American healthcare is in dire need of price reform. As is, employers are significantly disadvantaged.
In my blog on Monday, I bemoaned the fact that American drug pricing is manyfold greater than in other developed nations. It serves as a major disadvantage to American consumers, their health, and the healthcare system as a whole. You can read that blog here: https://www.healthcarelabyrinth.com/trumps-populism-could-spell-trouble-for-big-pharma/ .
I thought it made sense to reflect on some issues related to other healthcare pricing. As I have made the case often on this website, America’s healthcare pricing is fundamentally broken. A lot goes into this, but I wanted to reflect on two issues: (1) excessive employer coverage prices generated by Medicare and Medicaid actual and perceived underpayments and (2) the lack of site neutral payments in healthcare.
Employer coverage price disparity
I have made the case that employers in America have a disproportionate cost burden compared with businesses in other developed nations. That is because, even with tax deductibility of healthcare costs, employers pay a disproportionate burden of healthcare costs due to our predominantly employer-sponsored system. Foreign companies just don’t have this. There is little doubt that U.S. employers could reap huge savings and therefore be more competitive if we did one thing: adopt uniform pricing across healthcare coverage and properly funded government programs.
What do we know about provider rates in various lines of business?
Medicaid vs. Medicare – Medicaid rates generally are the lowest. It is hard to obtain exact payment rates in Medicaid, principally because reimbursement can vary greatly by state and even among healthcare services. In general, according to the Kaiser Family Foundation (KFF), Medicaid rates are almost 30% below Medicare rates. MACPAC, the congressional policy arm for Medicaid, says Medicaid inpatient hospital rates are found to be about 22% below Medicare rates. But many states provide supplemental reimbursement on the hospital side to close that gap. Accounting for these payments, inpatient Medicaid rates actually are about 6% above Medicare rates (but note, not all states offer such payments and supplemental payments may be funded by provider taxes).
Medicaid vs. cost – I am often dubious of statistics from hospital lobbies, but the American Hospital Association (AHA) tells us that hospitals received payment of only 88 cents for every dollar spent by hospitals caring for Medicaid patients in 2020. It is unclear if all supplemental payments are included or not. Given the power of the hospital lobbies in states, it is fair to say that the gap between cost and payment can be greater for other providers.
Medicare vs. cost – The AHA indicates that hospitals in Medicare received payment of only 84 cents for every dollar spent by hospitals caring for Medicare patients in 2020. In general, other Medicare provider rates are more robust than in Medicaid and gaps between service types in Medicare are less.
Medicare vs. commercial – Studies find that commercial physician rates are 130% to 145% of Medicare rates. For inpatient care, rates range from 185% to 255% higher than Medicare. Outpatient hospital commercial rates can be as much as 290% more than Medicare.
What can we conclude?
It paints a picture of some possible under-reimbursement in government programs that may need more government money to stop a cost shift to commercial. More importantly, what the actual and sometimes perceived under-reimbursement in Medicaid and Medicare does is allow providers, notably powerful hospitals, to pursue and justify a policy of demanding and achieving over-reimbursement in commercial and employer coverage.
I say actual or perceived under-reimbursement because a case can be made that Medicare and Medicaid rates may be adequate for most providers, especially hospitals. The non-profit think tank The Third Way concluded that 55% of U.S. hospitals make money on Medicare payments, with 33% making money on Medicaid payments as well. The efficient hospitals made money in Medicare by keeping costs down, saving almost $4,000 per patient discharge ($12,000 for those making money vs. $16,000 for those that did not). Of those that made money, most of them made 10% or less on Medicare. In contrast, most hospitals that lost money on Medicare had significant losses of over 10%. So, the more you spend, the worse you do.
Third Way also gives us a glimpse of where commercial profitability might be for hospitals. At Duke Regional Hospital in Durham, N.C., the hospital makes money on both Medicare and Medicaid rates. The breakeven point for commercial might be somewhere about 154% of Medicare. It charges about 258% of Medicare and makes a 35% profit on commercial insurance. Third Way says that commercial rates for hospitals are a nationwide average of 254% of Medicare. Extrapolated across the nation, that difference in rates (258% vs. 154%) could be worth hundreds of billions annually to the healthcare system.
