Private plans pay 247% more for hospital services than Medicare does, study finds

A new study puts a number to just how much more private health plans are paying for hospital services compared to Medicare.

Researchers at RAND Corporation analyzed claims data from 2016 to 2018 representing $33.8 billion in spending at 3,112 hospitals across all 50 states except Maryland and found private insurers, on average, paid prices 247% higher for hospital care than Medicare.

Prices varied widely between states, according to the study, with some, such as Arkansas, Michigan and Rhode Island, with prices 200% higher than Medicare. Others, such as Florida, Tennessee and Alaska, saw prices that were more than 325% higher than Medicare rates.

Christopher Whaley, the study’s lead author and a policy researcher at RAND, told Fierce Healthcare that employers lack easy access to data on healthcare pricing despite the fact that it's typically their largest expense after wages.

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"There’s just been this kind of ecosystem that’s evolved around the employer market that’s made it hard for employers to get information about prices," Whaley said.

Employers have been largely hands-off when it comes to demanding price transparency for healthcare costs; however, that's starting to change as prices continue to go up, he said.

The study also found that spending on hospital services accounted for 44% of overall personal healthcare spending among those with private plans. Prices for such services have been a key driver in the increasing per capita spend in the employer market.

Whaley said comparing pricing between hospitals gives a strong picture of the full extent of variation. For example, for labor and delivery services, the lowest-price hospital charges 83% of Medicare rates, or about $7,700.

At the high end, however, there is a hospital that is charging 377% of Medicare rates, or about $52,700, Whaley said.

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The report argues price transparency efforts have put a spotlight on the extent of the pricing variation but have done little to actually curb it. The researchers say rethinking traditional pricing approaches altogether, through a reference-pricing model, for example, would instead be necessary to make a dent in prices.

Reference-based pricing is not popular with providers as it would cut down on reimbursements; their pushback on such a model is central to the back and forth over a plan to address surprise medical billing.

But, Whaley said, some providers are seeing the opportunity in new arrangements. Henry Ford Health System's direct contracting agreement with General Motors offers mutual benefits, as the health system gains access to a large pool of customers while GM covers services as a discounted rate.

"It may not be a particularly popular option with many providers, but it is popular for people paying the bills," Whaley said. "And so, that being said, there are actually a fair number of providers who see the increased focus on prices from employers as a business opportunity."