Hospitals charged private insurers 254% more than Medicare paid: RAND report

Private insurers paid hospitals 2 ½  times – and in some states, 3 times— more than what Medicare paid for the same services in 2022, a new RAND report found.

“There’s so much variation,” principal investigator Brian Briscombe told Axios. “There might be valid reasons why one hospital is more expensive than the other. But there’s definitely some room for shopping, shall we say?”

Arkansas, Iowa, Massachusetts, Michigan and Mississippi had relative prices less than 200% of Medicare, while California, Florida, Georgia, New York, South Carolina, West Virginia and Wisconsin had relative prices that were more than 300% of Medicare. Researchers also found wide price variations within the same market. For example, private insurers paid three times the Medicare rate to one hospital but only twice as much at another hospital in the same city with the same quality rating. Greater consolidation was correlated with higher prices, with market share explaining 18% of price variation.

Researchers also found that commercial insurance prices for select administered drugs received in a hospital setting averaged 278% of average sales price, compared with the 106% of average sales price paid by Medicare.

Spending on hospital services accounted for 42% of total U.S. personal health care spending for privately insured individuals in 2022. Hospital price increases are key drivers of growth in per capita spending among the 160 million Americans with private insurance.

“The utility of this work is that it gives employers important tools they can use to become better-informed purchasers of health-care services,” said Peter S. Hussey, director of RAND Health Care. “Hospitals account for the largest share of health-care spending in the United States, so this report also provides valuable information that may aid policymakers interested in curbing health-care costs.”

The American Hospital Association had a different interpretation of the data.

“The RAND study only underscores what we already know — that hospitals are chronically underpaid for Medicare services,” said Molly Smith, the organization’s group vice president for policy. “Anything beyond that should be taken with a healthy measure of skepticism.”

Federal policies require hospitals to post prices for at least 300 “shoppable” services, and insurers must post their full set of negotiated rates. However, many hospitals have not complied with these policies, and insurer-posted data often contain duplicative information that often makes file sizes so large that they are difficult to use.

Related: Employer health care advocacy group urges action on ‘indefensible’ hospital prices

The state-level average hospital price has remained above 200% of Medicare—from 247% of Medicare prices in 2018 to 224% in 2020 and to 254% in 2022.

“The widely varying prices among hospitals suggests that employers have opportunities to redesign their health plans to better align hospital prices with the value of care provided,” Briscombe said. “However, price transparency alone will not lead to changes if employers do not or cannot act upon price information.”