Hospitals charge privately insured patients 250% more than those on Medicare. The gap is growing.

By | September 19, 2020

Dive Brief:

  • Privately insured patients pay 247% more at hospitals on average than Medicare patients for the same care, according to a new study by nonprofit think tank RAND.

  • The study, based on 2018 data, shows the gap is increasing from 2017 and 2016, which saw disparities of 230% and 224%, respectively. If private payers had paid Medicare rates over the three-year study period, they would have saved $ 19.7 billion, RAND determined.

  • The study could provide fodder for proponents of a government-run public option, a key tenet of Democratic presidential nominee Joe Biden’s healthcare agenda, which — like Medicare — would negotiate prices with hospitals and other providers. American Hospital Association EVP Tom Nickels slammed the report as “broad claims about pricing based on a cherry-picked and limited data set” and “research short-cuts” in a Friday statement. 

Dive Insight:

While the reimbursement gap between private pay and Medicare patients isn’t new, the RAND analysis of charge data at more than 3,000 U.S. hospitals not only quantifies it, but finds it’s growing at a 5.1% annual compounded rate.

But AHA, which has continually lobbied against policies to increase healthcare price transparency or curtail hospital M&A, argued RAND hand-picked its employer and insurer sample. Nickels alleges the claims RAND analyzed only represented 0.7% of inpatient admissions and 1.8% of outpatient visits over the study period, based on comparing RAND’s data to data from AHA’s annual hospital survey.

RAND scrutinized $ 33.8 billion in claims between 2016 and 2018, aggregated from 120 self-insured employer groups, 11 state employee plans and all-payer claims databases from six states for the report.

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“The study again perpetuates erroneous suggestions that Medicare payments should be used as a benchmark for private insurers, in spite of Medicare reimbursing well below the cost of providing care,” Nickels said.

Benchmarking healthcare costs to Medicare payments has been a long-shot policy wish of democrats for years now, as U.S. medical spending continues to spiral out of control. Former Vice President Biden has pledged to enact a Medicare-like public option if elected come November, available to people who can’t afford expensive private insurance or those residing in states that have yet to expand Medicaid under the Affordable Care Act.

RAND also found outpatient services in 2018 were priced even higher than inpatient on average, at about 267% what Medicare reimbursed. In some states, such as Florida, Tennessee, West Virginia and South Carolina, the disparity in price was higher than 325%.

In one bright spot, the RAND study was unable to find a correlation between providers with large numbers of Medicare patients making up for the relatively low payments by charging commercial patients more.

“We find a very weak relationship between hospital prices and the share of patients treated by that hospital who are covered by either Medicaid or Medicare,” the researchers wrote. Instead, they concluded that consolidation among providers is what has driven much of the price jumps.

The study did have other positive findings. Using quality data from Medicare and the Leapfrog Group, it concluded that there are numerous high-quality providers that charge rates below 250% of Medicare for privately insured patients. More than half of the hospitals that charge at or below 150% of Medicare rates also had A or B grades from Leapfrog.

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RAND was less sanguine about what to do regarding the growing price gap between Medicare and privately insured patients.

Researchers from the Santa Monica, California-based think tank noted that employee wellness programs are not very effective, while narrow networks a little more so.

However, reference pricing — where patients are incentivized to receive care at lower priced providers — can be effective. So can price transparency. Under a Trump administration price transparency rule finalized last year, hospitals would be required to disclose secret negotiated rates with insurers starting in 2021, though critics are uncertain it’ll lead to lower market prices.

However, the study concluded that no more than 43% of healthcare services are shoppable for patients. And placing the burden entirely on them to find the least expensive, most effective provider may be unrealistic.

Rebecca Pifer contributed reporting.

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