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Why is Health Care So Unaffordable? New Study Shows Once Again: It’s the Prices

An updated analysis of commercial market health care prices by the RAND Corporation has revealed irrationally high prices. These prices trickle down and result in higher costs for consumers, employers, and taxpayers.

Privately insured consumers and employers across the country pay, on average, 247 percent of what Medicare pays for the same hospital services, according to a new analysis by the RAND Corporation (“RAND 3.0”) — which provides new data that once again highlights that hospital and physician prices are often extremely high and vary widely across markets. These high prices are a major driver of the increasingly unaffordable health care costs consumers are facing.

The analysis — an update from RAND’s previous blockbuster report on prices released in 2019 — examined claims for inpatient and outpatient hospital services across all 50 states (with the exception of Maryland, given the state’s all-payer model) between 2016 and 2018. The findings reinforce what other researchers have found: Privately insured consumers and employers are often paying excessive hospital prices set by providers with significant market power.

Key findings from RAND 3.0 include:

  • In 2018, privately-insured consumers and employers paid 247 percent of what Medicare would have paid for the same services across all hospital inpatient and outpatient services.
  • The average relative price for hospital inpatient procedures was 231 percent of Medicare rates; hospital outpatient procedures averaged even higher, at 267 percent.
  • Wide variation in prices exists among states, and even within states. For example, prices in Arkansas, Michigan and Rhode Island averaged less than 200 percent of Medicare, while prices in other states — including Florida, Tennessee, Alaska, West Virginia and South Carolina — were much higher, above 325 percent of Medicare on average in each of the states.

High Provider Prices Have Real Financial Implications for Consumers, Employers, and Taxpayers

As a part of this analysis, RAND also analyzed the savings that would accrue if the private plans included in the study paid Medicare rates — finding that they would have saved $19.7 billion between 2016 and 2018, roughly 58 percent, according to the analysis.

Exorbitant hospital bills not only impact those needing care — the ever-rising price of hospital care is also driving up premiums for people with private insurance and dramatically increasing the amount people must pay for care out-of-pocket. The average employee premium has increased by 65 percent over the last ten years, according to a 2018 Kaiser Family Foundation survey of employer health benefits. In 2019, the average deductible for an American family was over $3,500.

$19.7B

Savings that would have accrued between 2016 and 2018 if private plans in the RAND study paid Medicare rates

Even before the pandemic struck the United States and ignited a national economic slowdown, one-third (34 percent) of insured adults had reported that it was “very difficult” or “somewhat difficult” for them to afford their deductible. More than one-fourth of U.S. adults (26 percent) say that they, or a household member, had problems paying medical bills, and about half of this group (12 percent of all Americans) said the bills had a major impact on their family.

Hospitals have been able to extract higher rates for their services from privately insured patients in part due to consolidation — hospitals buying other hospitals, hospitals buying doctors’ practices — which allows hospitals to gain greater market power to negotiate higher rates and exert a stronger influence over prices. Moreover, the high price tag is seemingly divorced from quality: while consolidation increases prices, there is little evidence to suggest it improves quality.

Fixing the Price Problem and Improving Health Care Affordability

As the country debates ways to make U.S. health care more affordable, there are a number of potential federal and state solutions for addressing high hospital and provider prices.

Some policy solutions are aimed at lowering prices by increasing transparency or improving competition in the market. Examples of these solutions include policies to eliminate anti-competitive contracting practices that providers use when negotiating their contracts with insurers to make it difficult for insurers to steer consumers to lower-priced providers, such as all-or-nothing clauses and anti-steering/anti-tiering provisions. Possible solutions also include promoting the development of All Payer Claims Databases or other price transparency policies.

While these types of policies are good first steps, they alone won’t solve the prices problem. Getting costs under control and reducing what privately insured consumers pay for health care will require policies that directly lower the prices we pay. Several policy options with the potential to lower hospital prices are being discussed in the current policy debate at the federal and state level. This includes solutions that would expand the use of Medicare rates — typically a multiple of Medicare rates (e.g. 150 percent of Medicare) (the so-called “Medicare Prices for All” plan) — in the private insurance market. As evidenced by the RAND analysis and others, Medicare has done a much better job at constraining prices than the private market.

Examples of these policies include:

  • Rate Caps: Capping payment rates throughout the private market, or in segments of the market based on a multiple of Medicare rates. For example, some policy experts support capping rates in highly consolidated markets without sufficient competition or targeting the highest priced hospitals or services.
  • Public Option: Offering a public plan in the individual and/or employer markets that sets rates based on a multiple of Medicare. Two states — Colorado and Washington — have explored public options that include a cap on hospital prices that is a multiple of Medicare rates. Washington is in the early stages of implementation; Colorado’s policy is still being considered by policymakers in the state and is not yet enacted.

Depending on how they are designed, both of these policies have enormous potential to lower health care costs and create savings for consumers, employers, and taxpayers, as evidenced by recent work from the Urban Institute. Under one of the reforms modeled, Urban found capped rates at 160 percent of Medicare for hospitals and 115 percent of Medicare for professionals resulted in $157 billion in savings to employers, $79.7 billion in savings to families, and a roughly 17 percent decrease in premiums for consumers with employer-sponsored insurance.

As federal and state policymakers consider health care reform in coming years, solutions that directly target hospital and physician prices are essential to making health care more affordable for millions of Americans.