Employers Paying More than Twice What Medicare Pays for Hospital Care: What Can Policymakers and Payers Do About It?

Sustainable Health Care Costs

By Rachel Block

Based on the latest analysis from RAND, employers and private insurers are paying even more for hospital services (both inpatient and outpatient) as a proportion of Medicare each year. Using 2018 data (provided by employers, health plans and state claims databases), the average relative commercial price for hospital services was 247% of the Medicare price for the same services. By comparison, the relative commercial price was 230% in 2017 and 224% in 2016.

Medicare adjusts its health provider prices regularly for wage and price increases, geographic factors, and case-mix, or the intensity of patient characteristics. Given that, it is clear that the trend for commercial payers is rising at an uncontrolled rate. According to RAND, in states like Tennessee and South Carolina employers pay even more—up to 327% of Medicare rates—but in other states, like Arkansas, Rhode Island, and Michigan, they pay about 200% more than Medicare.

There are both market-oriented and regulatory strategies to bend the curve of commercial hospital prices. First, employers and other payers need access to the right kind of data. The RAND data are particularly powerful because they combine data from a variety of sources, including insured and self-insured employer plans, as well as commercial data from state- operated all-payer claims databases. Many states don’t have access to the self-insured data, so the RAND data set is more complete than many states’ own data sets. Having more complete information means that the resulting price transparency analysis should be more accurate.

Employers can use this data to change their benefit design by providing employees with financial incentives to choose lower-priced providers. Employers can also adopt new payment models that focus on reducing the Medicare/commercial price differences. Hospital outpatient services like imaging have even higher rates of commercial prices—267% higher on average—and employers may find it easier to influence prices and spending for those services than inpatient services.

If market-oriented strategies are not sufficient, then public policy can provide additional incentives to reduce the commercial price gap. As noted in research from the UC Hastings College of the Law, San Francisco, states can adopt a variety of laws and regulations to deter anti-competitive practices by providers and health plans. Many states and Congress are considering limits on out-of-network prices, which could be indexed as a percent of Medicare. Finally, more states are setting up public option health plans whose prices are indexed to Medicare. These plans could be opened up to employers and exert even more market power.

Health care prices for commercial insurance continue to grow faster than the economy, faster than household incomes, and faster than Medicare. This research adds to a growing body of evidence that points to hospital prices as a large contributor to that growth.

But a systemic view is necessary. Making health care more affordable means employers, health plans, and policymakers have to work together to bring the rate of price growth down. Through the Peterson-Milbank Program for Sustainable Health Care Costs, states will bring stakeholders together and develop the data and policy capacity to measure, understand and address health care cost growth.