Hospitals across the country are charging private insurance companies 2.5 times what they get from Medicare for the same care, according to a new RAND Corporation study of hospital prices released on Friday.
In a half-dozen of 49 states in the survey, including West Virginia and Florida, private insurers paid three or more times what Medicare did for overnight inpatient stays and outpatient care.
“The prices are so high, the prices are so unaffordable — it’s just a runaway train,” said Gloria Sachdev, the chief executive of the Employers’ Forum of Indiana, a coalition that worked with RAND on the study. This year’s report expanded on the research the nonprofit organization conducted in 2019 on hospital prices in 25 states.
The study, which exposes the aggressive pricing by mega-hospital systems that have gained enormous market power through widespread consolidation, is sure to kick-start the debate over the U.S. health care system and the need to overhaul it.
While the pandemic caused losses for many hospitals, many of these big systems are sitting on large profit reserves, while also receiving some of the $175 billion in aid Congress allocated to make up for their costs and lost revenue.
Employers provide health insurance coverage for more than 153 million Americans. The companies and insurers in the study paid nearly $20 billion more than Medicare would have for the same care from 2016 through 2018, according to the RAND researchers.
The findings cast doubt on the ability of private employers and insurers to competitively purchase health care for workers and their families compared to the federal government, said Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation, which helped fund the study. “You have this widening gap,” she said.
Proponents of a so-called public option seize on such price-gouging news to argue that creating a government health plan that could use its clout to demand lower prices would help bring down the cost of care.
“There’s a lot of energy behind the public option, and this is clearly one of the reasons,” said Dan Mendelson, the founder of Avalere Health, a Washington, D.C., consulting firm.
Employers say the proof of how much more they pay underscores the need for change. “The report lays out in stark terms what the employers have been dealing with for years,” said Elizabeth Mitchell, the chief executive of the Pacific Business Group on Health, a San Francisco group that represents employers and companies in the region. “If we want to keep a private market in U.S. health care, it has to function,” she said. “It’s really not functioning.”
A public option, distinct from the more controversial “Medicare for all” proposals that would do away with private insurance, has been embraced by Joseph R. Biden Jr., the Democratic presidential nominee. Democrats and even some Republicans seem open to the idea, according to a recent poll from the Kaiser Family Foundation.
Hospitals warn that they might not be able to function if they were paid Medicare rates. “There is certainly a cost shift, because the government knowingly underpays,” said Tom Nickels, an executive vice president for the American Hospital Association, a trade group. He warned that hospitals would lose billions of dollars in revenue. Some could be shuttered if forced to operate at lower Medicare payments.
“We cannot survive in that kind of the world,” he said, adding that many hospitals are struggling financially because of the pandemic. “To suggest cutting hospitals during a pandemic is outrageous.”
The report, which has data from the District of Columbia and every state but Maryland (because that state sets hospital rates), provides a sweeping view into the wide variation of prices paid by private insurers, which pay multiples of what Medicare does for a hospital stay or an M.R.I. “The magnitudes are quite eye-catching,” said Michael R. Richards, a health economist at Baylor University who reviewed the study.
The most costly hospital system in the nation from 2016 through 2018, according to the researchers, was John Muir Health in Walnut Creek, Calif., near San Francisco. Private insurers pay its hospitals four times what Medicare reimburses for care.
In Indiana, Parkview Health, based in Fort Wayne, also remained one of the most expensive, charging private insurers in 2018 three times what Medicare paid for an overnight hospital stay and more than four times the Medicare rate for outpatient care. Employers pressured Anthem, the state’s largest insurer, to force Parkview to lower prices by threatening to drop it from the plan’s network.
The RAND data “predates Parkview’s new agreements with several major insurance companies and direct-to-employer partnerships,” as well as significant prices reductions for outpatient care, said Parkview’s chief executive, Mike Packnett, in a statement.
The RAND report also documents a wide variation in prices within the same hospital system. Mass General Brigham, formerly Partners Healthcare, was the most expensive system in Massachusetts, but Massachusetts General, one of its premier hospitals, charged private insurers nearly three times what Medicare paid in 2016 through 2018, compared to roughly two times for the system’s Newton-Wellesley Hospital, according to the study.
Well-known and well-respected hospitals like Mass General “are the hospitals within the system that are likely to get the highest prices,” said Christopher M. Whaley, one of the RAND authors.
In some markets, the lack of an alternative means employers have no room to negotiate, said Suzanne Delbanco, the executive director of Catalyst for Payment Reform, a nonprofit that works with businesses to develop new ways of paying for medical care. “In a market that is highly consolidated with no choices, it can be logistically infeasible,” she said.
The pandemic could make things worse as big hospitals scoop up struggling physician practices or their smaller competitors. In West Virginia, Mountain Health Network is made up of the 2018 merger of two hospitals, after Cabell Huntington acquired its competitor over the objections of federal officials. Cabell was one of the nation’s most expensive systems from 2016 through 2018, according to the study. Mountain Health now has its eyes on a local physician group.
Some hospitals argue they charge more because they deliver better care, and there does seem to be some association. “What we see is quality and the ability to charge high prices are intrinsically related,” said Craig Garthwaite, a health economist at the Kellogg School of Management at Northwestern University, who says some hospitals may be taking the extra money to invest in ways of improving quality.
Employers have had mixed success in pushing back against high-priced hospitals. Indiana employers succeeded in pressuring Anthem to take action, according to Ms. Sachdev. The insurer threatened to drop Parkview from its network, before reaching an agreement in July in which the hospital offered significant savings. Two state employees’ plans, in Montana and Oregon, have also been able to negotiate contracts that use Medicare prices as a benchmark for what they will pay, according to the RAND researchers.
But in other areas, the hospitals have been less willing to budge. In Colorado, employers have had productive discussions with some of the specialty hospitals and independent hospitals, said Robert J. Smith, the executive director of the Colorado Business Group on Health. “We’ve made very little progress with health systems,” he said.
Many employers, including some represented by the U.S. Chamber of Commerce, oppose government action, but others are growing more open to the idea of some sort of government intervention, ranging from rate regulation to a public option. “They are increasingly seeing in some cases the need for regulatory intervention because the market is broken,” Ms. Mitchell said.
But the pandemic and the potential threat it poses for many hospitals could put off any discussion, even if the Democrats were to win the White House and the Senate. “The hospitals are the most effective, most sympathetic lobby there is,” said Dr. Robert Berenson, a policy analyst at the Urban Institute.
Democrats will also have to figure out how to design a plan that people find both affordable and comprehensive, in contrast to some of the mid-tier plans sold under the Affordable Care Act, said Rodney Whitlock, a former Republican Senate staffer who now works for McDermott+Consulting. “How can the Democrats create a public option that is not clearly better than private insurance?” he asked. “If they don’t, they will be tagged as failing.”