS price for each hospital,
and we computed the analogous ratio for commercial prices. We restricted the
analysis to hospitals that had at least 5 stays in 2013 in the DRG being
analyzed (we applied that criterion separately for the analysis of Medicare
Advantage prices and commercial prices). The bottom and top edges of the box
for each MSA represent the 25th and 75th percentiles of the price ratio, the
horizontal line inside the box represents the median, the marker inside the box
represents the mean, and the “whiskers” (ie, the endpoints of the lines
extending outside the box) represent the minimum and maximum values—except in
cases when some values are classified as “outliers,” which are shown as circles
beyond the whiskers. Outliers are defined as values that are above the 75th
percentile or below the 25th percentile by at least 1.5 times the
“interquartile range” (which is the difference between the 75th percentile and
the 25th percentile). The Medicare Advantage sample was limited to those 65
years and older, and the commercial sample excludes maternal stays associated
with childbirth and was limited to adults 18 to 64 years. The Medicare payment
rules were used to compute the amount that the Medicare FFS program would have
paid for each stay in the Medicare Advantage sample and the commercial sample.
For the comparison with commercial prices, the estimates of Medicare FFS prices
include the base payment amount plus any additional payments for IME and DSH.
For the comparison with Medicare Advantage prices, Medicare FFS prices were
estimated in the same manner except that payments for IME were excluded.
Because of data restrictions, the FFS prices were not adjusted to account for
outlier payments. FFS = fee for service; DRG = diagnosis-related group; MSA =
metropolitan statistical area; IME = indirect medical education payments; DSH =
disproportionate share hospital payments.
Variation in the ratio
of Medicare Advantage prices to Medicare FFS prices and the ratio of commercial
prices to Medicare FFS prices within metropolitan areas for DRG 392 (esophagitis,
gastroenteritis, and miscellaneous digestive disorders without major
complications and comorbidities), 2013.
Source. Authors’ analysis of 2013 Health Care Cost
Institute claims data.
Note. For each MSA, we computed the median ratio
of the Medicare Advantage price to the Medicare FFS price for each hospital,
and we computed the analogous ratio for commercial prices. We restricted the
analysis to hospitals that had at least 5 stays in 2013 in the DRG being
analyzed (we applied that criterion separately for the analysis of Medicare
Advantage prices and commercial prices). The bottom and top edges of the box
for each MSA represent the 25th and 75th percentiles of the price ratio, the
horizontal line inside the box represents the median, the marker inside the box
represents the mean, and the “whiskers” (ie, the endpoints of the lines
extending outside the box) represent the minimum and maximum values—except in
cases when some values are classified as “outliers,” which are shown as circles
beyond the whiskers. Outliers are defined as values that are above the 75th
percentile or below the 25th percentile by at least 1.5 times the
“interquartile range” (which is the difference between the 75th percentile and
the 25th percentile). The the Medicare Advantage sample was limited to those 65
years and older, and the commercial sample excludes maternal stays associated
with childbirth and was limited to adults 18 to 64 years. The Medicare payment
rules were used to compute the amount that the Medicare FFS program would have
paid for each stay in the Medicare Advantage sample and the commercial sample.
For the comparison with commercial prices, the estimates of Medicare FFS prices
include the base payment amount plus any additional payments for IME and DSH.
For the comparison with Medicare Advantage prices, Medicare FFS prices were
estimated in the same manner except that payments for IME were excluded.
Because of data restrictions, the FFS prices were not adjusted to account for
outlier payments. FFS = fee for service; DRG = diagnosis-related group; MSA =
metropolitan statistical area; DSH = disproportionate share hospital payments;
IME = indirect medical education payments.
Next, we examined whether the prices paid by MA
and commercial plans vary across plan type. The MA beneficiaries in our sample
were about evenly split between being enrolled in a health maintenance
organization (HMO) and preferred provider organization (PPO) plan (about 42%
each), and the remainder were enrolled in point-of-service (POS) (10%) and private
FFS plans (5%). This compares with about 65% of the total MA population
enrolled in an HMO plan and 29% enrolled in a PPO.7 The commercial sample was
predominantly enrolled in POS plans (74%) with a smaller share enrolled in PPO,
HMO, and exclusive provider organization (EPO) plans (11%, 8%, and 7%,
respectively).
We found that the average ratio of MA prices to
FFS prices did not vary across plan types and was about 1.0. By contrast, the
ratio of commercial prices to FFS prices for PPO (1.93) and POS plans (1.90)
were about 10 percentage points higher than in HMO (1.83) and EPO (1.79) plans
(see Online Appendix Table 4).
