Public and Private Payer Hospital Rate Trends

By January 8, 2020 Commentary

Medicare and Medicaid set the rates they pay to providers, including hospitals, by fiat, although obviously political influences exist.  Providers don’t really negotiate them although they do get the opportunity to comment on proposed rates and have other input.  Private plans, by contrast, have to negotiate with every hospital.  As hospitals have consolidated and increased their market power and as the rates paid by public payers deliver smaller margins, hospitals generally have charged private payers more and there is a substantial gap between the amounts paid by each type of payer.  A study in Health Affairs explores these relative payment trends.   (HA Article)   The authors used the Medical Expenditure Panel Survey from 1996-2016 to identify both hospital charges and actual payments.  While I can’t say I understand that data source in detail, I might feel more comfortable if private payer data from a large claims database were used, along with actual Medicare and Medicaid records.  In any event, the authors charted the trend in relative payments.  They looked at inpatient hospital, outpatient services and emergency room.  Over the entire study period Medicare and Medicaid inpatient hospital stay payments showed pretty much the same relationship and were very close in amount, with a slight exception in the 2012 to 2013 period when health care reform provided for somewhat enhanced Medicaid payments as part of expansion.  Beginning in 2003, both the trend and the actual payment gap between private and public payers began to widen, reaching a peak in 2012 and declining somewhat thereafter.  But the decline is due to Medicare and Medicaid paying more and private payments staying pretty flat.  The gap is extensive, with private payers typically reimbursing 40% to 50% more than public ones.

The trend is similar for ER visits, although Medicare and Medicaid payments rose faster than they did for inpatient services.  For outpatient services, there was also a similar trend, although Medicare and Medicaid payments diverged beginning in 2011, as Medicare rates plateaued while Medicaid ones declined.  Medicare’s new site-neutral payment policy should bring Medicare payment rates down.  In terms of hospital charges, or list prices if you wish to think of it that way, for inpatient services those rose from 170% of actual Medicare payments in 1996 to 411% in 2012.  Hospitals were likely boosting list prices so they could claim that they were offering really substantial discounts in terms of actual payments.  A similar pattern is observed for ER and outpatient services.  Although the article’s headline conclusion is that the gap between private and public payer reimbursements is narrowing, this is simplistic and misleading.  Beginning around 2000, either because of better bargaining power or a true need to cost shift to private payers, a substantial gap opened in relative payments.  That gap narrowed in the last couple of years only because Medicare and Medicaid began to pay more, likely due to access concerns, and private plan payments flattened, which could be due to several factors, including private payers increasingly tying their payments to Medicare rates, use of more value-based, bundled and other payment methods, and the fact that health plans have also begun to consolidate significantly, which evens out some of the negotiating leverage.

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