Public and Private Payer Reimbursement for Hospital Services

Medicare and Medicaid dictate hospital reimbursement, subject to political pressures.  Private health insurers must negotiate rates with hospital systems and the outcome of those negotiations is obviously dependent on relative bargaining leverage.  A study in Health Affairs compares reimbursement to hospitals from private payers and public ones.  (HA Article)   Almost a trillion dollars is spend on health care in the United States and it accounts for about a third of total spending.  In the period from 1996 to 2012, private health insurers consistently paid more than Medicare or Medicaid for the same care for patients with the same characteristics, and the gap has widened substantially since 2000.  As a sidelight, while Medicare has historically paid slightly more than Medicaid for hospital care, just in the last couple of years those amounts have become almost equal.  In 2001 a commercial health plan paid about 10% more than Medicare for the same service, by 2012 that gap had widened to 75%.  The results, which are consistent with the experience of people in the hospital and health plan business raise a number of questions and concerns.  Are Medicaid and Medicare paying hospitals enough to cover their costs of providing care?  Other research suggests the answer is yes, at least for well-run systems.  And since many, if not most, hospitals are non-profits, we shouldn’t be concerned about them doing much more than covering their fully loaded costs.  If Medicare and Medicaid are paying hospitals enough or close to enough for their services, why should we tolerate these providers charging private health plans 75% more for the same services?  In a competitive market we wouldn’t have to worry about this question, but we have allowed many geographic areas to become non-competitive in regard to hospital services, and a multitude of research suggests that prices and price increases are higher in these markets.  What is clear is that we likely could save as much as $200 to $300 billion is private health plans paid an amount similar to what Medicare and Medicaid paid.  Those savings would likely flow to consumers in the form of lower premium contributions and cost-sharing amounts.  As I have suggested before it is time for regulators to be truly bold and embark on a campaign of undoing almost all the hospital mergers over the last couple of decades to restore a competitive market.