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Why Are Employers’ Plans Charged More Than Medicare?

July 25, 2022, by New City Insurance

graph showing the high cost of health care with usd bank notes a stethoscope and calculatorHealthcare spending is on the rise in the United States and continues to outpace inflation. While everyone is feeling the pressure of rising health insurance, employers and private health insurers seem to be getting the shaft. According to a recent RAND study, hospitals charge employer health plans more than double what they charge Medicare for the same services.

Using data provided by health plans, employers and state claims databases, the study showed that the average relative commercial price for hospital services was approximately 247 percent of the Medicare cost for the same services.

Medicare adjusts health provider costs on a regular basis based on geographic factors, price and wage increases, and similar factors. Using this data, it is clear that the cost of healthcare for employers and private insurers is rising at an uncontrolled rate.

It is important for employers to understand why they are being charged more for health plans compared to Medicare and how they can make essential changes to combat rising costs.

Medicare vs. Private Insurance Rates

Each year, Medicare develops a fee schedule that dictates how much they are willing to reimburse hospitals for certain services. Private health insurers, on the other hand, typically contract directly with hospitals on a discounted-charge basis. This means that they agree to pay a certain percentage of the hospital’s list price. The prices on this list tend to be considerably higher than the prices on Medicare’s fee schedule.

The cost of Medicare is up 400 percent since 1969, a significant jump from decades past. However, private health insurance premiums during the same period are up 700 percent, almost double that of Medicare. While inflation is mostly to blame for the rise in Medicare costs, the astronomical jump in private insurance rates has no such cause.

Why Are Employers Paying More?

man calculating healhcare costHospitals account for approximately 37 percent of health spending for those who are privately insured. In addition, individuals who may have not received hospital services during a given time period often end up still footing a portion of the bill through their premiums.

Over the last decade, annual per-person spending for workplace health coverage has significantly exceeded the spending growth of government programs. However, demand and enrollment for these services have not seen much change.

Hospitals report that Medicare reimbursement rates are considerably low. To address this issue, hospitals say they must charge privately insured patients more. The COVID-19 pandemic has also had a direct impact on many hospital business models.

Elective procedures have suffered widespread cancellation and similar issues have occurred that affect the cost of health insurance. Employers can expect healthcare costs to continue rising, resulting in higher copays, deductibles and coinsurance designed to help offset these expenses.

How This Impacts the Consumer

When private insurers are forced to pay significantly more compared to Medicare rates, the cost is ultimately passed down to the consumer in the form of higher premiums. For many consumers, rising out-of-pocket costs, including copays, deductibles and insurance premiums, have increased to the point that they have become altogether unaffordable.

Over the last decade, the shared cost of health care between consumers and insurers has become a major issue. Many employers continue to address rising healthcare premiums by shifting more of the costs onto employees and by offering new insurance plan options that put more of the financial risk on workers.

Consumers face even more financial stress due to high deductibles. Many employees are never able to reach their deductibles, making it difficult to get the healthcare services they need.

According to a study by the Kaiser Family Foundation and New York Times, 65 percent of respondents had difficulty paying for doctor’s visits and diagnostic tests, such as X-rays. In addition, 65 percent had difficulty paying for lab fees and 61 percent had difficulty paying for emergency room services.

Factors That Impact the Prices

sthethoscope on dollarsAmericans spend a significant amount of money on health care each year. According to the Centers for Medicare & Medicaid Services, healthcare costs rose to $4.3 trillion in 2021 with national health expenditures expected to reach a whopping $6.8 trillion by 2030. With no end in sight to these rising healthcare costs, it is important to understand what causes these significant spikes.

One of the biggest drivers of rising healthcare costs concerns hospital business models. Medical providers are paid for quantity, not quality, meaning each visit, test, and procedure is reimbursed under a fee-for-service system. This type of business model often encourages providers to see a high volume of patients, resulting in redundant services or over-treatment.

New technology, a rising population of unhealthy individuals, and an overall lack of information regarding medical services and their costs have also contributed to rising healthcare costs. Other factors that can impact healthcare prices include:

Hospital Type and Type of Service

The type of hospital and service can have a direct impact on healthcare costs. There are many types of hospitals across the US that fit into three main categories: for-profit hospitals, not-for-profit hospitals, and publicly owned hospitals.

Hospitals also range by size, teaching or non-teaching, rural or urban, acute or long-term care, and similar factors. Some hospitals also specialize in certain areas, such as research hospitals and children’s hospitals.

The type of hospital service can also play a role in cost. Some of the most basic services that hospitals offer include emergency room services, short-term hospitalization, X-ray/radiology services, specialty surgical services, blood services, and laboratory services. The technology required for these services, coupled with drug requirements and nursing services, can have a significant impact on plan costs.

Payment Form

health cpt codesPayment components also affect the cost of healthcare plans. Hospitals have fee schedules for physicians and other healthcare professionals. These fee schedules provide a list of the maximum rates that a payer will allow for services. The definition of services is based on a code set, such as Current Procedural Terminology (CPT). Generally, the payment is the lower of the provider’s fee schedule allowance or the provider’s actual charge.

Fee schedules give payers greater control over payment with predictable amounts. They also reward activity and promote a patient’s access to care as providers are paid more for the increased number of patients they see. However, fee schedules also encourage overprovision of services and often ignore whether a service was performed well and was appropriate for the situation.

How New City Insurance Can Help

Much has changed in recent years in regard to healthcare plans. Challenging economic times have caused many employers to cut costs. New and improved technologies, drugs, and treatments have also added to healthcare costs. These rising costs have made it difficult for many businesses to pay for insurance. This is where New City Insurance can help.

