Hospitals charge employers 254 percent over Medicare. The "why" gets fuzzy (2024)

Health systems are all too familiar with the differences between Medicare reimbursem*nts and payments from private insurers. But a controversial new report illustrates just how wide that gap can get.

The nonprofit think tank RAND released its most recent health care report May 13, comparing what hospitals charge private health plans to the prices paid by Medicare. This "employer-led transparency initiative" analyzed medical claims data from 2020 to 2022 in 49 U.S. states—except for Maryland, which sets its own rates for third-party payers under the nation's only all-payer hospital rate regulation system.

In 2022, employers and private insurers paid 254 percent of what Medicare would have paid for the same services at the same hospital inpatient and outpatient facilities, according to the study. That figure has remained stable throughout the two most recent rounds of RAND's research: private insurers also paid 254 percent of Medicare prices in 2018, and 246 percent in 2020.

Why do private insurers foot such high bills? The answer depends on who you're asking.

Hospitals frequently argue that they need to charge private payers more to offset underpayments from public payers. Indeed, a recent report from Strata—a decision technology company that reports hospitals' performance analytics—found that hospitals saw a "sizable" increase in delayed or missing payments in the first three months of 2024, from both Medicare and commercial payers. Gaps in expected versus actual revenue ranged from 16.5 percent to 17.9 percent, depending on the hospital's size.

Although hospital margins have continued to stabilize into 2024, the average health system isn't swimming in cash. Strata reported a median hospital operating margin of 4.7 percent in March of this year, up significantly from 0.4 percent in April 2023. But considering margins were negative for more than a year between January 2022 and February 2023, there's still ground to make up—all while labor costs continue to climb.

Then, there's the issue of uncompensated and charity care. According to RAND, Marietta, Georgia-based Wellstar Health System has the highest relative price for inpatient and outpatient services out of 301 health systems studied, charging private insurers approximately 452 percent more than Medicare.

The cost appears sharp compared to the lowest relative price on the ranking—nearly 110 percent out of New York City Health + Hospitals. It's notable that in Modern Healthcare's recent analysis of 255 health systems, New York City Health + Hospitals was the No. 1 provider of charity care—and Wellstar was second.

RAND both acknowledges hospitals' argument and highlights these gray areas: "For cost-shifting to be a main contributor to price differences, hospitals with higher shares of nonprivate patients should charge higher prices, while those with more privately insured patients should charge lower prices," the report reasons.

But when researchers plotted hospitals' relative prices against the number of nonprivate patients they discharged (patients covered by Medicare or Medicaid, and uncompensated or charity care patients), they did not find a "strong" or "statistically significant" relationship.

RAND did find a statistically significant relationship elsewhere. The greater a hospital's market share, the greater its price for private payers relative to Medicare—18 percent of relative price variation could be explained by a hospital's dominance in a given area.

Brian Briscombe, a senior quantitative analyst at RAND who led the report, told Newsweek that variation might come as a shock to patients.

"I think that the most important story, the most interesting story, is when one hospital costs a lot more than another overall in the same market, and they have the same quality score," Briscombe said. "That variation, that spread is surprising to some people because they've never had access to that simple way to compare one hospital to another."

The report—which ranks individual hospitals, health systems and states by relative price—could prove useful to employers that provide health insurance, many of whom are fed up with rising health care costs. But RAND has not been met with unanimous support. The American Hospital Association (AHA) has openly rebuked the report, alleging it makes an "apples-to-oranges" comparison by weighing private costs against "woefully inadequate" Medicare payments.

"Ultimately, the RAND study only underscores what we already know—that hospitals are chronically underpaid for Medicare services," said Molly Smith, the AHA's group vice president for policy, in a statement shared with Newsweek.

Newsweek reached out to both Wellstar and NYC Health + Hospitals about their positions on RAND's list.

Wellstar responded via email, saying the company's "pricing is competitive in the markets we serve. As a nonprofit health system, we serve the entire community, and we reinvest every dollar we make into initiatives that create healthier communities. In fact, Wellstar was recently listed as one of the top two large health systems in the country for the amount of charity care we provide."

Matthew Siegler, senior vice president for managed care and patient growth at NYC Health + Hospitals, gave the following statement: "For too long, insurers have taken advantage of safety net health systems who aren't profit driven and deliver high value care to lower income patients. NYC Health + Hospitals never seeks to be the highest paid provider in our market, but there is always more to do to ensure equitable reimbursem*nt for providers who serve vulnerable patients."

Briscombe hopes hospital executives can view the report as a valuable tool.

"If the market is functioning, [hospitals'] margins are going to be easier to see, they're going to be easier to access. All the price information is going to be easier to access," he said. "It's a new era of transparency that hopefully [hospitals] can embrace."

Briscombe also encouraged readers to look between the lines: "Try not to generalize about all the hospitals, because there's so much variation. There's nothing you could say that's true about all hospitals."

Update 5/14/2024, 5:40 p.m. ET: This article was updated with a comment from Wellstar.