The U.S. healthcare system has two categories of payers, pubic and private. And according to a new RAND study that looked at 2018 data, prices paid to hospitals by privately covered patients averaged 247% of what Medicare would have paid. The exact figure for a given state varied widely.
The authors of the study analyzed $33.8 billion in spending from 3,112 hospitals across the country. This accounted for about 750,000 claims for inpatient care and 40.2 million claims for outpatient services.
Another finding by the authors is that hospital costs within individual states and health care systems vary widely.
Public and Private Payers in Healthcare
A public payers is any organization associated with the federal or state government. Some examples of publicly funded insurance include Medicare, Medicaid, the Veterans Administration (VA), and the Children’s Health Insurance Program (CHIP).
Private payers include commercial payers such as health insurance carriers, self-funded groups, and private-paying individuals.
Why is This Important for Healthcare?
There are significant differences in how prices are determined based on the payer’s identity. This is an anomaly of the U.S. healthcare system when compared to most other markets for goods and services.
The cost of groceries, a car, or housework doesn’t change based on the payer, subsidies such as SNAP notwithstanding. But with healthcare, an identical test or procedure can vary by 247% or more, according to both this RAND study and other sources.
How Do Medicare and Private Insurance Vary in Pay Methodology?
Medicare follows a set fee schedule that calculates price for a service based on a base number that is adjusted for inflation, geography, condition severity, and other factors. This accounts for differences across cities, states, and patients, and seeks to pay providers their costs plus a mark-up.
Under private health insurance, the carrier has a contract with hospitals and providers on a discounted-charge basis, where the insurer has agreed to pay a set percentage of billed charges. The provider determines this billed price and agrees to contracts with various contracted networks to accept discounted payment from the carriers active in their area.
Pressure on Private Payer Calculations
RAND researchers brought up the pressure on private insurers to leave discounted-charge contracting behind and shift to paying providers based on a percent of Medicare, a fixed-price arrangement known as reference-based pricing or RBP.
What’s Reference-Based Pricing?
In reference-based pricing, a payer leaves a discounted-charge contract and begins paying claims based on a percent of Medicare. This can simplify administration but also present familiar challenges in healthcare, such facility access and provider availability.
Reference-based pricing has been featured in headlines recently, with both Montana and Oregon transitioning their state health plans to reference-based pricing. In Montana, the State of Montana Benefit Plan estimates that it has saved $13.6 million under the RBP model.
Like anything in health care, RBP can be implemented effectively or poorly. Some companies run into difficulties with RBP programs when local providers simply refuse to care for RBP-covered patients ie employees, and this can cause massive headaches. A key strategy for successful RBP plans is pre-authorizing with providers and letting the plan administrator get a confirmation that their rate will be accepted.
“Nationwide Evaluation of Health Care Prices Paid by Private Health Plans: Findings from Round 3 of an Employer-Led Transparency Initiative.” Brian Briscombe, Rose Kerber, Brenna O’Neill and Aaron Kofner.