Private insurance plans pay hospitals far more than Medicare. Could price transparency fix that?

Have health insurance through your employer? Your plan is probably paying hundreds if not thousands of dollars more for hospital services compared with Medicare.

A new report by the Rand Corp. found that employer-sponsored plans routinely pay twice or even three times as much as Medicare for the same hospital services. What’s more, the markup that private plans pay varies significantly by state.

Health care is a major business expense for any company, yet many don’t have a strong grasp of what they’re paying for it — or whether they’re getting a good deal.

“Employers spend billions of dollars in hospital care and, for the most part, are in the dark on pricing. They have no idea if one hospital in the area is more expensive than the other, and that limits their ability to rein in health-care costs,” said Chris Whaley, an associate policy researcher for Rand and study co-author.

That has a direct impact on the 156 million people covered by an employer health plan. As costs continue to rise, employers are shifting the burden to workers.

Premiums for employer-sponsored plans rose 55 percent over the last decade, twice as fast as workers’ earnings. Deductibles — the amount people pay on their own before the plan takes over — rose 212 percent during that time, according to the Kaiser Family Foundation.

“Ultimately, it falls on employees,” said Chapin White, an adjunct senior policy researcher for Rand and lead author of the study.

The concept of private insurers, who must negotiate rates with hospitals, paying more than publicly funded Medicare, which sets its own rates, is not new. But the Rand report brings into focus the magnitude of the gap.

For example, at Thomas Jefferson University Hospital, employer-sponsored health plans pay 636 percent more than Medicare for outpatient care, or non-urgent services that don’t require being admitted to the hospital, according to the report.

Statewide, employer-sponsored health plans paid 144 percent more for outpatient hospital services compared with Medicare.

Rand researchers analyzed 2015-2017 data for about $13 billion in hospital spending from self-insured employers, state-based all-payer claims databases, and health plans in 25 states (New Jersey was not among the states studied). They compared negotiated rates for employer health plans with Medicare reimbursement rates for the same procedures and facilities.

In Pennsylvania, most hospital claims data came from employers in the western part of the state. Researchers included hospitals if there were at least 11 claims from the employer plans that contributed data. As a result, a few Philadelphia-area hospitals, including Jefferson and the Hospital of the University of Pennsylvania (where employers paid 233 percent more than Medicare for outpatient services) made it into the report. Rand hopes to expand its research to include more employers in Eastern Pennsylvania in its next report.

The study was supported by the Robert Wood Johnson Foundation, the National Institute for Health Care Reform, the Health Foundation of Greater Indianapolis and employers who contributed their health plan data.

Researchers found that in every state they studied, employer plans paid more for hospital services compared with Medicare — but how much more varied significantly by state.

Employers in Michigan, for example, paid 56 percent more than Medicare for all hospital services (inpatient and outpatient), while their neighbors to the south in Indiana paid 211 percent more than Medicare.

Hospitals say that Medicare underpays for services and that they are forced to negotiate higher rates with private plans to compensate. And Medicaid generally pays less than Medicare.

The Hospital and Healthsystem Association of Pennsylvania recently commissioned a study that found Medicaid pays hospitals about 81 percent of the cost of providing care to Medicaid beneficiaries, said Jeff Bechtel, senior vice president of health economics and policy for the association. He declined to provide a copy of the study.

“Hospitals need to pay their bills and pay the 24-hour, seven-day-a-week services to individuals that depend on their care and because of the lower government payer rates, it’s necessary and not surprising that rates for commercial payers are higher,” Bechtel said.

Jefferson declined to comment.

Other studies have challenged that long-touted explanation. White reported in a 2013 Health Affairs article that at hospitals where Medicare rates went down, private payer rates declined, too.

The Rand study didn’t draw conclusions about why employers in some states are paying so much more than in other states, but White and Whaley said the data show the need for more transparency in pricing.

While some employers buy health plans from insurers, most large companies self-fund, meaning the health plan withdraws money directly from the company to pay employees’ medical expenses. They may not know exactly what they’re buying or what they’re paying.

“It’s a ludicrous arrangement. Employers need to demand price information and not just trust that everything is going to work out to their benefit,” Chapin said.

Neil Goldfarb, CEO of the Greater Philadelphia Business Coalition on Health, said he hopes the Rand report will encourage more local employers to take a closer look at their health plans.

The coalition is a group of about 40 Philadelphia-area businesses that have come together to move the needle on health-cost issues that they lack leverage to address individually.

The task is one that may seem daunting to executives with big businesses to run and hundreds of employees to manage, Goldfarb said, but he thinks the Rand report will give employers information they can use to open a conversation about more equitable pricing and price transparency.

“There’s a lot of learned helplessness — I can’t influence the health plans, I can’t influence the providers — some employers will say I’m not in the business of health care,” he said.

That’s an attitude that businesses spending millions on health insurance can’t afford to have, he said.