This might suggest that there are out-of-network commercial claims in PPO and
POS plans where commercial insurers pay hospitals a higher rate relative to
their HMO and EPO plans. However, because there was no out-of-network indicator
in the HCCI data, we are unable to determine the extent of such claims and
hence cannot determine if price differences across product types reflect
differences in use of out-of-network services or differences in in-network
prices across products.
We next examined whether the ratio of MA prices
to FFS prices varied across DRGs to assess whether there are certain DRGs for
which MA plans tend to pay more or less than FFS. We ranked the ratio of MA prices
to FFS prices and adjusted for outlier payments. We found that there were some
DRGs where the average MA price was much higher than FFS and there were some
DRGs where the average MA price was a bit lower than FFS. For example, on
average, MA plans paid 129% more than FFS for rehabilitation stays (DRG 945),
33% more for depressive neuroses (DRG 881), and 27% more for stays related to
psychoses (DRG 885). But MA plans paid an average of 9% less than FFS for stays
related to pathological fractures (DRG 542) and wound debridement and skin
graft (DRG 464) (see Online Appendix Table 5).
These results suggest that there may be certain services where MA plans pay
more than FFS possibly because the FFS rate for those services are too low, but
there may be other services where MA plans pay less than FFS possibly because
the FFS rate for those DRGs are too high.
We also examined whether the prices paid by MA
and commercial plans vary with hospital market concentration, as measured by
the Herfindahl-Hirschman index (HHI). We found that the ratio of MA prices to
Medicare FFS prices was not correlated with hospital market concentration
(correlation = −.04; P = .06), but the ratio of commercial
prices to Medicare FFS prices had a small positive and highly significant
correlation with hospital market concentration (correlation = 0.19; P <
.001) (see Online Appendix Figures 1 and 2).
Thus, although an increase in the concentration of the hospital industry is
associated with higher commercial prices for hospital care, no such association
exists for MA prices. However, we acknowledge that MSAs may not be the best
measure to define a hospital market. Because the objective of our study was to
present new descriptive information on the hospital prices paid by MA plans, we
did not use a more sophisticated measure to construct hospital markets.
In addition, we examined whether the prices paid
by MA plans vary with the HCCI insurers’ combined market share. We found a
small and negative correlation between the ratio of MA prices to FFS prices and
the HCCI insurers’ combined market share for MA enrollees (−0.16; P =
.025) (see Online Appendix Figure 3).
This suggests that insurer market share may be associated with slightly lower
MA prices for hospital services.
We also found that the ratio of MA prices to
Medicare FFS prices was not correlated with the share of beneficiaries enrolled
in the MA program (see Online Appendix Figure 4).
Information on that relationship is important for evaluating policies that
would substantially increase the share of beneficiaries enrolled in MA plans.
Last, we examined whether the hospital prices of
MA plans (measured relative to Medicare FFS prices) are correlated with MA
benchmarks. Industry sources report that one reason hospitals are willing to
accept payment rates near FFS rates from MA plans is that those plans are under
a budget constraint determined in large part by the payments they receive from
the Medicare program.4 That information suggests
hospitals might try to obtain higher prices in areas where MA benchmarks are
high relative to local per capita FFS spending. We examined the correlation
between the MSA-level index of the average ratio of MA prices to FFS prices for
the top 20 DRGs and the ratio of the average MA benchmark to local per capita
FFS spending and found the correlation was near zero (Online Appendix Figure 5).
This finding suggests that variation in payments from the Medicare program to
MA plans bears little relationship to the differences in the amounts that MA
plans pay hospitals.
Discussion
Our finding that MA prices for hospital stays
are similar to Medicare FFS prices is generally consistent with reports from
industry sources. The small difference between our results and those reports
(which indicated that MA prices for hospital services are equal to or slightly
higher than Medicare FFS prices) might be due to differences in how the
industry sources calculated FFS prices for such comparisons. In addition, the
hospital prices paid by the MA plans offered by the 3 large insurers included
in our analysis might differ slightly from the prices paid by other insurers.
