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Hospital rates out of control with private health insurance

Written by Diane Archer

Hospital rates are out of control for people with private health insurance. Medicare, in sharp contrast to private health insurers, has the power to rein in provider rates for its recipients, even when hospitals have monopoly power. Consequently, private insurers today pay hospitals much higher rates than Medicare, and health care costs are unsustainable for working Americans. 

On average, it costs more than $2,500 a day to stay overnight in the hospital. Prices keep going up, and more people are choosing not to get care. Congress needs to rein in hospital rates to ensure Americans under 65 access to care–and, soon. The higher these rates go, the more people will forego needed care and the harder it will be to rein in hospital rates.

Higher hospital rates mean higher expenses–more staff, higher salaries, more investments. So, if Congress decides to step in to control these rates, reducing rates could mean layoffs and other stressors on health care providers. N.B. Congress has no plans to do so as of yet.

To date, hospitals have gambled on generating the revenues they need for fancy equipment and high executive salaries from private health insurers. For some time they did well. Now, it looks as if many of them made a bad calculation.

The novel coronavirus has cut into hospital revenues significantly. Even before the novel coronavirus pandemic, many hospitals–particularly rural hospitals–were closing down, and now many more hospitals are folding. If the hospitals operated on global budgets, with government guaranteed annual income, the future of hospitals would be far more secure.

How do private insurer rates compare with Medicare rates today? Kaiser Family Foundation (KFF) looked at 19 studies.

Because private health insurers and providers are able to claim their data as proprietary, there is no national data on private health insurer rates to analyze and compare with Medicare rates. Researchers have only been able to compare some private insurer rates to Medicare rates; but, hospitals generally prohibit them from disclosing the specific rates particular providers are charging particular insurers.

KFF’s key findings:

  1. Overall, private insurers pay nearly 50 percent more than Medicare for physician services.
  2. Private insurers pay more than two and a half times Medicare rates for outpatient hospital services (264 percent) and nearly twice as much as Medicare (189 percent) for inpatient hospital services.
  3. Private insurers pay about twice Medicare (199 percent) for hospital services overall.

Allowing hospitals and doctors to keep raising rates is hurting Americans, keeping them from affording health insurance and from getting needed care. If Congress stepped in and negotiated lower hospital and doctor rates for everyone, many providers likely would claim they could not manage. But, right now, they have less incentive to operate efficiently than they would if their rates came down.

Hospital rates make no sense. Within a community and throughout the country, hospital rates vary wildly. Market power influences rates significantly. Bigger hospitals might operate more efficiently than smaller hospitals, but they also generally command higher rates from private health insurers than smaller hospitals.  They have more market power. In areas where private insurers have greater market power, they are able to negotiate lower rates.

Hospitals with strong market power today deploy it to command high prices from private health insurers because they can, even if they are non-profit. Their goal is to maximize revenues. The rates they charge private health insurers are not high because of Medicare rates. They seek the highest possible rates regardless of what Medicare pays them.

Kaiser Family Foundation explains that “much of the literature suggests that providers negotiate prices with private insurers irrespective of Medicare rates, and that providers with substantial market power are best positioned to command high prices, allowing them to evade financial pressure to become more efficient.”

Hospitals that operate efficiently manage with Medicare rates. MedPAC, the independent agency that provides Congress with policy advice on Medicare, believes that hospitals that claim they lose money on Medicare could do a better job of containing costs.

The federal government could ensure the financial viability of hospitals if it enacted Medicare for all. Hospitals would be assured annual revenues through global budgets. And, they would save a huge amount in administrative expenses, largely from not engaging in hundreds of negotiations with private health insurers. Most important, health care spending would fall and everyone in the US would be guaranteed access to the health care they need.

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1 Comment

  • As an ex-pat US citizen, a Canadian citizen and resident I’ve observed the US decline in health care as an outcome of the profit motive. Health care and for-profit are mutually exclusive. It is obvious that for-profit, as always, ends up with profits achieved by sacrificng everything else, including it seems, its own survival.

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