Three Times the Cost: The Variability of Prices Paid to Hospitals by Private Health Plans

As sponsors of employer healthcare plans we have agreed to pay the healthcare costs of employees. This leaves us managing an expense that is both volatile and on a hyperinflation.  This hyperinflation, healthcare trend, has increased at a rate faster than normal inflation for many years and is driven by the rate that healthcare is utilized and the actual cost of healthcare.  As consultants, we always advise that trend is regional and varies by where you purchase healthcare.  This makes sense because we intuitively know that things cost more in Los Angeles than they do in Indianapolis.  But never would we imagine this cost differential to be 200-300% more; that’s irrational.

A recent study by the RAND Corporation of hospital pricing of self-funded plans in 25 states found that hospital pricing relative to Medicare varied significantly from state to state.  Using the Federal Medicare program as a base line, this study reviewed hospital pricing for privately insured patients.  The report indicates that, “Relative prices, including all hospitals and states in the analysis, rose for 236% of Medicare prices in 2015 to 241% of Medicare prices in 2017.”  The average cost that these self-funded private plans paid was 204% of Medicare with a range from 150% of Medicare rates to 400% of Medicare; nearly threefold difference in pricing.

With hospital expenses comprising 44% of privately insured costs, these hospital price increases and market variability can have a significant impact on the finances of employers and their plans.  The network negotiated discount process no longer yields advantage as hospital systems have grown and own their markets.  There are a number of employers attempting to exert pressure on the hospital systems they do business with by setting reimbursement levels as a function of Medicare (Reference Based Programs).  Furthermore, there is legislative action in several states to impose limits on payments for out of network hospital care.

Understanding the hospital systems’ pricing in the markets you do business in, or are considering opening new locations in, is an important part of managing this volatile expense.  A benefits consultant can help you implement strategies in the design of your benefit plan to leverage lower healthcare costs. Contact a Gallagher consultant today learn the options.