Hospitals: RAND price study doesn’t add up

A study published last week shedding light on the wide variation in prices paid by employer-sponsored health plans to U.S. hospitals sparked debate over the reasonableness of commercial payments and why they diverge so significantly from Medicare rates.

RAND Health researchers found that private health plans across 25 states paid hospitals 2.4 times what Medicare would have paid, on average. Some hospitals’ prices were more than 400% of Medicare. And prices paid by employer health plans in some states, such as Indiana, were much higher relative to Medicare rates than in other states with lower prices, like Michigan. 

“If you ask hospitals, they will pretty commonly say, ‘Our prices are high because we lose money on Medicaid patients and barely break even on Medicare.’ But if you kind of look at the data, that story doesn’t hold up that well empirically,” said Christopher Whaley, an associate policy researcher at RAND and one of the study’s authors. “Sometimes hospitals that can charge higher prices because of market clout, reputation or must-have status do so.”

If employers and health plans participating in the RAND study reimbursed hospitals at Medicare rates, they would have paid $7 billion, or about 50%, less between 2015 and 2017.

“We feel strongly that the RAND report inaccurately represents payments received by our hospitals,” said a spokeswoman for Brentwood, Tenn.-based Quorum Health Corp., which RAND listed as having the highest prices among 70 health systems studied. She said the study reflected seven of 26 Quorum hospitals and that the health system’s data shows its payments are between 30% and 50% lower than some of the relative prices in the report.

Community Health Systems, based in Franklin, Tenn., raised similar concerns and said it works with patients to help them understand the cost of their care and has implemented strategies that promote lower-cost settings, such as walk-in clinics. CHS was listed in the study as one of the 10 hospital systems with the highest inpatient and outpatient prices relative to Medicare rates.

Hospital trade groups made the case that Medicare is not an adequate benchmark to compare hospital prices because it does not fully cover the average cost of caring for a Medicare patient.

“It is wrong to assume that Medicare, which pays hospitals 11% below cost, sets a standard that ensures all patients access to the hospital care they deserve and expect,” said Chip Kahn, CEO of the Federation of American Hospitals.

But other experts say Medicare rates are an appropriate benchmark because they are not affected by market forces and were calculated to cover the cost of providing a certain service to a Medicare patient, although there is disagreement over whether that formula is correct. 

However that doesn’t mean commercial plans paying three times more than what Medicare would are paying three times too much, said Erin Trish, an associate director of health policy at the University of Southern California’s Schaeffer Center for Health Policy & Economics. 

“There’s a distinction between what is the cost of providing a service and is Medicare reimbursement adequate to cover that service, and the question of how much money in today’s world do hospitals and physicians need to make from treating commercial patients to balance their books overall, because a lot of the patients (they see) are paying less than Medicare,” she said.

Gail Wilensky, an economist and senior fellow at Project HOPE, said hospitals’ claim that Medicare underpays is probably true given their current cost structure, but “that doesn’t mean that hospitals couldn’t deliver the services at Medicare costs” and some already do. 

The aggregate Medicare margin for U.S. hospitals stood at negative 9.9% in 2017, according to the Medicare Payment Advisory Commission. The Medicare margin for “relatively efficient providers” was negative 2%. 

RAND’s report builds on a wealth of research showing that commercial prices for healthcare services generally exceed what Medicare pays. It is one of the few reports that shows relative prices at both the individual hospital level and the system level.

Using claims data from self-insured employers, all-payer claims databases and health plans that chose to participate, researchers analyzed prices from 1,598 hospitals. The claims represented about $13 billion in claims from 4 million people.

Prices, which were defined as the negotiated allowed amount paid per service, included amounts from the health plan and the patient and were limited to facility claims for inpatient and outpatient services at Medicare-certified short-stay hospitals. 

On average, relative prices in 2017 for outpatient care were 293% of what Medicare would have paid for the same services, while prices for inpatient care were 204%.