getty
The second largest federal agency is in the market for a service sought by every company on the stock exchange. Who gets the best deal? Don’t assume the bureaucrats lose out to the free market competitors. As the findings of a new RAND study suggest, when it comes to buying health care services, the jumbo agency—the Centers for Medicare and Medicaid Services (CMS)— gets the sweetest deal, and the businesses are the chumps. According to the study, employers nationally pay two and half times what Medicare pays for the same services provided at the same hospitals, in every state, every county, and every health system.
Researchers in the past have noted the pricing discrepancy between Medicare and private sector payors. But the RAND team is the first to access big data from virtually every corner of the country to confirm it. Getting the data was a triumph and it required leadership from the Employers’ Forum of Indiana and other employers, as well as funding from the Robert Wood Johnson Foundation. RAND used commercial claims from across the country, representing $33.8 billion for 3,112 hospitals located in every state except Maryland.
The study finds that on average employers paid 247% what Medicare paid for the same services. Even that appalling number obscures the dismal reality: variation in pricing among hospitals is dramatic. Employers paid eight times what Medicare did for some services and got a relative bargain paying just twice what Medicare did for other services. The variation persisted among hospitals in the same state, same community, and even the same health care system. Some states (Arkansas, Michigan, and Rhode Island) had relative prices under 200% of Medicare, whereas other states (Florida, Tennessee, Alaska, West Virginia, and South Carolina) had relative prices that were above 325% of Medicare. But in all cases, employers paid much more than Medicare.
According to Christopher Whaley, policy researcher at RAND and lead author of the report, employers in this one study would have saved 58% if they had the same deal Medicare did during the study period. That is real money, and it means real sacrifice. According to Gloria Sachdev, President and CEO of the Employers' Forum of Indiana, “High hospital prices have taken a financial toll on employers and everyday people. And for employers specifically, it has resulted in them having less money available for employee raises, hiring staff, offering robust health benefits, growing their businesses, and contributing to their communities.”
Why does this happen? The RAND team dismisses the common rationale that hospitals are inadequately paid by Medicare and Medicaid, so they shift excess costs onto the commercially insured. If that were the case, commercial prices would correlate with the level of a hospital’s reliance on government payors. But the researchers did not find a compelling relationship between hospital prices and the share of patients covered by Medicare or Medicaid.
Researchers also dismiss the idea that higher payments are needed to deliver higher quality care. The study found little correlation between prices and quality ratings for the hospitals they examined.
Fundamentally, the number one reason hospitals charge employers so much more than Medicare is that they can. Although employers collectively spend as much as Medicare on health services, it is not in the DNA of a competitive market for businesses to act collectively. But even the largest individual employers have far less negotiating leverage than the singular Medicare agency.
Employers have been deeply frustrated by this. Over the past decade especially, employers put pressure on the market to change incentives, and push their health plans and claims administrators to negotiate for reduced costs and improved quality. These so-called value-based purchasing arrangements are increasingly incorporated into some contracts, but they are not dominant. And frankly, many health plans may not be serious about the quest for change. United Healthcare (UNH) has been trading at all-time highs this year despite the pandemic, but a survey of employers by The Leapfrog Group (my organization) ranked UNH lowest among plans for improving value.
This study has the potential to reenergize employers as they struggle to contain costs in a tough economy. And employers are right to focus on value, the combination of price and quality. As strange as it may sound, price alone is not the key to solving the cost problem in health care. Preventable errors, accidents, injuries and infections, ubiquitous in too many hospitals, are extremely costly. They lead to disability, lengthy hospital stays, readmissions, and distressing treatments and restorative surgeries—as well as death for more than 500 people a day in the United States. Employers and patients pay for this in dollars and in human lives. Because these problems are so common, our organization finds as much as a third of the dollars many employers spend on health care go to cover the consequences of these preventable errors.
Let’s hope this study puts the stake in the ground for employers and sends a message to hospitals and health plans that they want action. Lower the prices, eliminate the waste, and give all Americans the high-quality health care we deserve.
