Analysis: Comparing commercial hospital rates to Medicare is inappropriate

According to the New York Times, a recent RAND study found that, “Across the nation, hospitals treating patients with private health insurance were paid overall 2.4 times the Medicare rates in 2017, according to the RAND analysis. The difference was largest for outpatient care, where private prices were almost triple what Medicare would have paid. The RAND researchers gathered information on 1,598 hospitals, about a third of the total number in the United States, using 4 million insurance claims from 2015 through 2017, a fraction of the total filed nationwide. The information was collected from employers, some insurers and state agencies.

“The study did not identify the employers, but researchers named individual hospitals through the information they obtained, a rare public listing. The claims included a variety of services, ranging from a hospital stay for heart surgery to an outpatient visit to the emergency room. The researchers compared the claim as it would have been reimbursed by Medicare and what the private insurer paid to determine the overall difference in prices. The hospitals did not see the study before it was released. Many businesses that contract with insurance companies have no idea what their insurers are paying individual hospitals in their plan’s network.

“The study’s author, Chapin White, commented ‘The insurers don’t have a strong incentive to demand the lowest prices because many, working for employers that are self-insured, are ‘literally spending someone else’s money,’ he said. ‘Insurers are also frequently paid based on how much the employer spends. They take in more revenue when the employer spends more.’

“One outlier was Michigan, where private prices run about 1.5 times Medicare rates. The auto industry and unions that represent autoworkers have put pressure on the major Blue Cross plan to hold hospital prices down.”

Takeaway

No. 1, there might be a reasonable conversation to be had related to the variation in commercial payment rates within a market if the hospitals have about the same case mix and uncompensated care burden.

However, comparing commercial rates to Medicare rates is inappropriate. Medicare does not cover the cost to provide care. 

According to MedPAC, in 2017 the average hospital’s Medicare margin was -9.9% (down from -9.7% in 2016, which is the continuation of a trend). Even MedPAC’s grouping of relatively “efficient” providers has in recent years experienced negative margins (-2% in 2017). The decline in margins from 2016 to 2017 was primarily because of a decline in supplemental payments for uncompensated care and health information technology. In 2019 MedPAC projects Medicare margins will sink to -11%.

No. 2, it’s interesting the study’s author has, rightfully, commented on the large portion of employers who abdicate responsibility for overall healthcare costs and negotiated rates to third parties who may not have aligned incentives. Walmart (as described in a separate post this week) and some auto unions are examples of what happens when employers become engaged and are willing to make hard tradeoffs. My guess is you would see within market price variation decrease and quality improve if more employers were willing to move their employees to narrow network or exclusive provider plans. However, few employers are willing to make the same hard choices with the suppliers of their employees’ healthcare as they are with any other input they purchase.

No. 3, I wouldn’t be surprised to see the administration cite this study to support their position that negotiated rates be publicly posted.