Private Plans Pay Hospital Prices 241% Higher Than Medicare, RAND Finds

As healthcare costs rise, price transparency has become more important for consumers and healthcare purchasers to better understand the value they are getting. Hospital prices of privately insured patients are more than twice the price that Medicare pays, according to a new report from RAND and supported by the Robert Wood Johnson Foundation, the National Institute for Health Care Reform, the Health Foundation of Greater Indianapolis, and participating employers and business groups, such as Economic Alliance for Michigan.

In 2017, hospital prices for privately insured patients in 25 states were an average of 241% of what Medicare would have paid. The study used claims data from 3 sources: self-insured employers who chose to participate in the study, state-based all-payer claims databases in Colorado and New Hampshire, and health plans that chose to participate. The data represented 4 million covered lives receiving hospital services from 1598 hospitals between 2015 and 2017.

“The purpose of this hospital price transparency study is to enable employers to be better shoppers of health care on behalf of their employees,” Gloria Sachdev, president and chief executive officer of the Employers’ Forum of Indiana, said in a statement. “We all want to know which hospitals provide the best value (best quality at best cost).”

The study also showed that relative prices rose from 236% of Medicare prices in 2015. The ranged from approximately 150% in Michigan to more than 300% in Indiana. In Indiana and Colorado, the relative prices increased rapidly from 2015 to 2017, while they fell in Michigan during that time frame.

The research also found that prices varied nearly 3-fold among hospital systems. In nearly all systems, the relative price of outpatient care was much higher. While the relative prices of inpatient and outpatient care were nearly the same in the hospital with the lowest prices—still 150% of Medicare—for the hospital system with the highest prices—nearly 450% of Medicare—there was a much bigger difference. In the hospital system with the highest relative prices, inpatient costs were about 250% of Medicare while outpatient costs were nearly 600% of Medicare.

“The widely varying prices among hospitals suggests that employers have opportunities to redesign their health plans to better align hospital prices with the value of care provided,” said Chapin White, the study’s lead author and an adjunct senior policy researcher at RAND. “Employers can exert pressure on their health plans and hospitals to shift from current pricing system to one that is based on a multiple of Medicare or another similar benchmark.”

If hospital prices paid for by employers and health plans participating in the study were reduced to Medicare rates during the 2015-2017 time period, healthcare spending would have been reduced by approximately $7.7 billion, or 50%, according to the research.

“This study allows us for the first time to compare hospital prices within a state and across states,” Sachdev said. “With quality and price transparency now available, our aspiration of having improved, affordable health care seems within reach.”