September 21, 2020 Read Advisory Board's take: 2 reasons you can't ignore this study

Employer-sponsored private health plans on average in 2018 paid hospitals 247% of the amount Medicare paid for the same health care services, according to a new study from RAND Corporation.

Report details

For the study, RAND researchers assessed data from self-insured employers, six state databases for all-payer claims, and claims voluntarily submitted by health plans to compare how much Medicare and private insurers paid hospitals for health care services between 2016 and 2018.

According to the researchers, the data included a total of $33.8 billion in spending from 3,112 hospitals in the District of Columbia and every state except for Maryland, since Maryland sets its own uniform, all-payer hospital rates.

Those totals mark an increase in scope from RAND's two previous iterations of the report, the first of which focused solely on Indiana and the second of which included just 25 states and the District of Columbia. In addition, the latest edition includes physicians' professional fees, rather than focusing solely on hospitals' facility fees.

Findings

Overall, the researchers found that private insurers on average paid 247% of Medicare's rates for the same health care services in 2018, up from 224% in 2016 and 230% in 2017. According to the study, had private insurers paid Medicare rates between 2016 and 2018, they would have saved $19.7 billion.

Private insurers on average paid 267% of Medicare's rates for outpatient services and 231% of Medicare's rates for inpatient services. The averages also varied by location; in six of the states studied, for instance, private insurers paid at least three times Medicare's rates for both inpatient and outpatient care.

Overall, hospitals in West Virginia had the highest relative rates at 349.2% of Medicare rates, while those in Arkansas had the lowest, at 186.1% of Medicare rates.

The researchers also found significant disparities between hospitals, and even within the same hospital system. At the high end, one health care system received 401.3% of Medicare's rates, while at the low end a system received just 117.7% of Medicare's rates. Similarly, within just one health system, one hospital received more than triple Medicare's rates from private insurers, while another received only about twice Medicare's rates.  

RAND researchers also found that higher reimbursements from employer-based plans correlated with better CMS star ratings. Among hospitals with rates at least 2.5 times that of Medicare, 20% received five-star ratings, while among hospitals with rates 1.5 times Medicare or lower, just 2% received five stars.

However, among the 71% of hospitals that had Leapfrog scores, the researchers found no difference in safety grades between hospitals that received higher and lower reimbursements from employer-based plans.

Comments

Christopher Whaley, policy researcher at RAND and lead author on the study, said it's not surprising that private insurers pay more for care than the relatively low rates set by Medicare and Medicaid. But he said the study found little evidence that the reimbursement difference is driven by "cost-shifting," or shifting the cost of caring for patients with government-sponsored insurance onto private insurers.

According to Whaley, if cost-shifting were the main driver of differences in reimbursements rates, he would have expected to find that facilities with higher numbers of Medicare and Medicaid patients receive higher commercial reimbursements—but the report found no such correlation.

Whaley said that "really suggests, combined with other studies, that sometimes hospitals charge high prices because they have the reputation or the quality or the market dominance to charge high prices, outside of these patient care factors."

"Cost shifting is, I think, a useful rhetorical device that health systems use," Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation, who helped fund the study, said. "But the truth is that in any negotiation, health systems are looking for the best price they can command, which often has more to do with their market power than what they need and the deficits they get from public payers."

However, Tom Nickels, EVP of the American Hospital Association, said the latest report "perpetuates erroneous suggestions that Medicare payments should be used as a benchmark for private insurers," even though Medicare and Medicaid reimburse less than the cost of providing care.

He added that hospitals would be unable to stay in business if they were paid the same as Medicare. "There is certainly a cost shift, because the government knowingly underpays," he said, adding, "We cannot survive in that kind of world."

Furthermore, Nickels argued the study relies on a "hand-picked sample of employers and insurers," whose claims account for 0.7% of inpatient admissions and 1.8% of outpatient visits between 2016 and 2018.

Adding that many hospitals are already struggling amid the novel coronavirus epidemic, Nickels added, "The case for pulling resources from care providers was weak from the start. It is beyond reckless to advance this approach now."

Meanwhile, some hospitals argue they receive higher commercial reimbursements because they deliver higher-quality care—and according to Craig Garthwaite, a health economist at the Kellogg School of Management at Northwestern University, data supports that association.

"What we see is quality and the ability to charge high prices are intrinsically related," Garthwaite said, noting that some hospitals make use those additional funds in invest in quality-improvement initiatives (Abelson, New York Times, 9/18; Bannow, "Transformation Hub," Modern Healthcare, 9/18; Owens, "Vitals," Axios, 9/18).

Advisory Board's take

2 reasons you can't ignore this study

Rob Lazerow, Managing Director

Last December, I nominated RAND's 2019 study on the amount private payers paid to hospitals for the Daily Briefing's list of the 10 biggest stories of the year. It was striking for quantifying the payment discrepancy between Medicare and private payers—and for naming names. While it's hard to imagine the new study being the top story of 2020, health care leaders can't ignore it for two main reasons:

1. The 2020 RAND study demonstrates that the gap between Medicare and private reimbursement continues to grow.

The RAND study found a 5.1% annual increase in the amount private plans reimbursed hospitals; for comparison, CMS recently finalized a 2.9% standardized rate increase for fiscal year 2021. Given the different growth rates, the gap increased from 224% in 2016 to 247% in 2018.

Will these finding ignite another round of backlash from employers? It's unlikely—at least right now. Employers have much bigger economic concerns, and their spending on health care is generally down this year after elective procedures were canceled due to the novel coronavirus epidemic. But as volumes rebound and stabilize, employers are more likely to take another look at their health care spending. After the crisis abates, the demand for affordability will return.

2. Regardless of the epidemic or economy, hospitals and health systems have entered a new era of price transparency.

RAND's interactive tool shows how much individual hospitals were reimbursed by private payers for care, displayed as an overall percentage of Medicare reimbursement for the same services. But once CMS' new price transparency rules go into effect in 2021, we'll start seeing service-level prices with actual dollars. I expect the press coverage will highlight the price variation from hospital to hospital (and even within a hospital)—and the hospitals that don't post their prices. Price transparency is here to stay.

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