• May 10, 2021

Gap between what private insurers and Medicare pay hospitals is growing

Sep 18, 2020

The AHA has criticized previous versions of the RAND study. Tom Nickels, the trade group’s executive vice president, said the latest version “again perpetuates erroneous suggestions that Medicare payments should be used as a benchmark for private insurers,” despite reimbursing below cost. Nickels also said the study uses a “hand-picked sample of employers and insurers,” whose claims represent just 0.7% of inpatient admissions and 1.8% of outpatient visits over the study period.

“The case for pulling resources from care providers was weak from the start,” he said. “It is beyond reckless to advance this approach now.”

RAND’s study also examined whether higher prices correlated with higher CMS star ratings and better safety scores from the Leapfrog Group. It found that among high-priced hospitals—those whose relative prices were 2.5 times that of Medicare—20% received five-star CMS ratings and 4% received one star. Among lower-priced hospitals—those with relative prices below 1.5 times Medicare—just 2% received five stars and 1% received one star.

At the same time, the study noted that so-called “high-value hospitals,” those offering low prices and high quality based on their star ratings, do exist: 91% of lower-priced hospitals received three or more stars. Further, 17% of higher-priced hospitals received one or two stars, compared with 10% for lower-priced hospitals.

Among the 71% of hospitals in the study that had Leapfrog scores, the high-priced ones tended to have the same safety grades as their lower-priced counterparts, the study found.

Gloria Sachdev, CEO of the Employers’ Forum of Indiana, said it’s instructive for employers to know there are high-quality hospitals with low and medium prices. Now, employers need to use tactics like narrow networks or reference pricing in their health plans to steer employees toward those facilities.

“That’s what we need to start catering to really aggressively,” Sachdev said. “We need to start saying, ‘Here’s the best quality at the best price,’ and developing benefit models that steer patients and incentivize people to use high quality, low cost facilities.”

The Employers’ Forum of Indiana, a multi-stakeholder business coalition whose members include Chrysler and Cummins, commissioned the new study and its two previous versions with the goal of helping members lower their healthcare costs. The previous research has helped numerous members enter narrow networks, tired networks and direct contracting with hospitals, Sachdev said. Some are considering centers of excellence and reference pricing.

The study lists Parkview Health in Fort Wayne, Indiana as the second most expensive between 2016 and 2018, with a relative price of 388% of Medicare for inpatient and outpatient services. Relative prices are the ratio of private amounts paid divided by the Medicare allowed amounts for the same services. Sachdev said health insurer Anthem, in partnership with employers, was able to negotiate lower prices with Parkview after a previous version of RAND’s article showed it was expensive relative to its peers.

Parkview CEO Mike Packnett said in a statement the RAND study uses data that predates its new agreements with several major insurers and direct-to-employer contracts. It also doesn’t include price reductions the system made to common outpatient services.

Packnett also said affordability requires a much broader focus that looks at value.

“We understand that the report’s authors agree that in order to fully measure hospital value, one would have to consider other factors, including patient outcomes and utilization, which are not reflected in the rankings,” he said.

If employers’ own use of the data doesn’t put enough of a dent in healthcare spending, it might show the need for policy solutions, such as rate setting or a public option, Hempstead said.

“It’s the only real industry that can go to purchasers and say, ‘It’s your job to cover our costs. It’s not our job to reduce our costs,'” she said.

The study lists John Muir Health in the San Francisco Bay Area as the most expensive health system, with a relative price of 401% of Medicare. The two-hospital system said in a statement that the study drew on less than one-quarter of 1% of its roughly 1.2 million inpatient and outpatient cases between 2016 and 2018. John Muir also said its operating margin has consistently held at 3% or lower, and its reimbursement from Medicare and Medicaid are well below the cost of care.

Orlando Health was third on the list, at 374% of Medicare. In a statement, the health system said the study included less than one-quarter of 1% of Orlando Health’s 3.9 million admissions and outpatient services during the study period.

“If Rand were to use a more appropriately sized data base, the results would show Orlando Health’s rates are lower than others in the state, while our quality remains high,” the statement said.

Whaley explained that fewer Florida employers contributed to the study than those in other states, which explains why Orlando Health’s sample size is smaller. Its relative price is based on 86 inpatient stays and about 700 outpatient services.

The study covers 49 states plus Washington, D.C. Maryland was excluded because of its all-payer hospital rate setting system. RAND’s previous version of the study included 25 states, and the first version focused only on Indiana.

Unlike previous versions, this study includes physicians’ professional fees in addition to hospitals’ facility fees. The study found that, on average, 13% of the overall hospital price difference relative to Medicare was driven by professional fees, with wide variation by state. In Minnesota, professional fees were 378% of Medicare, compared to 259% for facility fees. In West Virginia and Indiana, professional fees much lower than the facility fees.

Dr. Michael Richards, associate professor of economics at Baylor University, said he was surprised to see that hospitals’ average markup on the outpatient side was actually higher than on the inpatient side. Richards, who reviewed the study prior to publication, said that’s important because people often think of outpatient care as being less expensive, but that may not always be the case.

Richards said in his mind, the new RAND study highlights the value of promoting competition from a policy standpoint. He said the opposite is happening in Texas, where lawmakers last year passed a law that lets the state green light hospital mergers the federal government would deem anticompetitive. In fact, the Federal Trade Commission is urging Texas regulators to block two mergers currently being sought under the new law.

“While we’re seeing consolidation and more evidence of negative downstream consequences of consolidation, our policies seem to be more promoting consolidation as opposed to promoting competition,” Richards said.

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