Tying hospital reimbursements to Medicare rates could reduce spending by $352B
A new KFF analysis shines more light on the discrepancy between private insurance reimbursements and Medicare.
With a self-funded plan, a company operates their own health plan with the help of a broker and a third party administrator (TPA). Companies take on more risk in the process but can manage this risk by buying stop-loss or excess-loss insurance. Once a company reaches an employee size of over 100, they should start considering going to a self-insured plan to save money and improve cash flow.
Total health care spending for people with private health insurance would be an estimated $352 billion lower in 2021 if private insurers used Medicare rates to pay hospitals and other health care providers — rather than the substantially higher rates they currently pay. That’s according to a new analysis by the Kaiser Family Foundation (KFF), a nonprofit organization focused on national health issues.
“A variety of policy levers could be used to move the health system in this direction, including Medicare for all, a public option, or regulatory controls over private prices,” note the report’s authors in their executive summary. “Our estimate illustrates the extreme of what could be accomplished in terms of reductions in spending.”
Related: Addressing hospital costs: Reductions come with tradeoffs and uncertainty
The findings represent a 41% decrease from the $859 billion in projected health care spending for people with private insurance this year, according to the brief. The resulting savings would be spread among employers ($194 billion) and employees ($116 billion), and the non-group market ($42 billion), assuming proportional savings throughout the private insurance market.
Other key findings of the report:
- Nearly half (45%) of the total reduction in spending would be for outpatient hospital services, where the price gap between private insurance and Medicare is relatively large. Other reductions would be for inpatient services (27%) and physician office visits (14%).
- About a third of the reduction would come from lower health care spending for privately insured adults ages 55-64, who tend to use more health care services than younger Americans.
- On average, health care spending per person with private insurance would be an estimated $2,096 less for adults ages 19-64 and $1,033 less per child if Medicare rates were used.
As KFF notes, federal and state lawmakers over the years have proposed using Medicare rates to rein in health care prices. The new analysis does not examine a particular health reform plan and is not intended to be a forecast, prediction, or endorsement of the policy. Rather, its authors seek to illustrate how lower payment rates could reduce health spending.
“With the United States economy still reeling from the impact of COVID-19, lowering private insurance reimbursement by using Medicare rates (or a multiple of Medicare rates) has the potential to put more money in the pockets of consumers and businesses,” the authors write. “It would also help address the high and rising cost of health care for people with private insurance.”
The authors also recognize, however, that “any proposals to limit private insurance reimbursement would undoubtedly be met with fierce opposition from health care providers, since it would decrease their revenue. … Any policy debate of this magnitude would highlight the significant tradeoffs, weighing the potential reduction in health spending against strong opposition from industry stakeholders, and concerns about the potential impact on quality and access.”
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