Researchers: Hospitals’ Commercial Prices Typically Double Those of Their MA Prices

A team of researchers, looking at hospital pricing using posted prices, in the wake of the transparency rules that have been implemented for hospitals, has come to conclude that hospital organizations’ rates negotiated with commercial health insurers are typically double those of the rates provided to health plans through their Medicare Advantage (MA) contracts with those health plans.

In an article entitled “Hospital Prices For Commercial Plans Are Twice Those For Medicare Advantage Plans When Negotiated By The Same Insurer,” Mark Katz Meiselbach, Yang Wang, Jianhui Xu, Ge Bai, and Gerard F. Anderson, writing in the Forefront section of Health Affairs, report that hospitals’ pricing varies dramatically between MA and regular commercial contracts.

The article’s authors write that “Most major insurers operate in both the commercial health insurance and Medicare Advantage (MA) markets. We investigated the ratio of commercial-to-MA prices negotiated by the same insurer, in the same hospital and for the same services, using 2022 price information disclosed by hospitals in compliance with the hospital price transparency rule. Insurers negotiated median hospital prices for commercial plans that were two to three times higher than their MA prices in the same hospital for the same service. The median commercial-to-MA price ratio in the same hospital varied, from 1.8 for surgery and medicine services to 2.2 for laboratory tests and emergency department visits and 2.4 for imaging services. In multivariable Poisson regression analysis, higher ratios were associated with system-affiliated, nonprofit, and teaching hospitals, as well as with large national insurers. These findings reflect the differences in financial incentives and regulatory policies in the commercial and MA markets. Because insurers respond to differing incentives by obtaining different negotiated prices across markets, policy and practice efforts that alter incentives for insurers may have the potential to lower commercial prices.”

Why such dramatic pricing differences? The researchers explain that “Prior qualitative work published in 2015 cited hospital and insurance executives’ thoughts about why MA prices may be lower than commercial-market prices. First, out-of-network prices for MA plans are set at 100 percent of Medicare fee-for-service rates, meaning that hospitals receive Medicare fee-for-service prices from MA insurers if they do not join their network. This limit gives insurers bargaining leverage in their negotiations for their MA plans that does not exist for their commercial plans and has been consistently noted in prior work as a key reason that MA prices tend to adhere closely to Medicare fee-for-service prices. Second, MA plans face competition from traditional Medicare, and high prices for MA plans compared with traditional Medicare plans would make the premiums in the MA plans uncompetitive. Last, hospitals may be taking into consideration the insurer’s total book of business, which may comprise both commercial and MA plans. In effect, hospitals may be willing to accept lower rates for MA plans, where out-of-network prices are benchmarked to Medicare fee-for-service, in return for higher rates in their commercial plans.

Another potential explanation is that insurers bear more risk for their MA plans than for their commercial plans: Every dollar spent on a patient by the MA plan is, in effect, a dollar lost. In the commercial market, in contrast, roughly two-thirds of the market is self-funded by employers,1,13 meaning that employers are paying out the claims while insurers are paid on a capitated basis to administer claims and manage provider networks. All else being equal, insurers may accept higher prices for their commercial plans if it allows them to remain competitive in the MA market, where gross margins are nearly twice as high per enrollee.14,15 In theory, insurers should compete for the business of self-funded employers by negotiating low prices with hospitals on their behalf. In practice, however, it can be difficult for employers to change third-party administrators, which also compete on a variety of other dimensions (for example, administrative fees), and many employers lack market power to negotiate directly with hospitals themselves.16 Recent empirical evidence suggests that self-funded plans pay higher prices than fully funded plans for the same service.17,18 Ultimately, higher prices are passed on to employees and their dependents in the form of higher out-of-pocket expenditures and premiums and lower wages.”

The analyzed differences are dramatic; the researchers note that “Across all service categories, median commercial prices ranged between 1.8 and 2.7 times more expensive than MA prices. In dollar terms (exhibit 1), the largest difference was within surgery and medicine, where the median commercial price was $1,702 compared with $928 in MA plans, followed by imaging ($490 versus $191), laboratory tests ($32 versus $12), and ED visits ($519 versus $262). In regression-adjusted analyses, commercial prices were between $660 and $707 more expensive than MA prices, on average (or 2.1 to 2.2 times more expensive; see appendix 5 for regression-adjusted results).” What’s more, “Even within the same hospital and insurer for the same service, commercial prices were more than twice MA prices in most instances (exhibit 2). The median commercial-to-MA price ratio was 1.8 for surgery and medicine services (interquartile range: 1.2–2.9), 2.4 for imaging services (IQR: 1.4–4.7), 2.2 for laboratory tests (IQR: 1.2–5.5), and 2.2 for ED visits (IQR: 1.3–3.8). See appendix 10 for the full distribution of price ratios for each service category.”

In the end, the researchers note, “Our study has important implications for researchers, employers, policy makers, and other stakeholders interested in containing commercial hospital prices. High commercial prices are ultimately passed on to employees and their dependents in the form of lower wages, higher premiums, and higher out-of-pocket expenditures. The large price gap between commercial and MA prices within an insurer reveals the pricing consequences of differing incentives across markets. Out-of-network price benchmarking through government regulation, competition with Medicare fee-for-service, and the fact that insurers actually bear risk in the MA market may drive down prices in MA. In contrast, in the commercial market, self-insured employers are largely the ones bearing risk and paying the higher prices. Future research should investigate the relative contributions of these various factors in affecting the price gap between commercial and MA prices. Because insurers respond to differing incentives by negotiating substantially different prices across markets, policy and practice efforts that alter incentives for insurers may have the potential to lower commercial pricing.”

All five researchers are affiliated with Johns Hopkins University in Baltimore.