Prices Paid to Hospitals by Private Health Plans: Findings from Round 5.1 of an Employer-Led Transparency Initiative

Short abstract

Because U.S. employer-sponsored spending comes from employee wages and benefits, employers have a fiduciary responsibility to administer benefits in the interest of participants. The lack of transparency of prices in the health care market limits employers' ability to knowledgeably develop or implement benefit design decisions. This study is designed to allow readers to easily compare hospital prices using a single metric.

Abstract

Because employer-sponsored spending comes from employee wages and benefits, employers have a fiduciary responsibility to administer benefits in the interest of participants. The lack of transparency of prices in the health care market limits employers' ability to knowledgeably develop or implement benefit design decisions. This study uses 2020–2022 medical claims data from a large population of privately insured individuals, including hospitals and other facilities from across the United States, to allow an easy comparison of hospital prices. An important innovation of this study is that hospitals and hospital systems (hospitals under joint ownership) are identified by name, which is usually not allowed under data use agreements.

Background

Employers play a critical role in providing health benefits to more than half of the American population, thereby financing a significant portion of the U.S. health care system. Employers not only pay for health benefits for employees, but they also select which health plans to offer employees. To administer and design these employee benefits, employers often rely on third-party administrators, brokers, and consultants but usually have little insight into how their health benefit costs compare with what other employers are paying.

Over the past decade, nominal total premiums for employer-sponsored insurance plans have increased by approximately 50 percent. The total premium for a family coverage employer-sponsored insurance plan increased from $16,350 in 2013 to nearly $24,000 in 2023 (Claxton et al., 2023). One of the largest contributors to spending increases among privately insured populations is hospital price increases (Cooper et al., 2019a). In 2022, spending on hospital services accounted for 42 percent of total personal health care spending for privately insured individuals—approximately $486 billion (Centers for Medicare & Medicaid Services, 2023). Although many studies examine the variation in prices paid by private health insurers to providers, transparent information on hospital-specific and other provider-specific prices is not commonly available to those who purchase health benefits.

A defining characteristic of the U.S. health care system is the wide variation in prices both within and across markets (Anderson, Hussey, and Petrosyan, 2019; Anderson et al., 2003; Cooper et al., 2019b). Although some price transparency programs and tools have increased the availability of information about procedure-level prices to patients, employers do not commonly have practically useful information about the prices negotiated on their behalf—for example, the aggregate price levels of competing hospitals. Since 2021, federal policies have required hospitals to post prices for common services, through requirements that hospitals post prices for at least 300 shoppable services and that insurers post their full set of negotiated rates (U.S. Department of the Treasury, U.S. Department of Labor, and U.S. Department of Health and Human Services, 2020). Although illustrative, publicly posted price data have significant gaps in reporting. Many hospitals have not complied with these policies, and insurer-posted data contain duplicative information that often makes file sizes so large that they are difficult to use (McGinty, Mathews, and Evans, 2021; Nikpay et al., 2021; Whaley, 2023).

Goals and Approach

We designed this study to help fill this knowledge gap. Because hospitals account for the largest share of health care spending, this study focuses primarily on price variations in hospital services and for providers that frequently compete with hospitals for outpatient care. Employers can use this study to become better-informed purchasers of health benefits and to evaluate whether the prices negotiated on their behalf align with other employers' prices paid to the same providers or to alternative providers within their markets. With this information, weighed together with quality and convenience information, employers can independently assess whether the prices they pay are reasonable. For broader policy and research audiences, the information in this study also highlights the levels and variations in hospital prices paid by employers and private insurers.

To shed light on these prices, we collected and analyzed claims data, including provider identifiers and allowed amounts, for enrollees in employer-sponsored health benefit plans from three types of data sources:

• self-insured employers that chose to participate in the study and that provided claims data for their enrollees

• state-based all-payer claims databases (APCDs) from Arkansas, Colorado, Connecticut, Delaware, Maine, Minnesota, New Hampshire, Oregon, Rhode Island, Utah, Vermont, and Washington

• health plans that chose to participate.

Together, these data sources include hospital and associated spending from more than 4,000 hospitals in all 50 states (except Maryland) from 2020 to 2022. At a national level, the final sample represents approximately 6 percent of U.S. commercial insurance hospital spending. We include facility and professional claims for inpatient and outpatient services provided by both Medicare-certified short-stay hospitals and other facility types, including ambulatory surgical centers (ASCs), which are free-standing facilities that perform outpatient surgical services. For each private claim, we reprice the service (i.e., we estimate what Medicare would have paid for that same service at that same time and location) using Medicare's grouping and pricing algorithms, which combine claim-level line items into procedural groupings. We report price levels and trends for states, hospitals, hospital systems (i.e., groups of hospitals under joint ownership), and other provider types (e.g., ASCs), all of which we identify by name.

