Healthcare 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?
Hospitals 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
Americans 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 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.