Capping prices for all commercial payers could reduce hospital spending by $61.9 billion to $236.6 billion if those prices were set between 100 percent and 150 percent of Medicare rates, according to a new analysis from policy research firm RAND Corporation.
The researchers noted that hospital spending—the largest health spending category in the U.S.—accounts for one-third of national health expenditures; in 2018, U.S. hospital spending totaled $1.2 trillion. In response to high healthcare spending and concerns about affordability, policymakers have proposed a variety of reforms to increase health insurance coverage and modify how providers are paid, the analysis noted.
In this report, the authors analyzed the spending impacts of policy options to reduce hospital prices paid by private health plans. The authors estimate the potential impact on hospital prices and spending for a range of policy designs and assumptions for each option. They specifically considered three policy options—regulating hospital prices, improving price transparency, and increasing competition among hospitals—with various design choices and effectiveness levels for each approach.
The authors noted that price regulation could have the largest impact on hospital prices and spending but would likely face political challenges, while improving price transparency and competition could help reduce prices—but to a lesser extent than price regulation. Some of their detailed key findings include:
Regulating prices for all private plans, by either setting or capping prices, has the potential for a significant impact on hospital spending
- Setting prices for all commercial payers could reduce hospital spending by $61.9 billion to $236.6 billion when the rates are 100 to 150 percent of Medicare rates; this change would lead to a 1.7- to 6.5-percent reduction in national health spending.
- Setting prices for a public option or for highly concentrated hospitals would reduce the impact on spending, while capping prices could increase the impact on hospital spending.
Increasing hospital price transparency could help reduce prices, but is unlikely to reduce spending as much as regulating hospital prices could.
- Increased price transparency potentially reduces hospital spending by $8.7 billion to $26.6 billion.
- The uncertainty in how patients and employers would respond to price transparency initiatives necessitated the modeling of patient-driven scenarios, in which patients use price information to seek lower prices, and employer-driven scenarios, in which employers use price information to seek plans that steer patients toward lower-cost hospitals.
To this end, as of Jan. 1, 2021, new regulations from the Centers for Medicare & Medicaid Services (CMS), mandate that hospitals make public a list of their standard charges for items and services they provide, and to update this list annually. There are two ways hospitals can satisfy this requirement: via a comprehensive machine-readable file, or through a consumer-friendly shoppable services file. About a month into the new regulations, while overall, most providers have been compliant with at least one of the file types, approximately 30 percent of providers were not compliant for either, according to a recent analysis of more than 1,000 providers from consulting firm Guidehouse.
An increase in hospital market competition, even one that is large by historical standards, could also reduce prices but is unlikely to save as much as regulating hospital prices for all private plans
- Decreasing hospital market concentration would reduce hospital spending by $6.2 billion to $68.9 billion.
- Given how concentrated today's hospital markets are, policymakers would need to radically restructure hospital markets for prices to approach competitive levels.
Responding to the report, the American Hospital Association (AHA) Hospitals expressed dissatisfaction with RAND’s revelations, noting that “hospitals are doing their part to contain costs, as evidenced by the 1.9 percent increase in price growth per year on average over the last decade, according to the U.S. Bureau of Labor Statistics.” AHA’s President and CEO Rick Pollack added, “Many have also struggled financially during the COVID-19 pandemic, with an estimated $320 billion in lost revenue in 2020 alone. And yet, hospitals and health systems continue to be there for their communities no matter what and are the only sector that provide life-saving 24/7 care to everyone who needs it. This is reflected in the $660 billion in uncompensated care provided to patients since 2000 and $100 billion in community benefits in 2017.”
The association, which represents thousands of hospitals and other patient care providers, contends that RAND ignores the unique role of hospitals and health systems, and dismisses rising costs and market concentration in the commercial health insurance industry, which is earning record profits during the public health emergency while spending less on actual care. Pollack stated, “RAND continues to regurgitate older and flawed ‘studies,’ which may be why they land on a poorly-reasoned proposal to have the government regulate prices. Despite claims otherwise, it is widely acknowledged that Medicare and Medicaid – the two largest public programs – pay below the cost of delivering care. Price-setting would only enrich commercial health insurers at the expense of innovations in care that truly benefit patients.”
