The High Price of Lowering Health Costs for 150 Million Americans
February 18, 2021
Image by 32BJ Health Fund, created to educate their plan members about hospital price differences
New data has a small but growing group of employers laser-focused on lowering the prices they pay for care. It’s a mission that has them on a collision course with hospitals, insurers and even their own workers.
Listen to the full episode below, read our companion piece on Kaiser Health News, read the transcript or scroll down for more information.
Employers — including companies, state governments and universities — purchase health care on behalf of roughly 150 million Americans. The cost of that care has continued to climb for both businesses and their workers.
For many years, employers saw wasteful care as the primary driver of their rising costs. They made benefits changes like adding wellness programs and raising deductibles to reduce unnecessary care, but costs continued to rise. Now, driven by a combination of new research and changing market forces — especially hospital consolidation — more employers see prices as their primary problem.
The prices employers pay hospitals have risen rapidly over the last decade. Those hospitals provide inpatient care and increasingly, as a result of consolidation, outpatient care too. Together, inpatient and outpatient care account for roughly two-thirds of employers’ total spending per employee.
By amassing and analyzing employers’ claims data in innovative ways, academics and researchers at organizations like the Health Care Cost Institute (HCCI) and RAND have helped illuminate for employers two key truths about the hospital-based health care they purchase:
1) PRICES VARY WIDELY FOR THE SAME SERVICES
Data show that providers charge private payers very different prices for the exact same services — even within the same geographic area.
For example, HCCI found the price of a C-section delivery in the San Francisco Bay Area varies between hospitals by as much as:
Research also shows that facilities with higher prices do not necessarily provide higher quality care.
2) HOSPITALS CHARGE PRIVATE PAYERS MORE
Data show that hospitals charge employers and private insurers, on average, roughly twice what they charge Medicare for the exact same services. KFF recently estimated that private payers would save $352 billion in 2021 if they started paying Medicare rates.
A recent RAND study analyzed more than 3,000 hospitals’ prices and found the most expensive facility in the country charged employers:
Hospitals claim this price difference is necessary because public payers like Medicare do not pay enough. However, there is a wide gap between the amount hospitals lose on Medicare (around -9% for inpatient care) and the amount more they charge employers compared to Medicare (200% or more).
A small but growing group of companies, public employers (like state governments and universities) and unions is using new data and tactics to tackle these high prices. (Learn more about who’s leading this work, how and why by listening to our full podcast episode in the player above.)
Note that the employers leading this charge tend to be large and self-funded, meaning they shoulder the risk for the insurance they provide employees, giving them extra flexibility and motivation to purchase health care differently. The approaches they are taking include:
Some employers are implementing so-called tiered networks, where employees pay more if they want to continue seeing certain, more expensive providers. Others are trying to strongly steer employees to particular hospitals, sometimes know as centers of excellence, where employers have made special deals for particular services.
Purdue University, for example, covers travel and lodging and offers a $500 stipend to employees that get hip or knee replacements done at one Indiana hospital.
There is a movement among some employers to renegotiate hospital deals using Medicare rates as the baseline — since they are transparent and account for hospitals’ unique attributes like location and patient mix — as opposed to negotiating down from charges set by hospitals, which are seen by many as opaque and arbitrary. Other employers are pressuring their insurance carriers to renegotiate the contracts they have with hospitals.
In 2016, the Montana state employee health plan, led by Marilyn Bartlett, got all of the state’s hospitals to agree to a payment rate based on a multiple of Medicare. They saved more than $30 million in just three years. Bartlett is now advising other states trying to follow her playbook.
In 2020, several large Indiana employers urged insurance carrier Anthem to renegotiate their contract with Parkview Health, a hospital system RAND researchers identified as one of the most expensive in the country. After months of tense back-and-forth, the pair reached a five-year deal expected to save Anthem customers $700 million.
Some employer coalitions are advocating for more intervention by policymakers to cap health care prices or at least make them more transparent. States like Colorado and Indiana have passed price transparency legislation, and new federal rules now require more hospital price transparency on a national level. Advocates expect strong industry opposition to stiffer measures, like price caps, which recently failed in the Montana legislature.
Other advocates are calling for more scrutiny by state and federal officials of hospital mergers and other anticompetitive practices. Some employers and unions have even resorted to suing hospitals like Sutter Health in California.
Employers face a few key barriers to purchasing health care in different and more efficient ways:
Hospitals tend to have much more market power than individual employers, and that power has grown in recent years, enabling them to raise prices. Even very large employers have geographically dispersed workforces, making it hard to exert much leverage over any given hospital. Some employers have tried forming purchasing coalitions to pool their buying power, but they face tricky organizational dynamics and laws that prohibit collusion.
Employers can attempt to lower prices by renegotiating contracts with hospitals or tailoring provider networks, but the work is complicated and rife with tradeoffs. Few employers are sophisticated enough, for example, to assess a provider’s quality or to structure hospital payments in new ways. Employers looking for insurers to help them have limited options, as that industry has also become highly consolidated.
