With healthcare costs on the rise, many employers are seeking greater insight into where their money is going. Health Affairs recently published a Johns Hopkins analysis of pricing data published by hospitals.
They discovered an alarming disparity between what hospitals charge for commercial plans versus what they charge for Medicare Advantage (MA) plans for the same services. According to the report, hospitals nationwide charge payers twice as much for healthcare services covered under commercial plans than for the same insurer’s MA plans.
Let’s dive deeper into the factors that make up this steep price gap and learn what employers can do to mitigate climbing healthcare costs.
The Growing Disparity Between Commercial and Medicare Advantage Charges
A team of researchers from Johns Hopkins University examined hospital pricing in the wake of the Hospital Price Transparency Rule that requires hospitals to post their standard charges for patient items and services publicly.
The study showed the median commercial-to-MA price ratio within the same medical facility to be 1.8 for medical and surgical services, 2.4 for imaging, and 2.2 for emergency department visits and laboratory tests. The average commercial plan prices were between $660 and $707, which was more expensive than MA plans.
Some types of medical facilities were seen to have an overall higher commercial-to-MA plan price ratio. This includes hospitals associated with teaching institutions, health systems, and large national insurers.
Factors Behind the Cost Gap
The researchers cited several reasons for the contrasting cost differences in hospital charges. One of the most notable factors involves the regulatory policies and financial incentives between the two markets.
Medicaid Advantage plans, which have become an increasingly popular arrangement in which the government contracts with private insurers to provide healthcare to seniors, are currently set at 100% of traditional Medicare fee-for-service rates. This gives insurers the upper hand when negotiating with hospitals.
With MA plans and traditional Medicare in direct competition, insurers are motivated to keep MA offerings relatively low. Many hospitals are willing to compromise and accept lower MA plan prices in exchange for higher commercial plan costs.
Another possible explanation for the significant cost gap is that insurers face a higher risk for their MA plans than their commercial plans.
With nearly two-thirds of the commercial market being self-funded, employers are covering claims while insurers are paid on a capitated basis to manage provider networks and administer claims. Many insurers are willing to accept higher costs for commercial plans if it enables them to stay competitive within the MA market.
Employees and Employers are Paying More
Healthcare costs have increased significantly over the last decade, and there does not seem to be an end in sight. An article published by Blue Cross Blue Shield of California revealed an anticipated annual proliferation of 5.5% from 2018 to 2027, an increase in spending from 2018’s 4.4%.
Both employees and employers will be tasked with taking on these additional costs. KFF’s 2023 Employer Health Benefits Survey found that annual premiums for employer-sponsored family health coverage totaled $23,968 this year.
Employees were responsible for paying an average contribution of $6,575 for their healthcare coverage. Employers project a median healthcare cost increase of 7% in the next year based on new data published by the International Foundation of Employee Benefits Plans (IFEBP).
The data lists the primary reasons for the 2024 cost increase, with utilization due to chronic health conditions topping the list at 22%, followed by catastrophic claims at 19%, and costly prescription drugs and cell and gene therapy at 16%.
Employers are Struggling to Manage the Cost
With healthcare costs continuing to rise, many employers struggle to provide their employees with comprehensive health plans that have become essential to attract and retain talent in today’s competitive labor market.
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survey published by the Pew Research Center revealed that 43% of employees who left their jobs said it was due to insufficient benefits, such as paid time off (PTO) and health insurance.
Today, more than half (56%) of small employers currently offer health insurance to employees, according to a press release published by the National Federation of Independent Business (NFIB).
However, of the 44% that do not offer these benefits, 65% of small employees say the reason is because health insurance is too expensive. In addition, 88% of organizations with 30 or more employees report cost as the leading factor in not offering health benefits.
Pricing Disparities Between Medical Services
In 2019, former President Donald Trump issued an executive order on pricing transparency in the healthcare industry to empower patients to compare healthcare pricing at different hospitals before making an informed choice of services.
