Prices Paid to Hospitals by Private Health Plans Are High Relative to Medicare and Vary Widely

Short abstract

Based on all hospitals analyzed in this study, RAND Corporation researchers found that the prices paid to hospitals by private employer-sponsored health plans rose from 236 percent of Medicare reimbursement rates in 2015 to 241 percent in 2017.

Abstract

Large price discrepancies exist between what private health plans pay for hospital services and what Medicare pays. RAND Corporation researchers used data from three sources—self-insured employers, state-based all-payer claims databases, and health plans—to assess $13 billion in hospital spending in terms of hospital price levels, variation, and trends from 2015 through 2017 in 25 states. In this study, prices reflect the negotiated allowed amount paid per service, including amounts from both the health plan and the patient, with adjustments for the intensity of services provided. These negotiated prices are then compared with Medicare reimbursement rates for the same procedures and facilities to determine relative prices.

Key audiences for this study are (1) self-insured employers that have participated in the study and that are assessing the reasonableness of the prices they are paying for hospital care, (2) other employers that are struggling with high and rising health care costs and that want to better understand patterns and trends in hospital prices, and (3) policymakers and researchers who are concerned with hospital pricing and price transparency. Employers can use this study to become better-informed purchasers, and this report illustrates for policymakers that it is feasible and worthwhile to use claims data from private health plans to measure and compare hospital prices at a high level of detail.

This is the first broad-based study that reports prices paid by private health plans to hospitals identified by name and to groups of hospitals under joint ownership (hospital systems) identified by name.

Background, Goals, and Approach

Most Americans receive insurance coverage through employer-sponsored private health plans. Employers play an important role in the U.S. health care system both in financing health care spending and in selecting health plans to offer to their employees. Spending on hospital services accounts for 44 percent of total personal health care spending for the privately insured, and hospital price increases are key drivers of recent growth in spending per capita among the privately insured. Employers, however, generally lack useful information about the prices their health plans are paying to hospitals.

The goals for this study are

1. to provide a detailed hospital price report that is designed to help employers become better-informed purchasers and stronger advocates on behalf of their employees

2. to illustrate—for policymakers, employers who participated in the study, and other employers and employer groups nationwide—that it is feasible and worthwhile to use claims data from private health plans to measure and compare hospital prices at a high level of detail: facility by facility and service line by service line.

Our approach was to gather claims data, including provider identifiers and allowed amounts, for enrollees in employer-sponsored health benefits 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 Colorado and New Hampshire

• health plans that chose to participate.

Together, those data sources include roughly 4 million covered lives that received hospital services from 1,598 hospitals in 25 states (Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Missouri, Montana, New Hampshire, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Vermont, Washington, Wisconsin, and Wyoming). The analysis focuses on 2015 through 2017 and includes only facility claims for inpatient and outpatient services provided by Medicare-certified short-stay hospitals. For each private claim, we reprice the service using Medicare's grouping and pricing algorithms, and we report price levels and trends for states and for hospitals and hospital systems (i.e., groups of hospitals under joint ownership) identified by name.

We calculate and report two types of hospital prices:

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

• relative prices, meaning the ratio of the actual private allowed amount divided by the Medicare allowed amount for the same services provided by the same hospital.

Relative prices have the advantage of incorporating all of Medicare's adjustments for case mix, wages, and inflation, and they are comparable across service lines (e.g., inpatient versus outpatient).

The key limitation is that the claims data included in the study represent only a small share of the entire population of privately insured patients. Therefore, prices could be calculated and reported for only around one-third of U.S. hospitals and, for many of those hospitals, only their outpatient prices could be reported. The prices reported may not necessarily reflect a hospital's price for all private health plans. The analysis also includes only facility claims and does not include professional claims from physicians or claims for prescription drugs.

Key Findings

Relative prices, including all hospitals and states in the analysis, rose from 236 percent of Medicare prices in 2015 to 241 percent of Medicare prices in 2017. Relative prices varied twofold among states. Some states (Michigan, Pennsylvania, New York, and Kentucky) had relative prices in the 150 to 200 percent range of Medicare rates, while other states (Colorado, Montana, Wisconsin, Maine, Wyoming, and Indiana) had relative prices in the 250- to 300-plus percent range of Medicare rates. Relative prices increased rapidly from 2015 to 2017 in Colorado and Indiana while falling in Michigan over the same period. Prices varied nearly threefold among hospital systems, ranging from 150 percent of Medicare rates at the low end to 350 to 400-plus percent at the high end.

Relative prices for hospital outpatient services were 293 percent of Medicare rates on average, far higher than the average relative price for inpatient care (204 percent of Medicare). However, eight states—Michigan, New York, Tennessee, Massachusetts, Louisiana, New Hampshire, Montana, and Maine—stand out as exceptions to this general finding, with relative prices that are roughly equal for inpatient and outpatient services.

Implications

Widely varying prices suggest that employers have opportunities to redesign their health benefits to better align hospital prices with the value of care provided. Employers can exert pressure on their health plans and hospitals to shift from discounted charge contracts to contracts based on a multiple of Medicare or other prospective case rates. Discounted-charge contracts are relatively simple and have historically been common, but they allow wide and unwarranted variation in prices, and they leave employers and their plans vulnerable to aggressive inflation of charges by some hospitals. Employers can also use network and benefit design to move patient volume away from high-priced, low-value hospitals and hospital systems.

Employers can encourage expanded price transparency by participating in existing state-based APCDs and promoting development of new APCDs. But transparency by itself is likely insufficient, and employers may need state or federal policy interventions to rebalance negotiating leverage between hospitals and employer health plans. Such interventions could include placing limits on payments for out-of-network hospital care or applying insurance benefit design innovations to target high prices paid to providers and allowing employers to buy into Medicare or another public option that pays providers prices based on Medicare rates.