Employers say they primarily provide benefits to recruit and retain happy and healthy employees. Many are reluctant to risk upsetting employees by cutting out expensive providers or redesigning benefits in other ways. A recent KFF survey found just 4% of employers had dropped a hospital in order to cut costs.
Employers play a unique role in the United States health care system, and in the lives of the 150 million Americans who get insurance through work. For years, critics have questioned the wisdom of an employer-based health care system, and massive job losses created by the pandemic have reinforced those doubts for many.
Assuming employers do continue to purchase insurance on behalf of millions of Americans, though, focusing on lowering the prices they pay is one promising path to lowering total costs. However, as noted above, hospitals have expressed concern over the financial pressures they may face under these new deals. Complex benefit design strategies, like narrow or tiered networks, also run the risk of harming employees, who may make suboptimal choices or experience cost surprises. Finally, these strategies do not necessarily address other drivers of high costs including drug prices and wasteful care.
Scenes from the Episode
If you listened to our full podcast episode, below are a few images of key scenes in the story. If you haven’t listened, find the episode in Apple Podcasts or Spotify.
This episode is part of a series on health care prices supported in part by West Health.
Want more Tradeoffs? Sign up for our weekly newsletter!
Select Resources on Employer Insurance and Health Care Prices:
Limiting Private Insurance Reimbursement to Medicare Rates Would Reduce Health Spending by About $350 Billion in 2021 (Karyn Schwartz, Jeannie Fuglesten Biniek, Matthew Rae, Tricia Neuman and Larry Levitt; KFF; 3/1/2021)
Montana’s Health Policy MVP Takes Her Playbook on the Road (Dan Gorenstein and Leslie Walker, Kaiser Health News, 2/18/2021)
Employers Can’t Fix U.S. Health Care Alone (David Blumenthal, Harvard Business Review, 1/12/2021)
2020 Employer Health Benefits Survey (KFF, 10/08/2020)
RAND Hospital Price Transparency Studies (Employers’ Forum of Indiana, 9/18/2020)
A Proposal to Cap Provider Prices and Price Growth in the Commercial Health-Care Market (Michael Chernew, Leemore Dafny and Maximilian Pany; The Hamilton Project; 3/10/2020)
2018 Health Care Cost and Utilization Report (HCCI, 02/2020)
Inside America’s high-deductible revolution (Noam Levey, Los Angeles Times, 2019)
Self-Insured Employers Are Using Price Transparency To Improve Contracting With Health Care Providers: The Indiana Experience (Gloria Sachdev, Chapin White and Ge Bai; Health Affairs; 10/7/2019)
Employer strategies to reduce health costs and improve quality through network configuration (Gary Claxton, Daniel McDermott, Cynthia Cox, Julie Hudman, Rabah Kamal and Matthew Rae; Peterson-KFF Health System Tracker; 9/25/2019)
Hospital Prices Grew Substantially Faster Than Physician Prices For Hospital-Based Care In 2007–14 (Zack Cooper, Stuart Craig, Martin Gaynor, et al; Health Affairs; 2/04/2019)
It’s Still The Prices, Stupid: Why The US Spends So Much On Health Care, And A Tribute To Uwe Reinhardt (Gerard F. Anderson, Peter Hussey and Varduhi Petrosyan; Health Affairs; 01/07/2019)
In Montana, a Tough Negotiator Proved Employers Don’t Have to Pay So Much for Health Care (Marshall Allen, ProPublica, 10/2/2018)
Many Hospitals Charge Twice Medicare (Reed Abelson, New York Times, 9/18/2020)
Marilyn Bartlett, CPA, CMA, CFM, Senior Policy Fellow, National Academy for State Health Policy; former administrator of Montana state employee health plan
Mike Chernew, PhD, Leonard D. Schaeffer Professor of Health Care Policy, Harvard Medical School
Will Haynes, 32BJ SEIU member
Elizabeth Mitchell, President and CEO, Purchaser Business Group on Health
Sara Rothstein, MSc, Director, 32BJ Health Fund
Gloria Sachdev, PharmD, President and CEO, Employers’ Forum of Indiana
Rep. Donna Schaibley, Indiana House of Representatives
Candace Shaffer, Senior Director of Benefits, Purdue University
Bob Smith, MBA, Executive Director, Colorado Business Group on Health
The Tradeoffs theme song was composed by Ty Citerman. Additional music by Blue Dot Sessions.
This episode was reported and produced by Dan Gorenstein and Leslie Walker. It was mixed by Andrew Parrella and edited by Cate Cahan. Web content created by Leslie Walker.
Additional thanks to:
Chris Whaley, Phil Terry, Natalie Roberts, Niall Brennan, Steve Abel, Rachel Cohen, Julie Stone, Suzanne Delbanco, Dan Villa, Dan Burke, Brian DeVore, Barbara Wachsman, Tom Williams, Arnie Milstein, Vivian Ho, Gary Claxton, Tricia Neuman, Erica Socker, Kathy Hempstead, Jennifer Fairman, Trish Riley, the Tradeoffs Advisory Board and our stellar staff!