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Fact Check: Do Colorado Hospitals Charge Insurance Companies Too Much Compared to Medicare Prices?

May 27, 2019 / Rand Corp.

A recent report from Rand Corp. suggests Colorado hospitals are charging private insurers more than twice what they receive from Medicare – the federal health plan for seniors – for the same services.

CLAIM #1: Hospitals should be charging Medicare rates for all the services they provide.

FACT: The press release accompanying the study states: “If employers and health plans participating in the study had paid hospitals using Medicare’s payment formulas, total payments over the 2015-2017 period would have been reduced by $7 billion—a decline of more than 50%.”

This claim ignores the reality of the Medicare program, which systematically underpays hospitals for the services they provide. Nationally, hospitals are reimbursed only 87 cents out of every dollar spent treating Medicare patients, according to the AHA.  But in Colorado, the payment-to-cost ratio is even lower: 69 cents for every dollar, according to the Colorado Healthcare Affordability and Sustainability Enterprise.

As the American Hospital Association said in response to the RAND Corp. report:

“Medicare payment rates, which reimburse below the cost of care, should not be held as  a standard benchmark for hospital prices. … Simply shifting to prices based on artificially low Medicare payment rates would strip vital resources from already strapped  communities, seriously impeding access to care. Hospitals would not have the resources needed to keep our doors open, innovate to adapt to a rapidly changing field and maintain the services communities need and expect.”

Making Medicare pricing the benchmark for what is a good or bad price for hospital services will help control costs, according to the press release accompanying the report:

“RAND researchers recommend that private insurers move away from discounted-charge contracting for hospital services and shift to contracting based on a percent of Medicare or another similar fixed-price arrangement. … [L]egislative interventions might include placing limits on payments for out-of-network hospital care or allowing employers to buy into Medicare or another public option that pays providers based on a multiple of Medicare rates.”

“[E]mployers have opportunities to redesign their health plans to better align hospital prices with the value of care provided.” 

If reducing healthcare costs is the goal, hospitals already have serious, thoughtful and pragmatic ideas on how to find savings without sacrificing quality. These ideas include standardizing insurance forms and procedures to reduce the 18 percent of healthcare spending that’s devoted to billing and insurance-related activities, or reducing unnecessary emergency room visits, which in Colorado alone would save more than half a billion dollars per year.

CLAIM #2: Hospitals in Colorado “had relative prices in the 250 and 300-plus percent range of Medicare rates.”

FACT:  The authors of the study admit these numbers are shaky in the middle of the report, where the authors detail the “limitations” on their findings. Two are the most striking:

1. “Our claims data sources lacked consistent flags for in-network versus out-of-network providers, and our analysis was not limited to in-network providers. Therefore, the prices that we report represent a mixture of negotiated contracted rates paid to in-network providers and allowed amounts for services provided by out-of-network providers.”

When a hospital is part of an insurance company’s network, it means the hospital and the insurer have negotiated an agreed set of prices for different hospital services. In-network prices are lower because the insurance company is, in effect, paying for those services in bulk. When a hospital is out-of-network, however, there is no such agreement in place and therefore the hospital must charge a one-off price that is usually higher.

The report glosses over the differences between out-of-network and in-network prices. Most people pay in-network prices, which are much lower.

2. “Also, it is possible that some private health plans bundle the payment for the professional component with the payment for the facility claim—in that case, facility prices relative to Medicare would be overstated because they do not include the professional component in the simulated Medicare price.”

The authors note they compared the price of two things, namely hospital facilities and the work of medical professionals with the price of one thing, hospital facilities. The price paid by the insurance company for two things will be larger than the price paid by Medicare for one thing.