Privately Insurance Pays Much Higher Hospital Prices than Medicare Does

It is often said that the patients who pay the highest prices are the uninsured. This is because hospitals and other clinical providers have multiple prices with (artificial) discounts for large payers, but few discounts for patients who lack access to a health plan network. Hospitals charge different prices for each payer, depending on the payers’ market power. By negotiating discounts off high list prices hospitals are able to make it appear they are giving private insurers huge discounts (on paper). Of course, there really isn’t a huge discount; quite the opposite as I will explain later in this post. Caught in the middle of this price-gouging scheme are uninsured patients who are charged high list prices. The reality is that hospitals find that few uninsured patients can afford to pay their prices, who are often saddled with debts they cannot pay. The debts are often written off as uncollectable. Uninsured patients are not a significant source of income for hospitals. Third party payers are.

A new study by the Rand Corp. found that insurers and insured patients, many of whom have high deductibles, pay prices far higher than government payers, like Medicare and Medicaid. NBC Health News has a summary:

A report published Monday by the research group Rand Corp. found that in 2022, the prices hospitals charged to private and employer-based insurance providers were, on average, 254% higher than what Medicare would have paid for the same services.

“These very high payments ultimately result in higher premiums for health insurance coverage and can result in those needing care having to pay high prices to get it,” said Stacie Dusetzina, a health policy professor at Vanderbilt University in Nashville, Tennessee, who wasn’t involved with the report.

Hospitals are the largest component of health care expenditures. Historically hospital costs were three times that of prescription drugs and 50% higher than physician charges. Indeed, one of the reasons that drug makers are able to justify such high prices is because drugs are a more efficient method to treat illnesses than hospitals. Drugs that keep patients out of hospitals are a bargain compared to hospitalization.

In 2022, hospital services accounted for 42% of health care spending for people with private health insurance, and price hikes from hospitals were a significant contributor to the rise in the average amount spent per person.

Hospital prices in some states are even higher than the outrageous national average. California, Florida, Georgia, New York, South Carolina, West Virginia and Wisconsin all experienced prices of 300% higher than Medicare pays.

Another finding was no surprise: Hospitals charge more for simple services like administering drugs than prices for the same service in a clinical setting. Hospitals have considerable market power and charge accordingly. Hospitals have consolidated into large, regional health care systems in recent years. Virtually all major metropolitan areas are now served by a few large health care systems that wield significant market power.

[T]he high prices charged to private insurers mean patients will also end up paying more, either directly, in the form of higher copays or out-of-pocket payments, or indirectly, in the form of a smaller paycheck.

About 160 million people in the U.S. get their health insurance through their jobs, Briscombe said. “When you think about it in the way of an economist, all of it is paid by the patient. I mean, if it cost my job half as much to have health care, my salary would go up,” he said.

Labor economists believe that health insurance is just one portion of employees’ total compensation. Employees themselves pay the cost in lieu of higher take-home pay. Rand scholars also debunked a common myth that hospitals charge private health plans and insurers more to make up for lower Medicare and Medicaid fees. The study found that the share of Medicare and Medicaid patients didn’t explain higher prices. Hospitals’ market power within a given region explained the higher prices.

In recent years hospitals have consolidated into large, regional cartels with significant market power. Most major metropolitan areas are now dominated by two, three or four large health care systems that force all payers to contract with all affiliates at similar prices.

Read more at Rand: Prices Paid to Hospitals by Private Health Plans