Commercial insurers pay higher prices for health care than Medicare programs

The subcommittee heard testimony from Chapin White, director of health analysis for the Congressional Budget Office on health care subsidies and the difference between costs for Medicare fee-for-service (FFS) plans and what commercial insurers pay for health care services.

"The average prices that commercial insurers pay for hospital and physicians' services have historically been higher than the prices paid by the Medicare FFS program," White said. "Those higher prices result from several factors. Primary among them are the market power of providers and the limited sensitivity of consumers and employers to the prices that insurers pay providers. Limited price sensitivity on the part of insurers also contributes to high prices, but it mainly results from price insensitivity among consumers and employers."

White also noted that subsidies from the federal government for health insurance plans under the Affordable Care Act (ACA) are rising faster than costs under Medicare and Medicaid, due to the ACA plans being more subject to changes in the commercial market.

"Average subsidies grow at different rates for different sources of insurance coverage," he said. "Part of the reason is that the prices that commercial health insurers pay providers tend to rise faster than the prices paid by government programs such as Medicare and Medicaid, whose prices are generally set administratively. CBO estimated that between 2013 and 2018, the prices paid by commercial insurers with employment-based or nongroup plans grew by an average of 2.7% a year, whereas the prices paid by the Medicare fee-for-service (FFS) program grew by an average of 1.3% a year."

Transparency helps, but how much?

Price transparency was discussed as a way to hold down costs, but White indicated the CBO viewed transparency as important but not a quick fix for costs. Even comprehensive transparency reform would only bring a small amount of price reductions. Capping prices would be more effective in cost containment, he added.

"In CBO's assessment, a comprehensive set of policies that promoted price transparency would lead to very small price reductions (between 0.1% and 1%), and a comprehensive set of policies that promoted competition among providers would lead to small price reductions (more than 1% to 3%)," White testified. "Moderate to large price reductions (3% to 5% or more) would be possible under policies that capped the level or growth of prices paid to providers."

Sophia Tripoli, MPH, senior director of health policy for Families USA, praised the "Lower Costs, More Transparency Act" as a good first step towards addressing rising health care costs, but told the committee further steps were needed. These could include limiting mergers and acquisitions of health systems and hospitals, and more emphasis on site neutral payments, which would pay providers the same for a service regardless of where it was performed. The bill being considered has some site-neutral provisions for specific outpatient drug services, but Tripoli said the policy should be expanded.

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"The CBO estimates that this policy could save Medicare approximately $140 billion over the next decade," she said. "And the Committee for a Responsible Federal Budget projects that these polices could reduce health care spending by $153 billion over the next decade."

White, who noted that the CBO does not advocate for any specific policy, said that site-neutral payments could have some positive effects. "The site neutral policy that's in [this act] is pretty narrow, but a more expansive version could have some dampening of the incentives to consolidate," he said.