Prices Paid to Hospitals by Private Health Plans: Findings from Round 4 of an Employer-Led Transparency Initiative

Short 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 the ability of employers to knowledgeably develop or implement benefit design decisions. This article is designed to allow an easy comparison of 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 the ability of employers to knowledgeably develop or implement benefit design decisions. This study uses medical claims data from a large population of privately insured individuals, including hospitals and other facilities from across the United States, and allows an easy comparison of hospital prices using a single metric. An important innovation of this study is that our data use agreements allow reporting on prices paid to hospitals and hospital systems (hospitals under joint ownership) identified by name.

Background, Goals, and Approach

Relative to other countries, a defining characteristic of the U.S. health care system is the wide variation in prices both within and across markets (Anderson et al., 2003; Anderson, Hussey, and Petrosyan, 2019; Cooper et al., 2019b). Driving this variation, and the largest source of insurance coverage in the United States, is insurance provided through an employer or a union in the form of employer-sponsored health insurance. 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 their employees. Employers fund health care costs out of worker wages and other benefits. In 2019, spending on hospital services accounted for 37 percent of total personal health care spending for the privately insured, or approximately $434 billion. Hospital price increases are key drivers of growth in per capita spending among the privately insured (Cooper et al., 2019a). Several studies have highlighted variations in private health insurance prices, but information on provider prices in this market is not commonly available.

To address price variation, several initiatives have sought to increase the transparency of provider prices. Although price transparency programs and tools have increased the availability of information about procedure-level prices available to patients, employers do not commonly have usable information about the prices negotiated on their behalf—for example, the aggregate price levels of competing hospitals. Beginning in 2021, federal policies have required hospitals to post prices for common services. Although illustrative, publicly posted price data contain gaps in reporting, and many hospitals have not complied with the policy (McGinty, Mathews, and Evans, 2021; Nikpay et al., 2021).

This study is designed to help fill this knowledge gap. Employers can use this study to become better-informed purchasers of health benefits. For broader policy and research audiences, the information in this study also highlights the levels and variation in hospital prices paid by employers and private insurers.

To accomplish these goals, we compiled claims data, including provider identifiers and allowed amounts (amount paid to a health care provider per service, including amounts paid by the health plan and any amounts due from the patient, such as deductibles, copayments, and coinsurance), for enrollees in employer-sponsored health benefits from the following 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 from Arkansas, Delaware, Colorado, Connecticut, Maine, New Hampshire, Oregon, Rhode Island, Utah, Vermont, and Washington

• health plans that chose to participate.

These data sources include hospital and associated spending from more than 4,000 hospitals in all states from 2018 to 2020. We include facility and professional claims for inpatient and outpatient services provided by both Medicare-certified short-stay hospitals and other facility types, including over 4,000 ambulatory surgical centers (ASCs), which are free-standing facilities that perform outpatient surgical services. For each private claim, we reprice the service using Medicare's grouping and pricing algorithms. We report price levels and trends for states, hospitals, hospital systems (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 ratio of the actual private insurer–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 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 because we are comparing intensity-weighted price ratios relative to Medicare rather than absolute price differences for specific services. Importantly, we are using Medicare prices as a common benchmark to compare commercial prices. This study does not propose a percentage of Medicare price that employers should be paying hospitals and other health care providers but instead focuses on disclosing variations in private prices.

This study is designed to provide a level of transparency that allows employers to compare prices between hospitals and to consider whether the prices they are paying are appropriate. Because employer payments to hospitals are a key driver of employers’ health care spending, making these prices accessible and transparent can help employers and policymakers design appropriate policies to address rising health care costs. Employers can use this information, along with knowledge of their employee population and other market-specific information, to determine whether the relative prices that they are paying are appropriate.

Outpatient Prices for Nonhospital Services

Many services can be performed in both hospital and nonhospital settings. Although existing research finds that, on average, nonhospital sites of care tend to be lower-priced than hospital-based sites of care, little evidence exists on prices for individual facilities. We compare prices for common outpatient surgeries performed in ASCs, with hospital outpatient departments (HOPDs), which are outpatient surgical centers connected to a hospital.

Hospital Prices During the Pandemic

Hospitals and health professionals have played critical roles during the coronavirus disease 2019 (COVID-19) pandemic. To combat the pandemic, new tests and treatments have become widespread but little information exists on prices for these services. In this report, we also compare prices relative to Medicare for common COVID-19 hospitalizations. Our intent is to add transparency to a sector that accounts for nearly 20 percent of the U.S. economy. The pandemic has impacted employers and workers. Because rising health care costs are paid directly from worker wages and other benefits, ignoring health care prices places downward pressure on health care affordability for employees and their families and reduces employee take-home pay.

Key Findings

This report's key findings are as follows:

• Some states (Hawaii, Arkansas, and Washington) had relative prices below 175 percent of Medicare prices, while other states (Florida, West Virginia, and South Carolina) had relative prices that were at or above 310 percent of Medicare prices.

• In 2020, across all hospital inpatient and outpatient services (including both facility and related professional charges), employers and private insurers paid 224 percent of what Medicare would have paid for the same services at the same facilities. This percentage remained relatively stable over the study period; it was 222 percent of Medicare prices in 2018 and 235 percent in 2019. In 2020, relative prices for hospital facility-only services averaged 235 percent, while associated professional services averaged 163 percent of what Medicare would have paid for the same services.

• The 224 percent total for 2020 is a reduction from the 247 percent figure reported for 2018 in the previous study. This reduction is the result of a substantial increase in the volume of claims from states with prices below the previous mean price. Despite this change in the claims-weighted study average, the median state prices changed very little: to 248 percent in 2020 from 254 percent in 2018 in the previous round.

• Among the common data contributors in both this round and the previous round, 2020 prices averaged 252 percent of Medicare, which is similar to the 247 percent relative price reported in the previous round for 2018.

• Prices for common outpatient services performed in ASCs averaged 162 percent of Medicare payments, but if paid using Medicare, payment rates for HOPDs would have averaged 117 percent of Medicare.

• Although relative prices are lower for ASC claims priced according to HOPD rules, HOPD prices are higher than ASC prices. Among a set of five procedures commonly performed in both ASCs and HOPDs, the average HOPD price was $6,169 and the average ASC price was $2,404.

• 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.

• Prices for COVID-19 hospitalization were similar to prices for overall inpatient admissions and averaged 241 percent of Medicare.

Implications

Because employer-sponsored spending comes from 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, 2022). Employers and policymakers are unable to fulfill this obligation to their workforce without information on prices. For many employers, the prices they and their employees pay for hospital care might represent the value (e.g., quality of care, access to specialty providers, or breadth of network options) delivered by hospitals. Other employers might wish to use this and other information to reduce health care spending. For those employers, negotiating prices based on contextualized data presents a tangible 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 usable transparent prices paid to providers. However, price transparency alone will not lead to changes if employers do not 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 prices based on Medicare.