Now, hospitals deserve a margin, too. But let’s remember that health plans make 5% to 10% in a good year, so 35% margins are very high. Hospitals could make a margin on commercial that is reasonable at much lower commercial rates and huge savings to the nation.
The ugly health plan game
Health plans generally contract at or near Medicaid fee-for-service (FFS) rates given how low their rates are from states. They may supplement a little and leverage their relationships with providers in other lines of business to help network adequacy.
But health plans play an ugly game when it comes to negotiating commercial rates vs. Medicare Advantage (MA) rates. The vast majority of commercial coverage is self-insured by employers, where health plans act as an administrator of healthcare services for a set fee. Plans are not at risk for medical expense or the rates they pay in the self-insured employer coverage market.
But in MA, heath plans are at risk and rates they pay to providers are everything. Health plans want to maximize margins in this usually high revenue and high premium line. Thus, they trade higher rates in the employer coverage world in favor of maintaining rates that are close to Medicare FFS for MA. The higher costs in the employer world are covered by employer self-insured funds and employers usually are none the wiser.
Thus, plans and providers each have a role in driving up employer coverage costs by demanding and agreeing to excessive commercial rates.
Site neutral payments
Moving beyond lines of business, hospitals fight for favorable payments in Medicare by demanding excessive compensation for services performed in hospitals or hospital-owned settings when these same services are reimbursed lower at cheaper settings, such as physician offices or ambulatory surgery centers. Hospital outpatient settings, hospital-owned free-standing ambulatory centers, and hospital-owned clinics often are reimbursed more via straight rate-setting based on their place of service or by additional facility fees levied by the hospital owner.
While some small reforms have been made, hospitals continue to be reimbursed exorbitantly for services they perform at hospital-based or -owned settings that can be done much more cheaply in other settings. The problem is exacerbated by the fact that hospitals and health systems are buying up physician practices. About half of all doctors today work for hospitals or health systems and studies show these doctors’ practice patterns are changing to procedures at more expensive hospital-based or -owned settings.
Mandating site neutral payments in Medicare would save up to $145 billion over 10 years if fully applied. But commercial reimbursement and therefore employer costs are impacted by the lack of site neutral payments in Medicare because most commercial payments are primarily a percentage of Medicare rates.
A Blue Cross and Blue Shield Association study finds the following:
- Average prices paid for a large commercial population were 31% higher for clinic visits in 2022 when provided in a hospital outpatient department setting compared with a freestanding physician office.
- Average prices paid for a large commercial population were 238% higher for chest x-rays in 2022 when provided in a hospital outpatient department setting compared with a freestanding physician office.
- Average prices paid for a large commercial population were 563% higher for prostate biopsies in 2022 when provided in a hospital outpatient department setting compared with a freestanding physician office.
The Blue Cross and Blue Shield Association (BCBSA) says migrating completely to site-neutral payments would save $471 billion for the government (Medicare), private insurance premiums/costs (because they are based on Medicare rates), and Medicare patients (in cost-sharing) over 10 years (2024 to 2033). Some studies say the savings could be as much as $847 billion over the timeframe.
The solution
Providers live off high rates and have no impetus to be efficient. Health plans’ conflict of interest in negotiating rates for employer groups perpetuate the problem. Equalizing rates across all lines of business with a reasonable margin built in is the answer. As well, immediately implementing site neutral payments across all services would add to savings. All this would take away the hospitals’ and other providers’ excuses to demand over-reimbursement from commercial and employer coverage, thereby reducing the costs of employers and making them more competitive. The additional benefit would be equal access to providers regardless of how your insurance is provided. Further, the system would emphasize efficiency and outcomes throughout the healthcare system.
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— Marc S. Ryan
