Paying private insurers Medicare rates would tank hospital revenue by 35%, study finds

Dive Brief:

  • If commercial payers reimbursed at the same rate as Medicare, average hospital revenue would fall roughly 35%, though it would vary widely by state, according to a new pricing study published in Health Affairs.
  • Harvard Medical School researchers found private health insurers reimbursed for inpatient and outpatient facility services roughly double what Medicare reimbursed and shelled out roughly 60% more than Medicare for services provided by a physician in 2017.
  • Policy action is needed to lower out-of-control healthcare prices, researchers determined, but any moves from Washington to tie reimbursement to Medicare rates could send hospital revenues flatlining as some providers already teeter on the edge of insolvency amid the coronavirus pandemic.

Dive Insight:

The nation’s healthcare infrastructure is under unprecedented strain from the coronavirus pandemic that has infected more than 1.1 million Americans to date and threatens to bankrupt providers, especially small, rural hospitals and independent primary care practices.

Medicare covers roughly 15% of the U.S. population and reimburses at much lower rates than commercial insurers. That gap is growing due to forces like rampant provider consolidation, making it difficult for private payers to negotiate rates, and other market failures, academics say.

The Harvard researchers analyzed state-level price variation in the commercial market relative to Medicare to nail down the potential impact of setting prices at Medicare rates on provider revenue. They used administrative claims data for more than 27 million employees in the IBM MarketScan Research Database and Medicare hospital cost reports.

For inpatient facility services nationwide, private payers paid on average 206% more than Medicare in 2017, researchers found. For outpatient facility services, the gap stretched slightly to 216%, while commercial insurers paid 163% more than Medicare for professional services.

Limiting commercial prices to Medicare rates would have significantly different outcomes on hospital revenue by state. In New Hampshire, hospital revenues would fall 40%, while in Michigan they would fall 21%. Providers would face the most financial challenges in states like New Hampshire with large gaps, though consumers in those states would see the greatest reduction in prices, researchers said.

The states where commercial payers paid significantly higher inpatient facility prices than Medicare were Maine, Wyoming, Montana and Oregon. The states with higher-than-average ratios of outpatient facility prices were Indiana, Wisconsin, Wyoming, California, West Virginia, Vermont and Colorado.

The findings are consistent with previous studies, including one published roughly a year ago from research organization RAND that also found commercial payers paid roughly twice what Medicare did for the same services in 2017.

​”Given the potentially large impact, policies to address the market failures that lead to high and variable prices in the commercial insurance sector are needed, but they should be structured to avoid the large disruptions that could occur if there were a very rapid transition to Medicare rates in the commercial market,” the Health Affairs researchers wrote.

The findings are problematic for proponents of a “Medicare for All”-type plan such as that espoused by Democratic presidential hopeful Sen. Bernie Sanders of Vermont, who dropped his bid in April. Expanding the program to the entire U.S. population could put private payers out of business altogether, causing major upheaval to how the country pays for healthcare.

Former Vice President Joe Biden, the presumptive Democratic presidential nominee, is championing a plan including a new Medicare-like public option, bolstering the Affordable Care Act by increasing marketplace subsidies and lowering the age of eligibility for Medicare from 65 to 60. Biden’s blueprint is a mixed bag for the industry, as payers have spent millions lobbying against a public option.

However, as premiums and out-of-pocket spending continue to rise, some regulatory action is needed, whether price caps, limiting price growth to inflation, cracking down on provider consolidation or a more sweeping public option to inject competition into the marketplace, researchers said.​

It’s unlikely Washington would take concrete measures to shrink hospitals’ toplines during the pandemic. Providers are already receiving funds from a $175 billion pot of money allocated by Congress in two rounds of relief legislation, and the American Hospital Association has called for more to help struggling providers stay open.

Posted in Law