Our results are generally consistent with a recent study by Baker et al who
used 2012 claims data from HCCI and found that hospital payments by MA plans
were much more similar to Medicare FFS levels than they were to commercial
payment levels, although we used slightly different methods to calculate FFS
prices.6
Three reasons cited by industry sources may
explain why hospitals are willing to accept substantially lower payments for MA
plans than for commercial plans.4 The first reason is a provision
of federal law (Section 1866 of the Social Security Act and implementing
regulation 42 CFR 422.214) that requires providers to accept Medicare FFS rates
as payment in full for out-of-network services received by MA enrollees. In
contrast, hospitals that are not in a commercial plan’s network typically
charge much higher prices when they treat the plan’s patients—this gives
hospitals considerable negotiating leverage with commercial insurers. For
example, “must-have” hospitals (such as large academic medical centers and
other hospitals with excellent reputations) can threaten commercial insurers
that they will not join their networks unless they receive a sufficiently high
price. But those same hospitals have much less leverage with MA plans (because
their alternative price is the Medicare FFS price). This is a possible reason
why we observe a higher ratio of commercial prices to FFS prices in PPO and POS
plans relative to HMO and EPO plans, but we do not observe that same pattern
across plan types in MA.
The second reason cited by industry sources is
that hospitals recognize that they are constrained in how much they can charge
MA plans if those plans are to remain competitive with the FFS program. The
benchmarks for determining federal payments to MA plans are tied to local per
capita FFS spending. In 2013, those benchmarks were an average of 10% higher
than per capita FFS spending in MA plans’ service areas, although the ratio of
benchmarks to FFS spending varied geographically.10 Third, hospitals and insurers
may regard the MA program as part of the larger Medicare program and therefore
view Medicare FFS rates as establishing pricing norms for MA.
Our findings have important implications for
proposals to convert Medicare to a “premium support” system. Under such a
system, beneficiaries would obtain their Medicare coverage from one of a number
of competing plans, and the amount that the federal government contributed
toward each beneficiary’s coverage would be determined in advance and would not
depend on the plan chosen. Beneficiaries would face a strong financial
incentive to choose a lower cost plan, because their premium would depend on
the difference between the amount of the federal contribution and the premium
charged by their plan. Our findings suggest that if the Medicare FFS program
was not kept as a competing plan in such a system, the hospital prices paid by
the participating private plans under a premium support system would probably
be much higher than the prices that would have been paid by Medicare FFS. Such
an outcome would also be likely if the Medicare FFS program was retained as a
competing plan in the premium support system but the new system did not include
the provision of current federal law that limits the amount out-of-network
hospitals can charge private plans when treating their Medicare enrollees. In
either case, if the federal contribution was determined from the bids of
competing plans, those higher hospital prices could substantially reduce the
federal savings from such a system (and perhaps even increase federal
spending). Our finding that the hospital prices paid by MA plans (when measured
relative to Medicare FFS prices) are not correlated with the share of
beneficiaries enrolled in the MA program will be useful for future analyses of
premium support proposals. In a 2013 analysis of such proposals—and with no
data on MA plans’ provider payment rates—the Congressional Budget Office
expected that a significant reduction in the share of beneficiaries enrolled in
the FFS program would weaken the relationship between the provider prices of
the Medicare FFS program and the provider prices of private plans, causing the
latter to rise and thus raising the costs of those plans.5 Our analysis suggests that such
an effect is not likely.
Consistent with previous studies, we found
hospital prices for commercial plans to be substantially higher than Medicare
FFS prices. When measured relative to Medicare FFS prices, commercial prices
varied greatly across MSAs and across hospitals within MSAs, whereas MA prices
varied much less. However, because we are unable to identify out-of-network
claims in our data, this might overstate the level and extent of variation of
commercial prices relative to MA prices.
Supplemental Material
OnlineAppendix_Tables_and_Figures_clean
– Supplemental material for How Do the Hospital Prices Paid by Medicare
Advantage Plans and Commercial Plans Compare With Medicare Fee-for-Service
Prices?
Click here for additional data file.(378K,
pdf)
Supplemental material,
OnlineAppendix_Tables_and_Figures_clean for How Do the Hospital Prices Paid by
Medicare Advantage Plans and Commercial Plans Compare With Medicare
Fee-for-Service Prices? by Jared Lane K. Maeda and Lyle Nelson in INQUIRY: The
Journal of Health Care Organization, Provision, and Financing
Footnotes
Authors’ Note: This article has not been subject to
Congressional Budget Office (CBO)’s regular review and editing process. The
views expressed here should not be interpreted as CBO’s. The results of the
research described in this article were previously presented at a poster
session of the 2017 AcademyHealth Annual Research Meeting in New Orleans, LA.
Declaration of Conflicting Interests: The author(s) declared no potential
conflicts of interest with respect to the research, authorship, and/or
publication of this article.
Funding: The author(s) received no financial support for the
research, authorship, and/or publication of this article.
ORCID iD: Jared Lane K. Maeda https://orcid.org/0000-0001-9613-7623
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