Spending for services at hospitals is a large portion of total U.S. health care spending, 42% of all costs for privately paid services. The prices hospitals charge can vary widely by payer. The Medicare and Medicaid programs set what they pay through regulation, within boundaries set by Congress. This is in essence a political process, as hospitals and other providers have large lobbying groups and make substantial political contributions, and they constantly push Congress and the regulators to increase reimbursement.
For private health plans, payments to hospitals are negotiated, usually on an annual basis. That negotiation is a balance of relative leverage. Most areas have few hospital systems, and they tend to be quite large, and therefore have substantial market power. Most areas also may have few health plans, who also have market power. So you get pretty intense negotiations, although often the health plans take the line of least resistance and agree to large payment increases, knowing that they will pass those increases on to their customers — employers and individuals, in the form of higher premiums.
Hospitals routinely claim that Medicare and Medicaid don’t reimburse them at a level that covers the cost of providing services. Research suggests this is not true, but there isn’t much of a profit margin in government program reimbursement. Private health plans claim that hospitals shift costs from government programs onto them. This is probably not technically true if government payments cover costs, but the evidence suggests that hospitals try to get payments from private health plans that are high enough to generate profits across all the hospital’s business. Interestingly, hospital prices vary not just between payer types, but across and within geographic markets and to different health plans in the same market.
A new report from the Rand Corporation looks solely at the differences in what hospitals are paid by Medicare and what they charge private health plans. Hospitals have been forced to disclose contracted rates for several years, so better data is now available. The authors found that in every state, what private health plans pay hospitals is far above what Medicare pays them for the same services, even after patient factor adjustment, and in many situations is two or three times more than what Medicare pays. In fact, on average, a private health plan paid 250% of Medicare reimbursement for the same service.
The difference can’t be explained by different levels of Medicare and Medicaid patients at hospitals. It is largely explained by hospital market power. Employers and consumers are getting ripped off by hospitals — it is just that simple. You pay more in premiums and cost sharing because of these practices. And what do hospitals, especially nonprofit hospitals, do with all the extra money? They pay outlandish executive compensation. They waste money on marketing and advertising. They erect fancy buildings. So when you read that hospitals have financial issues, it is because they waste money left and right, not because they aren’t paid enough. We could save hundreds of billions every year by cracking down on these abusive so-called nonprofit hospital practices. And we should look into having all payers use the same reimbursement rates for hospital services.
Kevin Roche runs The Healthy Skeptic, a website about the health care system, and has many years of experience working in the health care industry. If you have health care-related questions, you can contact Kevin at xuebpur@urnygul-fxrcgvp.pbz and he may answer the question in a column.
Read more from Kevin Roche at his website: healthy-skeptic.com
Kevin Roche
Kevin Roche runs The Healthy Skeptic, a website about the health care system, and has many years of experience working in the health care industry.
