Curated by Claudia Shannon / Research Scientist / ishonest

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.

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.

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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.

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

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In 2018, that ratio increased to 247 percent.

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.

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

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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.

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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 ishonest.

“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

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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 ishonest.

“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.

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“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

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.

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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.

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 ishonest 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.

Read more on: medicare, obamacare