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RAND: Private insurers overpay hospitals

September 18, 2020

Topics: Quote of the Day

RAND, September 18, 2020

Prices paid to hospitals nationally during 2018 by privately insured patients averaged 247% of what Medicare would have paid, with wide variation in prices among states, according to a new RAND Corporation study.

The study notes a steady increase in hospital prices, rising to the 2018 average level from an average of 224% of Medicare costs in 2016 and 230% of Medicare costs in 2017.

The analysis, which includes information from more than half of the nation’s community hospitals, is a broad-based study of prices paid by private health plans to hospitals.

“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,” said Christopher Whaley, the study’s lead author and a policy researcher at RAND, a nonprofit research organization.

If employers and health plans participating in the study had paid hospitals using Medicare’s payment formulas, total payments over the 2016–2018 period would have been reduced by $19.7 billion, a potential savings of 58%.

“The rising gap between public and private hospital prices is a cause for concern and raises questions about the efficiency of the employer market,” said Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation, which sponsored the project. “The goal of this work is to arm employers with data so they can negotiate more effectively. Curbing excessive spending on employer health insurance is in the public interest.”

Spending on hospital services accounts for approximately 44% of total personal health care spending for the privately insured, and hospital price increases are key drivers of recent growth in per capita spending among the privately insured.

Other findings from the study include an observation that hospital costs within individual states and hospital systems vary widely. Researchers also examined whether the observed differences in prices could be explained by differences in the quality of care. However, they did not find a strong relationship between prices and two widely-recognized metrics of quality and patient safety, or that variation in hospital prices is explained by differences in Medicare and Medicaid patient populations.

A large portion of private health insurance contracting for hospitals is done on a discounted-charge basis where the insurer agrees to pay a percentage of billed charges. By contrast, Medicare issues a fee schedule that determines the price it will pay for each service, with adjustments for inflation, hospital location, the severity of a patient’s illness and other factors.

RAND researchers suggest that private insurers may want to move away from discounted-charge contracting for hospital services and shift to contracting based on a percent of Medicare or another similar fixed-price arrangement, often called reference-based pricing.

“In the case of specific high-priced hospitals, there may be justification for the unusually high prices, such as offering specialized services or a well-deserved reputation for higher-quality care,” Whaley said. “However, if two hospitals have similar quality, then any difference in prices may be harder to justify.”


The full report can be downloaded at a link through this website:

From the Conclusion of the full report:
“Although many hospitals do face increasing costs, such as growing employment and personnel costs, increased needs for investments in electronic health records, and other technologies, the results of this study show that some hospitals are still able to charge much lower prices than other hospitals.”


By Don McCanne, M.D.

Hospitals pay much higher prices for privately insured care than they do for the government programs Medicare and Medicaid. This difference is not due to higher quality care, but rather it is due to hospitals’ market power in being able to contract with the private insurers for higher prices, whereas the government programs use fixed fee schedule prices. Further, this study shows that the wide variation in prices paid demonstrates that low income hospitals are still able to provide high quality care.

Also, the evidence indicates that higher private insurance prices did not correlate with lower prices paid by government programs. The report states, “the absence of a correlation between hospital prices and payer composition does not support the argument that higher hospital prices are in place to offset underpayments by Medicaid and Medicare.”

Considering our very high health care prices in the United States, and considering that the private insurers have been ineffective in controlling hospital prices, shouldn’t that make you think that we should consider changing our health care financing system? Other nations that use global budgets to finance hospitals, much like budgeting fire departments, have been much more effective in controlling excess hospital spending.

If you consider the historical health care spending curves in the United States and Canada, they were about the same until Canada enacted their single payer systems in the provinces. Canada then bent their cost curve to sustainable levels (maybe a little bit too low) whereas ours has continued on its unsustainable trajectory.

How can we continue to look at these studies and then do nothing beyond occasional tweaking while leaving the private insurance industry in control of much of our health care spending? About $600 billion is wasted on the administrative burden created by this industry while they can’t even get pricing of hospital care right. We don’t need the insurers, but we do need the hospitals. We just need to fund them appropriately.

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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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