Payment Trends

Hospital price study draws pushback

December 23, 2019 4:49 pm

May 13—The dramatic conclusion of new research that hospitals prices are more than 200 percent of Medicare rates is raising questions among industry analysts. Recently issued RAND Corporation research, which was geared toward an employer and policymaker audience, concluded that relative hospital prices — among those studied — increased from 236 percent of Medicare rates in 2015 to 241 percent in 2017.

The study drew interest from healthcare policymakers, politicians and advocates. But it also raised concerns in the hospital sector, including:

  • The small sample size, which encompassed less than 5% of all covered individuals in about half of all states and only 2% of the 181 million Americans with employer-sponsored insurance
  • The lack of regard for the deterioration in hospitals’ overall Medicare margin from -9.7% in 2016 to -9.9% in 2017

The Medicare Payment Advisory Commission’s (MedPAC’s) latest report to Congress projected that the overall Medicare margin will decline to about -11 percent in 2019.

The decline in overall Medicare margins from 2016 to 2017 was echoed in the deterioration of margins for the most efficient providers to -2%, which MedPAC said was primarily due to a decline in supplemental payments for uncompensated care and health IT.

A key MedPAC finding was that hospitals’ all-payer margins were 7.1% in 2017—perhaps too large for some policy advocates—but far less than the attention-grabbing triple-digit margins of the RAND study.

Another concern about the research was that the authors aimed to use Medicare payment rates as a standard benchmark for hospital prices even though those payments are less than the cost of care, Melinda Hatton, general counsel for the American Hospital Association, said in a written statement.

“In 2017, hospitals received payment of only 87 cents for every dollar spent caring for Medicare patients,” Hatton said. “Simply shifting to prices based on artificially low Medicare payment rates would strip vital resources from already strapped communities, seriously impeding access to care. Hospitals would not have the resources needed to keep our doors open, innovate to adapt to a rapidly changing field and maintain the services communities need and expect.”

Various issues not addressed

Another key issue left unaddressed by the study’s authors was the cost-shift that hospitals undertake to cover shortfalls from Medicare underpayments with higher prices for commercial health plans.

“If you’re really going to analyze this in a way that’s comprehensive and fair, you have to also address the hard realities of governmental and employer cost shifting as well as some of the more obvious underlying causes of cost growth, first and foremost,” said Lilly Scher, vice president and senior investment analyst at Eaton Vance Investment Managers, where she specializes in healthcare finance credit evaluation.

The RAND researchers raised the cost-shifting issue but dismissed it as “abstract” for employer-payers.

Similarly unaddressed was the biggest cost-driver for hospitals: employment costs. Personnel costs frequently total at least 60%of hospitals’ budgets. And hospitals have added more than 100,000 positions per year in many of the years since the 2008 recession, both to implement a mandatory historic expansion of costly electronic health records and to operationalize labor-intensive value-based payment models that in some cases also are mandated by the federal government.  

The RAND study also lacked analysis of hospitals’ drug claims, which comprised their fastest-growing cost area in recent years.

“If the underlying causes are salaries, wages and pharma — hospitals are the number-one employer, typically, in any given town — hospitals are both responding to wage need and trying to compete with respect to providing fair compensation to employees,” Scher said.

Negotiating positions for employers

According to the RAND authors, the widely varying prices they found suggested that employers can design their coverage plans to shift from discounted-charge contracts to “contracts based on a multiple of Medicare or other prospective case rates.”

However, the researchers cited previous studies that found consolidation is a key cause of high provider prices. Scher noted that consolidation “in and of itself is not evil.”

“We really are on the beginning precipice of efficiency development and looking at the broad spectrum of care hospitals are becoming involved in,” Scher said. She cited the increasing hospital focus on and funding to address the social determinants of health, and partnerships to transport patients to medical appointments and social activities.

But the RAND authors said it would be up to employers to prod consolidated hospitals to reduce prices through price transparency initiatives.

“Over the medium term — two to five years — self-insured employers can use price data to gradually rein in high-priced hospitals,” the authors wrote.

State-specific results show wide range of prices

Other parts of the RAND research categorized the 25 states examined. Among the findings: 

  • Relative prices ranged from 150% to 200% of Medicare rates in Michigan, Pennsylvania, New York and Kentucky.
  • Relative prices ranged from 250% to more than 300% of Medicare rates in Colorado, Montana, Wisconsin, Maine, Wyoming and Indiana.
  • Relative prices increased rapidly from 2015 to 2017 in Colorado and Indiana and decreased in Michigan.
  • Prices at hospital systems varied from 150% of Medicare rates to more than 400%.
  • Average relative prices for hospital outpatient services were 293% of Medicare rates.
  • Average relative prices for inpatient care were 204% of Medicare rates.
  • Relative prices were roughly equal for inpatient and outpatient services in Michigan, New York, Tennessee, Massachusetts, Louisiana, New Hampshire, Montana and Maine.

The research was funded by the Robert Wood Johnson Foundation, the National Institute for Health Care Reform, the Health Foundation of Greater Indianapolis and “participating self-insured employers.”


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