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Fact Check: Should the Price of Healthcare Services Be Benchmarked Against Medicare Reimbursement Rates?

August 7, 2019 / Colorado Business Group on Health, Colorado Consumer Health Initiative, Rand Corp.
Flatlining ECG line indicating claims are false

Advocates for government price controls and the public option are attacking Colorado hospitals with a rebranded research paper from Rand Corp. But even the authors of the paper admit their numbers are shaky.

CLAIM #1: The price of all healthcare services should be benchmarked against Medicare reimbursement rates.

FACT: The Colorado Hospital Value Report, recently published by the Colorado Consumer Health Initiative and the Colorado Business Group on Health, purports to be a tool for comparing hospital costs and quality across the state. However, the report’s underlying objective is to argue for an expansion of government price controls on Colorado hospitals.

Specifically, page 13 of the report calls for employers and private insurance companies to:

  “Demand a shift from contracts based on a discount-from-charges contracts to contracts benchmarked against Medicare…”

This benchmark argument is often used by those who support price controls and a public option, which state officials are currently looking at. For example, the first draft of a reinsurance bill in the Colorado legislature this year would have capped prices that private health insurance companies pay to doctors, nurses, hospitals and other healthcare providers to “a percentage of Medicare reimbursement rates.” Similar price controls can also be found in “public option” proposals at the state and federal level.

Medicare and Medicaid, however, pay only 69 cents on the dollar for cost for care provided in Colorado.

One of the groups that produced the Colorado Hospital Value Report has demanded a new state-run insurance program and the below-cost price controls that go with it. That group, the Colorado Consumer Health Initiative, has even proposed a further expansion of the state’s Medicaid program to create a public option.

CLAIM #2: There is too much price variation in Colorado’s hospital sector, and private insurance companies should be paying much closer to Medicare rates for hospital care.

FACT: The principal data source for the Colorado Hospital Value Report is an earlier Rand Corp. study, which we have reviewed in detail before.

What public option advocates ignore are the massive problems with the numbers in the Rand Corp. study – problems that the authors have quietly admitted themselves.

To recap, the fine print of the report includes four pages of “limitations” which reveal the findings of the authors to be highly questionable. Specifically:

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.”

The report ignores the differences between out-of-network and in-network prices. Most people pay in-network prices, which are much lower. Failing to account for this dramatically inflates any price estimates developed by the authors.

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 report’s authors don’t know what was being paid for because private insurance companies often bill differently than Medicare. Therefore, the authors may be comparing a Medicare hospital facility charge to what an insurance company paid for both the hospital and the healthcare services provided by medical professionals. As noted before, the price paid by the insurance company for two things will be larger than the price paid by Medicare for one thing.

Other important factors were ignored by the Rand Corp. study and the Colorado Hospital Value Report that relies on those findings. According to the Colorado Hospital Association:

“When looking at price and quality, comparisons should be made across comparable hospitals – such as by type, geography and service offerings. Comparing small critical access hospitals to large academic medical centers to community hospitals to urban trauma centers, which vary significantly in the range of services offered and the patient populations served can be misleading.”

Finally, at least twice in the last year, federal judges have ruled that Medicare rate changes made by the federal government violated the law.