RAND: Employers Pay 254% of Medicare for Hospital Services
How Can Employers Address This?
This report from RAND examines hospital prices paid by private insurers relative to Medicare rates across all 50 U.S. states (excluding Maryland) from 2020 to 2022. It highlights wide variations in the percentage of Medicare rates paid by commercial (primarily employer plans) insurers and provides valuable insights for employers and policymakers aiming to address healthcare costs.
Key Findings:
National Overview:
In 2022, private insurers paid an average of 254% of Medicare rates for hospital services across inpatient, outpatient, and professional services combined.
Inpatient services averaged 244%, outpatient services averaged 263%, and associated professional fees averaged 184% of Medicare rates.
State-Level Variations:
States Paying Below 200% of Medicare: Arkansas, Massachusetts, Michigan, Mississippi, and Rhode Island had the lowest relative prices.
States Paying Above 300% of Medicare: California, Delaware, Florida, Georgia, New York, South Carolina, West Virginia, and Wisconsin had the highest relative prices.
Extremes:
Arkansas had the lowest relative prices at 170% of Medicare.
Florida and West Virginia had the highest relative prices, exceeding 335% of Medicare.
Trends Over Time:
Relative prices increased nationally from 241% in 2020 to 254% in 2022, driven primarily by increases in inpatient service rates.
Key Drivers of Price Variations:
Hospital market power and consolidation were strongly correlated with higher prices. A 10% increase in hospital market share was associated with a 0.09% rise in relative prices.
Price differences were not significantly explained by hospital quality or the share of patients covered by Medicare or Medicaid. I.e., more expensive hospitals did not correlate to better outcomes. In fact, other studies have shown the inverse.
Opportunities for Cost Savings:
States and employers could focus on negotiating lower prices in regions where commercial rates significantly exceed Medicare benchmarks and using Medicare plus some markup as a reference point for their reimbursement of hospitals. More on this below.
Employers could also consider shifting patient volumes from higher-priced hospital systems to lower-cost, high-quality providers.
Implications:
Employers using insurance carriers and their PPO networks to cover healthcare costs are paying 2.54 times what the hospital’s largest client (the federal government) pays. This pricing disparity creates significant financial challenges, reducing employer profit and employee compensation. Fair, reasonable, transparent, and accessible pricing data is essential for employers to negotiate effectively and design cost-efficient health plans.
The latest version of the full RAND report from December of 2024: https://www.rand.org/pubs/research_reports/RRA1144-2-v2.html
Solving the Cost Problem Through Reference-Based Pricing
One incredibly powerful and newer solution to address the unsustainable variation in hospital prices is implementing Reference-Based Pricing (RBP) tied to a percentage of Medicare rates. Under this model, employers negotiate and cap payments to providers at a predetermined percentage above Medicare rates—such as 140% of Medicare—instead of the 250% to 300% currently seen in many states.
By paying 140% of Medicare, employers realize immediate cost savings of 30% or more in the first year after factoring in the other expenses associated with this approach (stop loss coverage, a repricer, and a third-party administrator). This reduction is achievable without sacrificing access to quality care, as Medicare’s reimbursement structure is designed to ensure hospital profitability for efficient providers. Here’s how it can work effectively:
Transparency and Negotiation:
Employers leverage RBP to increase transparency around pricing and enforce discipline in hospital pricing and negotiations.
Hospitals are encouraged to align prices with Medicare benchmarks, which are fair and geographically adjusted for cost-of-living differences.
Employee Impact:
Employees benefit from reduced premiums and out-of-pocket costs because employer healthcare spending is more efficiently managed.
With thoughtful implementation, RBP plans can maintain or improve access to high-quality providers, particularly in regions where hospital market consolidation has driven prices far above Medicare rates.
Phased Implementation:
Employers can roll out RBP incrementally, starting with outpatient or elective procedures, where pricing disparities are most significant, before expanding to broader hospital services.
Alternatively, employers can install RBP as a cost option alongside their traditional carrier model or
Install RBP with a network solely for doctor’s office visits, leaving hospital charges (80% of claim expense) as the sole item undergoing RBP.
Employers should provide robust employee education and ensure a mechanism to handle balance billing disputes and access challenges, protecting employees from unexpected costs.
Long-Term Implications:
By normalizing payments at 140% of Medicare, employers create sustainable healthcare spending patterns that free resources for other critical benefits like wage increases, retirement contributions, or expanded health services.
This model also exerts downward pressure on hospital prices over time, benefiting the broader healthcare system.
In states like California, where commercial prices currently exceed 300% of Medicare, adopting RBP at 140% creates massive savings while maintaining equitable access to care. For employers grappling with rising healthcare costs, RBP offers the most impactful, practical, data-backed path to financial sustainability and better value for employees.
Below is an overview of just one of our California clients' experiences with the move to RBP.