New City is an employee benefits consulting firm that specializes in benefits consulting, tech services, and insurance. The team at New City works hard to build custom plans with major carriers to improve coverage and decrease healthcare costs. For more information or to schedule a consultation with an experienced benefits consultant, contact the professionals at New City Insurance.

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New City Insurance
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Carol Zhang
Carol Zhang
04:29 06 Mar 22
As a rapidly expanding national media organization, the employee benefits strategy and administration that New City has provided us during our growth has been invaluable. They have been proactive about informing us of the different benefit strategies available to us as we grow as well as managing the additional compliance laws and reporting requirements at each stage of our growth.
Claudia Villalobos
Claudia Villalobos
20:14 03 Mar 22
New City Insurance made navigating through all the health insurances super EASY. Their documents are highly informative, professional, and easy to work with. Thank you for making the process of choosing a health plan so simple. You guys are THE BEST!
Philippe Salas
Philippe Salas
17:02 22 Feb 22
I never expected to have a good time talking to an insurance salesman, but let me tell you Brendan was quite the treat. He was very helpful explaining the options and has a wonderful sense of humor. I hope to speak with him every time I call.
Jennifer Polito
Jennifer Polito
17:15 09 Feb 22
Super easy enrollment process. Fast and friendly customer service. If you are looking for an insurance company that is there for you every step of the way I highly recommend New City Insurance.
Rocky Salas
Rocky Salas
23:46 07 Jan 22
So friendly, I hope to speak to him again in all my future insurance needs.
Rocky Salas
Rocky Salas
23:38 07 Jan 22
So friendly and soft spoken. I hope to speak to him again in all my future insurance needs.
Jose Brena
Jose Brena
13:20 06 Jan 22
Eric Calciano has been extremely helpful in finding and selecting the right insurance coverage for our company. With many options out there Eric assisted us on getting a low cost provider saving more than 20% than from our competitors and providing excellent coverage for our employees.
Anastasia Beaverhousen
Anastasia Beaverhousen
17:05 28 Dec 21
Signing up for insurance was quick and easy. Felicity Sundsboe
SFCC
SFCC
22:08 29 Nov 21
Jeff Stoltey and his team provide excellent customer service. Jeff has always provided my company SFCC with straightforward options. I went to a larger insurance company only to RUN BACK to Jeff at New City Insurance. I recommend them to anyone needing insurance without hesitation.
Kevin Luby
Kevin Luby
19:13 22 Oct 21
Quick, easy & informative. We were able to secure quality insurance for our small business on a tight deadline. Thanks for the help New City.
Theresa Ruybol
Theresa Ruybol
19:30 01 Jul 21
Eric was so great with us. He was very patient and kind as we are a newer smaller organization who is growing rapidly. With that said, we had made our inquiry, he had great rapid response and mostly had to wait on me. Any request that we made and/or questions we had, he was great answering and helping us understand. Then when we were ready for all documents and to move forward, Brendan helped with getting that together and the two of them worked their magic on New City's end to notify me of what was needed, assist me in that process and confirming that all was complete and approved for the coverage. I just want to say thank you all again so much, as insurance has always been confusing to me, and you all made that process go a lot smoother.Thank you
Andrea Ordendorff
Andrea Ordendorff
21:06 07 May 21
I've been working with both Clayton and Brendan for well over a year. As the purchase of our dental practice was delayed well over 14 months they both patiently supported me and continued to make themselves available. When we were officially ready to sign up they made the whole process seamless and super easy. This team is highly knowledgeable, professional, supportive, and efficient! I can't thank them enough for everything they've done.
T W
T W
22:32 30 Aug 20
I love New City Insurance. I never had a good experience dealing with insurance brokers until I started working with Brendan. He’s awesome! He is patient with me and takes the time to answer all my questions. I’m very grateful for all his help and hard work!
Mary Jane Deyette
Mary Jane Deyette
00:57 11 May 20
Jeff Stoltey is so awesome...even thru my company had only two employees, he took the time each year to research and find the best plan for us. The only reason I am leaving New City Insurance is because we no longer have any employees. Thank you Jeff
Alma Ortiz
Alma Ortiz
22:25 23 Feb 20
Brendan was awesome! I couldn't figure out how to pick my plan and he returned my call on a weekend to help me. Outstansing service!
jessica kavanagh
jessica kavanagh
19:53 13 Feb 20
Brendan was so helpful I definitely recommend him if you’re in need of good help and getting it done promptly. Thankyou so much again.
Tricia DeYoung
Tricia DeYoung
19:49 13 Feb 20
I was very thankful I inquired about this info. with Brendan. He was very helpful so I understand the benefits available much better now. Thank you Brendan.
B Bayer
B Bayer
17:43 24 Sep 19
NCI handled almost everything from start to finish. Clayton and Brendan made the plans easy to understand and walked me through the application process. They got me my ID numbers before my cards arrived so that I could keep an appointment I had already scheduled. My last broker wouldn't have done that. 5 stars!
Jessica Lehr
Jessica Lehr
03:36 07 Jun 19
Our staff was interested in a health plan, but we didn't know how beneficial a solid employee benefits package would be for our business to expand. We'd lose prospective employees because they had more options for their medical insurance which was sometimes more valuable than more pay. The New City team was amazing and gave us as many affordable options as possible so that everyone had their needs met.
Mike McClay
Mike McClay
19:36 03 May 19
My employer uses New City as their insurance broker, and I'm always amazed when I call in for assistance by how knowledgeable and attentive their staff is with my requests. Their online benefits platform makes selecting insurance plans pretty darn easy. I would highly recommend their services.
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