Study: Hospitals Charge Private Insurers Way More Than Medicare

Hospitals with Dayton's two major health systems charge private insurance plans two to more than four times what Medicare paid for the same outpatient services, according to a new study.

Miami Valley Hospital, part of Premier Health, charged private health plans 295 percent of what Medicare paid for the same outpatient services. Kettering Medical Center, part of Kettering Health Network, charged private insurers 287 percent of what Medicare paid for outpatient services.

The price differences were revealed in a study by RAND Corp., with funding help from the Robert Wood Johnson Foundation, which provided a rare look into the prices that employers and private insurance plans negotiate with hospitals.

The research is geared toward employers making decisions about the prices they are paying for health care and toward policy makers concerned about hospital pricing and price transparency.

The terms of these contracts are typically secret, but the researchers with the study were able to look at 4 million claims paid to hospitals in 25 states from 2015 to 2017. This is the first broad-based study that reports prices paid by private health plans to specifically-named hospitals, according to RAND.

Hospital representatives say Medicare and Medicaid pay less than the cost of their services, so they have to charge employer-sponsored plans more in order to cover their costs. In Dayton, about 79 percent of Dayton-area hospital patients on an average day are covered by Medicare or Medicaid, according to the Greater Dayton Area Hospital Association.

Along with the high number of people on Medicaid and Medicare, Sarah Hackenbracht, president and CEO of the Greater Dayton Area Hospital Association, said there is no public hospital or teaching hospital in the Dayton area. These hospitals get reimbursed at a higher rate for Medicaid and in other regions take some of the strain off of the other health care systems.

"Our hospitals and our members take care of all of those patients no matter what form of payment they have attached to them," she said.

She said it costs money for local hospitals to have the latest patient interventions, which means spending money on education, technology and more.

And in addition, understanding the value of a hospital means also looking at the quality of care provided, according to Hackenbracht.

"We have exceptional value of our hospitals and the care that's provided here because we have such high quality care available and such high performing institutions that really prioritize patient experience and patient safety," she said.

Premier Health said in a statement that it reviewed the RAND study and had concerns about the size of the sample used in drawing conclusions about the cost of care.

"As noted by the American Hospital Association, hospitals received payment of only 87 cents for every dollar spent caring for Medicare patients in 2017; that program should not be used as the standard benchmark for hospital prices. If that were the case, hospitals would not have the resources necessary to operate," Premier stated.

Premier Health said the health system has undertaken various initiatives in recent years to reduce health care costs by hundreds of millions of dollars.

Some officials, however, said hospitals could be doing more to lower their cost of doing business and in turn lower the prices charged to employer-sponsored plans.

If employer-sponsored plans are paying for hospital operating costs that Medicare doesn't cover, hospitals have less incentive to lower their cost of doing business and operate in an efficient business manner, according to Tom Campanella, director of the Baldwin Wallace health care MBA program.

Campanella also said when employers pay a high price difference compared to Medicare, that can also reflect hospital consolidation. If a region has just one or two hospital systems, the hospital will have more leverage during price negotiations.

"If you don't have many options and you're not willing to walk out the door, you're going to be paying a lot more," Campanella said.

The study also showed a wide range from state to state. In Ohio overall, private insurers pay 300 percent of what Medicare pays for the same outpatient services, where in neighboring Indiana, private insurers pay 403 percent of what Medicare pays outpatient.

"It has very little to do with demographics and has everything to do, unfortunately, with health system power," said Scott McGohan, CEO of benefits brokerage McGohan Brabender.

McGohan said it's well known that hospitals charge employer-sponsored plans more than Medicare and Medicaid.

"The big question that everyone has to ask themselves is how much is too much and without information, we can't come to good conclusions. But our data is telling us that spread, the RAND study, is accurate," McGohan said.

Campanella said competitive forces should hopefully prompt higher priced hospitals to more aggressively address the cost of providing outpatient services for fear of losing business.

Outpatient care is growing faster than inpatient care, and it is also easier for third parties with lower prices to compete with hospital systems on outpatient care, because it's a smaller investment to open an outpatient service such as a imaging center than open a competing hospital.

It is also getting easier to shop for care, with insurance companies in recent years creating more user-friendly ways for policy holders to compare either the exact cost or estimated cost of different providers in a region.

One of the lowest priced hospitals in Ohio compared to Medicare prices is Medical Center at Elizabeth Place, which is a small private hospital in Dayton. For outpatient services, private insurance plans paid the hospital 129 percent of what Medicare paid, according to the study.

Beth Johnson, CEO of Medical Center at Elizabeth Place, said the hospital is small enough to know exactly what its expenses are, which let's the hospital set prices accurately based on what a service costs. She said they also work to reduce unnecessary overhead, such as cross training staff so they can operate efficiently based on changing needs.

"It's not unusual for us to come in less. Because we know exactly what things cost us, plus we don't have the overhead," she said.

Johnson said their physicians are given information on the cost of items they use for procedures, which lets them make decisions that pass along savings to their patients.

"As long as it doesn't impact quality of care, they are going to go with the lesser cost widget ... Physicians make wonderful decisions when they are given accurate information to work with," Johnson said.

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