We calculate and report the following two types of hospital prices:

• standardized prices, meaning the average allowed amount per standardized unit of service, where services are standardized using Medicare's relative weights

• relative prices, meaning the actual private insurer–allowed amount divided by the Medicare-allowed amount for the same services at the same hospital.

Relative prices have the advantage of incorporating all of Medicare's adjustments for case mix, wages, and inflation. Furthermore, relative prices are comparable across service lines (e.g., inpatient versus outpatient). Medicare prices are designed to provide modest profit margins for efficient hospitals (Medicare Payment Advisory Commission, 2022). Relative price comparisons also allow for an easier price comparison across hospitals and geographies because we are comparing intensity-weighted price ratios relative to Medicare rather than absolute price differences for specific services. We use Medicare prices as a common benchmark to compare many kinds of commercial prices, but we do not propose any percentage of Medicare price that employers should be paying hospitals and other health care providers—instead, we focus on disclosing variations in private prices so that employers and others can assess value for themselves.

Additional Price Measures

In addition to hospital and health system–specific price measures, we include two price measures that were not analyzed in previous rounds of this study. First, we compare prices for common outpatient surgeries performed in ASCs with prices for hospital outpatient departments (HOPDs), which are outpatient departments connected to a hospital. ASCs and HOPDs frequently compete for outpatient procedures, but price differences between these two organizations have neither been publicly available nor well understood. Second, a growing concern for employers is high and rising prices for specialty prescription drugs—particularly those that are administered by clinicians (Schilling, undated). In this study, we compare prices for drugs administered in hospital settings with those that are administered in physician offices.

Key Findings

This study's key findings are as follows:

• In 2022, states with commercial prices averaging below 200 percent of Medicare prices were Arkansas, Massachusetts, Michigan, Mississippi and Rhode Island. Washington's relative prices appeared significantly lower in the previous round of this study (Round 4, 2018–2020 data), mainly because some Medicare Advantage claims were erroneously included in that round from Washington's APCD dataset. That error has been corrected in this study. States with commercial prices averaging above 300 percent of Medicare were California, Delaware, Florida, Georgia, New York, South Carolina, West Virginia, and Wisconsin.

• In 2022, across all hospital inpatient and outpatient services (including both facility and related professional claims), employers and private insurers paid, on average, 254 percent of what Medicare would have paid for the same services at the same facilities. That year, relative prices for inpatient hospital facility services averaged 254 percent of Medicare prices, outpatient hospital facility services averaged 279 percent, and all associated professional services (inpatient plus outpatient) averaged 184 percent of what Medicare would have paid for the same services.

• Changes in the composition of data contributors can introduce changes into the study sample and lead to differences in prices across the five study rounds. However, state-level median prices have remained stable across study rounds—254 percent of Medicare prices in 2018 (Round 3, 2016–2018 data), 246 percent in 2020 (Round 4), and 253 percent in 2022 (Round 5.1—the current study, 2020–2022 data).

• In 2022, prices for common outpatient services performed in ASCs averaged 170 percent of Medicare prices but, because of differences in Medicare payment models between ASCs and HOPDs, would have averaged approximately 107 percent of Medicare prices if paid using Medicare payment rates for HOPDs.

• Weighting each state's prices equally, commercial insurance prices for select administered drugs received in a hospital setting averaged 281 percent of the average sales price (ASP) compared with 106 percent of ASP paid by Medicare.

• Very little variation in prices is explained by each hospital's share of patients covered by Medicare or Medicaid, although a larger portion of price variation is explained by hospital market power.

Implications

Because employer-sponsored health care spending is part of employee wages and benefits, employers have a fiduciary responsibility to administer benefits “solely in the interest of participants and beneficiaries” (U.S. Department of Labor, undated). Employers and policymakers are unable to fulfill this obligation to their workforce without transparent and usable price transparency data. For many employers, the prices they and their employees pay for hospital care may represent the value (e.g., quality of care, access to specialty providers, breadth of network options) delivered by hospitals. Employers that believe that the prices they pay exceed the value they receive may wish to use these data and other information to negotiate lower health care prices. For those employers, negotiating prices based on contextualized data presents a practical way to reduce health care spending. Where quality and convenience are comparable, employers can use network and benefit design approaches to move patient volume away from higher-priced, lower-value hospitals and hospital systems and toward lower-priced, higher-value providers. Employers can also use this information to reformulate how contracts are negotiated on their behalf.

These types of changes are not possible without easily accessible, usable, transparent information on the prices paid to providers. However, price transparency alone will not lead to changes if employers do not or cannot act on price information. In some cases, employers might need state or federal policy interventions to rebalance negotiating leverage between hospitals and their health plans. Such interventions could include addressing noncompetitive health care markets, placing limits on payments for out-of-network hospital care, or allowing employers to buy into Medicare or another public option that pays providers the prices that are some multiple of what Medicare has set.

This research was funded by the Robert Wood Johnson Foundation and participating employers and was carried out within the Payment, Cost, and Coverage Program in RAND Health Care and in collaboration with the Employers' Forum of Indiana (EFI).