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Hospital Prices for Public and Private Payers

By May 14, 2019Commentary

Not only is it hard to let a week go by without bashing drug companies for pricing, but the same applies to hospital pricing, at least for commercial payers.  A Rand Corporation report provides this week’s ammunition.   (Rand Report)   The authors used data from 2015 to 2017 for hospital inpatient and outpatient spending in 25 states, including about 4 million lives and 1600 hospitals.  The data sources were self-funded plans, health plans and state all-payer databases, covering a total of $13 billion in hospital spending.  Actual total paid amounts from private payers were compared with Medicare reimbursement for the same services.  The big picture is that in 2017 on average the paid prices by private plans was about 241% higher than the Medicare reimbursement, up slightly from 236% in 2015.  Reducing the private payments to the Medicare level would have saved $7.7 billion.  There was significant geographic variation among the states included in the analysis.  Some states, like Michigan, Pennsylvania, New York and Kentucky, had gaps of “only” 150% to 200%.  Other, such as Colorado, Montana, Wisconsin and Maine, had ones more like 250% to 300%.  Some states experienced a growth in the reimbursement difference, some saw shrinkage.  There was also substantial variation between hospitals, with some receiving paid prices from private payers equal to about 150% of Medicare reimbursement and others receiving 350% to 400% more.  The average gap was 293% for outpatient services and 204% for inpatient ones.

Hospital services in total are around 45% of total health spending, and growing on the outpatient side particularly fast, as hospitals acquire more and more physician practices and other health service vendors.  So what happens with pricing for these services is important to the system as a whole.  Now, to be fair (which I occasionally like to be), public programs are probably not covering the actual costs of caring for members of the program, although to be even fairer, hospitals almost certainly aren’t managing their costs to a level of real efficiency.  In any event, the hospitals do have some reason to try to recapture lost costs and margin from commercial payers and the extensive consolidation among health systems has given them the market power to do so and then some.  So commercial health plans are clearly getting screwed, as this analysis demonstrates.  And given hospitals market power, it is hard to come up with a reasonable solution to the issue.  So unfortunately that points to the necessity of some government regulation to rein prices in.  Or break up the health systems, horizontally and vertically, to create a more competitive environment.

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