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RAND: Private insurers pay hospitals excessive prices (but they left out why)

May 10, 2019

Topics: Quote of the Day

By Chapin White and Christopher Whaley
RAND, May 9, 2019

Large price discrepancies exist between what private health plans pay for hospital services and what Medicare pays. RAND Corporation researchers used data from three sources — self-insured employers, state-based all-payer claims databases, and health plans — to assess $13 billion in hospital spending in terms of hospital price levels, variation, and trends from 2015 through 2017 in 25 states. In this report, prices reflect the negotiated allowed amount paid per service, including amounts from both the health plan and the patient, with adjustments for the intensity of services provided. These negotiated prices are then compared with Medicare reimbursement rates for the same procedures and facilities to determine relative prices.

Key Findings

  • Relative prices, including all hospitals and states in the analysis, rose from 236 percent of Medicare rates in 2015 to 241 percent of Medicare rates in 2017
  • Relative prices for hospital outpatient services were 293 percent of Medicare rates on average, far higher than the average relative price for inpatient care (204 percent of Medicare rates)


  • Employers can exert pressure on their health plans and hospitals to shift from discounted charge contracts to contracts based on a multiple of Medicare or some other prospective case rates.
  • Employers can use networks and benefit designs to move patient volume away from high-priced, low-value hospitals and hospital systems.
  • Employers can encourage expanded price transparency by participating in existing state-based all-payer claims databases and promoting development of new ones.
  • Transparency by itself is likely insufficient to reduce hospital prices, and employers may need state or federal policy interventions to rebalance negotiating leverage between hospitals and employer health plans. Such interventions could include placing limits on payments for out-of-network hospital care or applying insurance benefit design innovations to target high prices paid to providers and allowing employers to buy into Medicare or another public option that pays providers prices based on Medicare rates.

RAND press release:

For links to full RAND report:

Many Hospitals Charge Double or Even Triple What Medicare Would Pay

By Reed Abelson
The New York Times, May 9, 2019

Across the nation, hospitals treating patients with private health insurance were paid overall 2.4 times the Medicare rates in 2017, according to the RAND analysis. The difference was largest for outpatient care, where private prices were almost triple what Medicare would have paid.

The RAND study underscores the widening chasm between what the federal government and the private sector pay the nation’s hospitals.

The disparity shows how competition has faltered in an opaque market where the costs of care are secret and hospital systems are increasingly consolidated, gaining outsize clout in price negotiations with employers, some experts say.

This yawning spread in hospital rates will likely fuel the debate over Medicare-for-all proposals that would give the federal government authority to decide what to pay hospitals and that have proved popular with many Democratic voters on the presidential campaign trail.

Some proponents of Medicare for all argue that employers and private insurers have failed to control costs. About one-third of all health care spending in the country goes to pay for hospital care. Many supporters point to the billions of dollars that could be saved annually if hospitals and doctors were paid at the much lower Medicare rates.

“The shadow of single payer hangs all over this,” said Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation, which helped fund the RAND research.

The RAND study shows “market forces are clearly not working,” said Richard Scheffler, a health economist at the University of California, Berkeley.

But soaring hospital costs have become a significant burden, and many businesses have off-loaded more of the expense onto their employees through higher premiums and deductibles. Families have struggled to cope with surprise medical bills and increasing out-of-pocket costs. The trend toward consolidation in the last several years has also spurred higher costs, as hospitals merged into bigger, more powerful systems that dominated their local markets, demanding ever-higher prices.

Unlike Medicare, which sets the price it will pay for a type of care, insurers often try to negotiate discounts with hospitals over charges, especially for outpatient services, said Chapin White, an adjunct senior policy researcher at RAND and one of the authors of the study.

The insurers don’t have a strong incentive to demand the lowest prices because many, working for employers that are self-insured, are “literally spending someone else’s money,” he said. Insurers are also frequently paid based on how much the employer spends; they take in more revenue when the employer spends more.

In contrast to private insurers, “Medicare has been much more zealous about keeping its payments down,” said Sherry Glied, dean of the Robert F. Wagner Graduate School of Public Service at New York University.

Policy experts say the hospitals have come to rely on higher payments from employers and insurers. “The whole system is symbiotic,” Ms. Glied said. If private insurers paid the hospitals less, they “would look different and have a different cost structure.”

Anthem says it is now developing new networks made up of significantly fewer hospitals and will steer people to places that deliver the best quality at lower prices, said Paul Marchetti, a senior vice president at Anthem. “That’s where we are headed as a company,” he said.

It will be up to the employers to prove that they can exert discipline on controlling health care costs, which (Robert J. Smith, executive director of the Colorado Business Group on Health) called an open question: “Can the U.S. market become more effective or more efficient or do we need a single payer?”


QOTD: Fixed MLR will drive health care costs higher

By Don McCanne, M.D.
April 20, 2010

Although this concept has been touched upon in previous qotd messages, it is important that we clearly understand that the newly enacted medical loss ratio (MLR) requirements provide insurers with an incentive to further drive up health care costs.

How could that be? The intent of placing minimum limits on the medical loss ratio (the percentage of premiums spent on actual health care) was to limit the maximum percentage of premium dollars spent on administrative costs and profits. When the administrative costs exceed the permissible limits, the insurers, it was suggested, would find administrative efficiencies in their own operations, thereby helping to control overall spending. But since administrative services are the product that they are selling us, why would they want to pare back their own business?

Rather than achieving compliance with the medical loss ratio by reducing their own product, doesn’t it make much more sense from a business perspective to increase the amount of medical services being paid for, thereby achieving compliance with the ratio without any reduction in their own product? Of course it does.

