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To save billions, federal government should set hospital rates

Written by Diane Archer

A new report from the Center for American Progress (CAP) focuses on the high cost of hospital care, the biggest health care expense in the US. To save billions of dollars, CAP recommends federal rate-setting for all hospitals. Commercial health insurers can’t rein in hospital rates; Medicare for All would.

One third of health care spending is for hospital care. Hospitals have power to charge high rates in most communities. The many communities with only one hospital tend to have rates 15 percent higher than the relatively few communities with four or more hospitals.

As a result, on average, hospitals earn a hefty margin of nearly eight percent. In the health care space, only pharmaceutical companies and medical device companies have greater margins.

A multitude of hospital mergers have reduced competition and driven up costs. But, not all hospitals are winners. One in four hospitals lost money in 2016.

Unlike commercial health insurers, Medicare has leverage over hospital prices. It pays rates that are about half of commercial health insurance rates. That said, Medicare rates overall are fair. According to MedPAC, Medicare rates are eight percent higher than the marginal cost of treating a patient with Medicare.

Note: Hospitals that charge higher rates are not necessarily hospitals that provide better care. They could be less efficient. And, their inefficiency should not be rewarded.

All in–Medicare, Medicaid and commercial insurance–hospitals receive average rates about one third higher than Medicare because only about one third of hospital revenue is from commercial insurance. The rest is from public payers, like Medicare and Medicaid.

The Center for American Progress recommends regulating hospital rates so that they are close to costs, an end to surprise medical bills, and transparent information on hospital rates. Rate regulation alone could generate tens of billions of dollars in savings. In addition, Medicare pays higher rates for the same service in hospital than out of hospital, which makes no sense. The Center for American Progress recommends that Medicare move to “site neutral” payments, which it has begun to do.

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