Using data published by hospitals nationwide, Crowe discovered a 297% difference between the highest and lowest gross charges in individual hospital procedures. Another notable number was the national disparity in allowable revenue, which was 236%.
The amount a person pays for a specific healthcare service can vary significantly depending on the payer, such as a government program or private insurance. Geographical areas also greatly impact the cost of healthcare services in the U.S.
The Impact of Negotiations Between Healthcare Providers and Insurers
Inflation and other factors directly impact payment negotiations between healthcare providers and insurers. With rising expenses, many health systems and medical facilities are looking to increase the cost of their services as they enter negotiations for new contracts.
However, many insurers are not budging regarding these requests for cost increases, arguing that more expensive hospitals have the finances to afford high labor costs without resorting to rate increases.
Consumers feel the most significant consequence of negotiations between healthcare providers and insurers. This breakdown in negotiations often results in a substantial cost shift to consumers, who often need help paying higher rates for healthcare services.
What Employers Can Do to Mitigate the Cost
Employers are always looking for new ways to reduce healthcare costs for themselves and their employees. Today, organizations understand that it is essential to offer in-demand healthcare benefits to stay competitive and attract and retain workers.
However, there are things that employers can do to help reduce these expenses. Many factors that affect healthcare costs are under the control of employers.
Often, healthcare carriers structure their plan offerings around these factors, which generally include the following:
- Carriers– Organizations should identify the most cost-effective insurance carrier for their organization to manage expenses better. Plan premiums may rise or fall depending on the carrier chosen.
- Deductibles– Note that health plans with low premiums typically feature high deductibles and vice versa. Compare plans and select one that offers the best balance between cost and coverage.
- Copays– One effective way to lower plan premiums is to choose a health plan with a higher copay. In comparison, lower copays often result in higher premiums for plan participants.
- Prescriptions– Organizations may choose to offer prescription coverage separate from their primary healthcare plan. Higher premiums may arise if the prescription coverage pays for more specialized brand-name medications.
It can be difficult to manage healthcare costs, but organizations have some power in how they respond to increasing healthcare costs.
Advocating for Price Transparency
The healthcare landscape continues to shift after introducing federal price transparency rules. However, the key to these changes has long been advocacy from the business community. Through transparency, employers and employees can gain access to the information they need to compare healthcare costs and ensure a better quality of care at an affordable price.
Price transparency also helps make the healthcare system more accountable. Employers can use their power to promote awareness about cost gaps in healthcare to help affect health policy and bring real changes to the industry.
Working with an Employee Benefits Consultant
Employee benefits consultants play an essential role for small and large businesses by highlighting the many advantages of offering a comprehensive and competitive employee benefits plan.
These professionals have unmatched expertise in benefits and will implement industry best practices to ensure affordability and maintain compliance. With healthcare costs continuing to outpace inflation, businesses must find ways to mitigate rising costs.
Employee benefits consultants work directly with organizations to build custom healthcare plans tailored to businesses’ unique needs and wants. In addition to helping lower organizational costs, custom healthcare plans can provide employees with a better overall experience.
Employee benefits consultants work with major national networks, such as United, Humana, Aetna, Cigna, and the Blues, to allow employees to continue accessing their preferred facilities and providers.
Employee benefits consultants can provide today’s businesses with a long-term solution for managing healthcare costs in the aftermath of price transparency rules. Custom health plans can help lower the impact of claims on a business’s health plan performance while improving plan members’ benefits experience.
Reach Out to New City for a Competitive Employee Benefits Plan
The prices paid for hospital services have long been controversial for many major players in the healthcare industry. With the recent launch of price transparency rules, the substantial difference in what hospitals charge for commercial plans versus what they charge for MA plans for the same services has come to light.
Mitigating these rising healthcare costs is a main priority for businesses nationwide. At New City Insurance, we have helped countless organizations maximize their employee benefits cost savings in the immediate and the long term by offering better ways to restructure employee benefits without comprising benefits or network access.
Contact New City today to learn more about our proven strategies for achieving benefits cost savings or to request a consultation with an experienced benefits consultant.