One way to do that is to reclassify as health care as much as possible of the administrative services that they provide. As the Senate report indicates, WellPoint has already reclassified more than half a billion dollars of administrative expenses as medical expenses. This has a double accounting advantage on the ratio since it both reduces the administrative component while increasing the health care component.

What should concern us even more is the potential impact on health care spending. The more health care that the insurers authorize, the greater the health care component of the medical loss ratio. If they can hold their administrative costs at about the same level, increasing the health care component of the ratio allows them to increase… guess what… profits!

There are two ways to increase health care spending. The insurers can approve more medical services, increasing both the frequency and intensity of services authorized. More scary is that they are also motivated to increase health care spending by simply paying higher prices!

For those who insist that all we need is incremental fixes to the legislation that passed (ACA), tell us how you’re going to fix this one. Private market forces will always place profits before all else. Change the rules, and they will always find another way.

Imagine instead a health care financing system with about 3 percent administrative costs, zero profits, and incentives to control excessive prices and limit the excessive growth in the frequency and intensity of non-beneficial, high-tech services and products. That’s what we would have if we enacted an improved Medicare system that covered everyone.



By Don McCanne, M.D.

It has long been known that Medicare is very effective in controlling hospitals’ prices for both inpatient and outpatient services. Though it is also known that private health plans negotiate higher prices with the hospitals, because of the confidentiality of rate negotiations few realized that the differential compared to Medicare rates was this great. RAND shows us that, in 2017, private health plans paid 204 percent of Medicare rates for inpatient care and 293 percent of Medicare rates for hospital outpatient services.

That should be enough to make us question why we should leave the private health plans in charge of health care financing. But there is something much more nefarious under all of this. It is how insurers handle the medical loss ratio – the percentage of revenues that insurers spend on health care which is considered a loss by Wall Street standards. But it is really the other part of the ratio – the administrative costs – that the insurers divert from patient care. There is nothing new here. Read my Quote of the Day comment above from almost a decade ago. Really, read it.

Health plans keep a percentage of funds paid to hospitals for their own administrative costs and profits. Because the medical loss ratio is generally a fixed percentage, insurers can increase their profits by increasing the volume of health care services they authorize. But worse, they further increase their profits by authorizing higher prices paid to the hospitals, because they keep percentage of those prices. So why should anyone be surprised that the RAND study shows that the private health plans are paying hospitals egregiously high prices, when those high prices are contributing to the spectacular Wall Street performance of the private insurers?

This is criminal. When the politicians and health policy community are supposedly looking for ways to try to control our outrageous national health expenditures, the health insurance lobbyists are right under their noses promoting these devious schemes to take care of their own industry while placing ever greater financial burdens on the backs of hardworking American families.

Hospitals claim that Medicare payments are too low (and they are much lower than private insurer payments) so they fear that a Medicare for All program would not pay enough to meet their costs. But under a well designed single payer system, hospital financing would change. Hospitals would be placed on global budgets, much like our fire departments, and capital improvements would be separately budgeted based on local need, ensuring appropriate capacity. Our public stewards would have a mission to provide adequate funds to meet the health care needs of the community, while preventing gouging of our public funds.

It is obvious that a single payer Medicare for all system would fix this and many of the other problems that are contributing to high costs and poor performance in our health care system. Now that we have shown once again that the private insurers are crooks, it’s time to throw them out and enact and implement our own publicly-financed and publicly-administered, single payer, improved Medicare for All. (How many times do I have to write this?)

ADDENDUM to the Quote of Day on RAND study of hospital prices

By Don McCanne, M.D.

ADDENDUM to Quote of the Day, “RAND: Private insurers pay hospitals excessive prices (but they left out why)” May 10, 2019:

Although an excerpt from The New York Times article stated the well known fact that hospital consolidation has given them an “outsize clout in price negotiations with employers,” that, and the leverage from “must have” hospitals, was knowingly left out of my comment because the message was already too long. Discussing only the theory that insurers increase their own profits by deliberately negotiating higher hospital prices may have left the false impression that this latter point was the main driving force behind high hospital prices in private insurance contracts as opposed to hospital prices under Medicare.

In a personal communication, one of the nation’s leading health services researchers, Richard Kronick of the University of California at San Diego, made the following point:

“While it is true that if an insurer has a contract with an employer in which the administrative fee is expressed as a percent of medical spending, then, in the very short run, if hospital prices increase then the administrative fee increases.  But that insurer is likely to lose business to other insurers that keep prices down, and also will lose money on the portion of business that is insured (unless it is able to increase premiums, but in most markets there is at least some competitive pressure that at least partially restrains that behavior).  I don’t think it is correct to state that insurers make more money when the prices they pay hospitals increase.”

My supposition is not totally without support:

“Insurers are also frequently paid based on how much the employer spends; they take in more revenue when the employer spends more.” – The New York Times, May 9, 2019

“On the other hand, the target ratios (MLR) might give them (the insurers) added incentive to raise premiums. By doing so, they could keep overhead and profit fixed, even as those items decline as a percentage of the premium dollar.” The Washington Post, April 18, 2010

At PNHP we try to rigidly adhere to facts. Because of my failure to emphasize the importance of hospital consolidation and “must have” status in hospital price negotiation, I considered retracting this Quote of the Day. However I decided not to since this still supports our contention that including private insurers as intermediaries in health care financing is deleterious when compared to the much more efficient method of administered pricing through our public Medicare program, though we do recommend a change to the more precise and equitable methods of global operating budgets and separate budgeting of capital improvements for hospitals.

I thank Professor Kronick for his input in clarifying this issue.

Stay informed! Visit www.pnhp.org/qotd to sign up for daily email updates.

About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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