RAND Study on Hospital Prices: The Takeaway for Employers 

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May 16 2019

With all the focus on the US health care system in general and proposals to expand Medicare in particular, it’s no surprise that a major study on the variance between prices paid to hospitals by Medicare and those paid by private health insurance plans would garner a lot of attention. Conducted by The RAND Corporation and released this month, the study found that commercial rates varied from 150-300% of the Medicare rates by state – and reached as high as 400% for some hospital systems.  Other key findings in the study show that:

  • Employers paid, on average, 241% of Medicare for hospital services in 2017
  • Relative to Medicare, outpatient facility has greater difference than inpatient facility - 293% vs. 204% of Medicare
  • Relative price differences increased during the 2015-2017 study period

In fact, macro trends such as the continued shift from inpatient services to outpatient services, Medicare budget pressures, and provider consolidation all combine to create serious headwinds, which, left unchecked, may contribute to even higher cost differences between private payers and Medicare.

Though previous studies have documented such differences, this is the first to do so across multiple states and with specific hospitals identified by name. While the size of the study and the precision of the price comparisons are impressive, the fact that private health plans pay hospitals more than government plans is not news to anyone familiar with hospital financing. There has been cross-subsidization from commercial insurance to Medicare and Medicaid for many years. Most hospitals would maintain that government payers have never covered the cost of providing care, and the high cost of uncompensated care for those with no insurance only pushes up commercial rates further. While some articles about the study seem to assume that the Medicare price is the “right” price, given the long history of cross-subsidies, most hospitals would struggle to stay open if all services were reimbursed at the current Medicare rates.

Look for variations in the variation

For employers, the “news you can use” from the study is the relative hospital payment rates for Medicare vs. private payers across states and within markets, since specific hospitals are identified by name. Though it’s tempting to focus on how much more private plans pay than Medicare, employers will be able to exert more influence by focusing on the differences in the size of the cost variation relative to Medicare among hospitals in geographic areas.

Medicare is able to set prices; most employer health plan sponsors are not. That means employers have a much different operating construct through which they have to apply creative analytics and tactics, to successfully promote competition and reduce price levels. In addition, while the RAND study is limited to variations in hospital pricing, employers are increasingly focused on variations in hospital cost and quality – because while price doesn’t predict quality, higher quality clearly leads to better outcomes and ultimately lower spending. Organizations like Leapfrog and Catalyst for Payment Reform have made important progress in advancing transparency in this critical area, and quality grades are now available for many US hospitals.

There is a suite of solutions that employers can use today that have the potential to improve private payer pricing and lower both the spread with Medicare payment levels and overall medical cost, including:

  • Improved network pricing reporting, ideally expressed as a dollar amount and as a percentage of Medicare, so that comparison across providers become easier for employers and employees. This is necessary for steerage strategies such as reference-based pricing, in which a visit or procedure is covered up to a specific amount, with the member responsible for charges above that amount.
  • Promoting the most cost-efficient site of care, for example, outpatient infusion centers and non-hospital based radiology and surgery centers
  • Creating virtual networks that enable steerage towards lower cost and/or higher quality providers
  • Introducing patient advocacy solutions with steerage goals to drive use of high-value providers – with value determined not just by pricing, but with measures of quality and appropriate utilization as well.

The RAND study is important research and can serve to help employers focus in on trouble spots where prices are especially high relative to Medicare. But, as most of us would agree, there’s room for improvement in just about every market.

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