• A new study published by RAND Corporation finds that private insurers pay much higher prices for hospital services than Medicare does.
• As hospital prices have increased in recent years, so has per capita healthcare spending among privately insured populations.
• Researchers found no strong link between hospital pricing and healthcare quality or safety ratings.

Even for people with private insurance, hospital bills can take a toll. The spending on hospital services ends up accounting for more than 40 percent of personal healthcare spending among privately insured people in the United States.

As hospital prices have increased in recent years, so has per capita healthcare spending among privately insured populations.

According to a new study published by RAND Corporation, private insurers pay much higher prices for hospital services than Medicare does.

“This analysis provides the most-detailed picture ever of what privately insured individuals pay for hospital-based care relative to what the government pays for people insured through Medicare,” Christopher Whaley, lead author of the new study and a policy researcher at RAND, said in a press release.

His research found that in 2018, employer-sponsored health insurance and other private plans paid about 2 1/2 times as much for hospital services compared with Medicare.

If employers and health plans that participated in the study had paid for services at Medicare rates, it would have reduced total payments to hospitals by $19.7 billion from 2016 to 2018.

Prices rising over time

Every year, Medicare issues a fee schedule that determines how much the federal insurance program will reimburse hospitals for specific services.

In contrast, most private health insurers contract with hospitals on a discounted-charge basis. They agree to pay a percentage of the hospital’s list price, which tends to be much higher than Medicare’s schedule.

The authors of the new RAND report found that over time, private health insurers have been paying more for hospital services relative to Medicare.

In 2016, private insurers paid hospital prices that averaged 224 percent of what Medicare paid for the same services.

In 2018, that ratio increased to 247 percent.

The RAND authors also found wide variability in hospital pricing, both within and between states.

These findings are consistent with a report issued this summer by the Kaiser Family Foundation (KFF) on variability in COVID-19 testing prices.

KFF researchers found that Medicare pays $51 to $100 per COVID-19 test. In comparison, hospital list prices range from $20 to $850 per test.

Adds to growing body of literature

In response to the RAND report, the American Hospital Association has accused the authors of making “broad claims” based on “cherry-picked” and “limited” data.

However, Healthline News spoke with multiple researchers in the field of health policy who talked positively about the authors’ methods and datasets.

“The authors of the RAND study should be applauded for assembling a wide range of datasets, including all-payer claims data from six states as well data from over 100 employers,” Jacob Wallace, PhD, an assistant professor of public health at Yale School of Public Health in New Haven, Connecticut, said.

“There are always limitations associated with analyses of private insurance claims, but the methods in the study appear rigorous,” he added.

Wallace also noted that the main findings of the RAND study are consistent with past research on the topic, which has found that the prices paid by private health plans far exceed those paid by public payers.

Not a matter of quality

Commentators sometimes suggest that variability in hospital pricing reflects differences in healthcare quality.

However, RAND researchers found no strong link between hospital pricing and healthcare quality or safety ratings.

They also found no strong relationship between hospital prices and the share of patients covered by Medicare or Medicaid.

In other words, they found little evidence that hospitals need to charge high prices to private insurers to offset low Medicare and Medicaid payments.

Rather, decreasing competition in the healthcare market may be to blame.

“If the prices were correlated with quality, I would be less worried because then it becomes a different product, right? As a consumer, I am willing to pay more for a safer car or safer hospital,” Neeraj Sood, PhD, a professor and vice dean for research at the USC Price School of Public Policy in Los Angeles, California, told Healthline.

“But if it’s the same service, I don’t want to pay more for the same service — and the reason I have to pay more is my choices are limited,” he said.

Decreasing competition

Competition in the healthcare market has been declining as a result of increased consolidation, which commonly occurs through hospital mergers or the acquisition of hospitals by larger health systems.

“Any time hospital rivals merge together, they have more market power to bring to bear and can negotiate for higher rates from insurers,” Jack Hoadley, PhD, a research professor emeritus at the Health Policy Institute of Georgetown University’s McCourt School of Public Policy in Washington, D.C., told Healthline.

“So there’s a lot of literature that says the more concentration there is, the higher the prices are for those hospitals’ services. I think that’s probably the biggest issue,” he continued.

There is also a growing trend of vertical integration in the healthcare market. Hospital systems have been buying up physician practices, which might also enable them to charge high prices.

“Suppose there are two hospitals. One is cheaper and high quality, and the other is more expensive. A physician might send the patient to the cheaper one,” Sood said.

“But if this physician’s practice is bought by the larger or more expensive hospital, then that funnels patients to that hospital,” he continued.

“And that in turn gives that hospital more market power to negotiate with the insurer,” he added.

Negotiating lower prices

To help curb rising prices, the authors of the new RAND study suggest that private insurance providers may want to shift away from the discounted-charge approach of hospital contracting toward reference-based pricing.

In a reference-based pricing approach, private insurers contract for hospital services based on a fixed-price arrangement. For example, their pricing may be set at a specific multiple of what Medicare pays.

This is the approach taken by state employers in Montana and Oregon. Recently, employers in Indiana have also pushed to establish a reference-based pricing for outpatient hospital services.

To help employers and private insurance companies negotiate changes in pricing contracts, the authors of the RAND study have published a list of hospital prices and quality ratings with their report.

This may help employer groups and other insurers compare pricing across hospitals, allowing them to make more informed judgements about appropriate pricing and negotiate more effectively.

Sood told Healthline that wider changes are also needed to increase competition in the healthcare market — for example, by reducing barriers to entry or using antitrust laws to curb healthcare monopolies.

“Greater pricing transparency might lead some insurers to renegotiate their contracts, and that might lead to more price competition,” Sood said.

“But I don’t know how much benefit that provides because if the underlying problem is lack of choice, you’re still stuck,” he added.

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