RAND Corporation released a recent study that analyzed reimbursement rate variation between Medicare and private payers, and the results are not surprising. Overall, employers were found to have paid 241% for inpatient costs and 293% for outpatient hospital services as compared with the reimbursement of the same providers by Medicare. These services account for about 44% of total spend for privately-insured medical care.
Over half of Americans are enrolled in employer-based plans, but the pricing of hospital charges is largely opaque to these payers. Health insurance networks negotiate discounted costs which are benchmarked by the health plan against the hospital’s “chargemaster,” the list prices as presented by the hospital. Routinely, networks boast about their greater-than-50% achieved discounts. So that means if the RAND study (which is based upon 2% of the U.S. population) is accurate, the chargemaster rates are about five times what Medicare pays.
Medicare rates are set using a complex formula but in general, these rates are supposed to equal 101% of the facility’s cost. But the rates are set by the government and hospitals have no choice – by law, they have to accept these reimbursements. Anecdotally, I have read that Medicare rates result in reimbursement of about 80% of actual facility costs. And adjusting for illness burden, governmental programs absorb the lion’s share of hospital costs and this study truly demonstrates the degree of cost-shifting.
Healthcare networks are battling this math with outcome-based reimbursement, case-rate pricing and the muscle of the members they represent – but it is a losing battle as Medicare rates continue to fall behind actual costs. In fact, the RAND study demonstrates that over its three-year period the cost spread increased by roughly 5%. It’s no wonder that reference-based pricing programs are gaining traction. Under reference-based programs, plans reimburse 120% to 150% of Medicare rates. The number of plans using this methodology is relatively small. But providers are seeing the writing on the wall as the fog around hospital reimbursement rates clear. This is a battle that is coming, and it isn’t going to be pretty.