Study: Indiana hospitals charge private health plans 311% of what Medicare would pay

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Indiana hospitals charge privately insured patients more than three times what Medicare pays for similar procedures, making it one of the most expensive states in the nation for hospital care, according to a new Rand Corp. study.

The study examined nearly 1,600 hospitals in 25 states, looking at prices paid by private health plans for a wide range of procedures in 2017 compared with what Medicare would have paid.

It found that Indiana hospitals charged 311% of what Medicare would have paid, making it the most expensive state in the study. Rand said it examined only states where it was able to obtain data, and hopes to include all 50 states for a report that will be released in early 2020.

On average, the hospitals across the study charged 241% of what Medicare would have paid. But there was a wide variation among states. Michigan hospitals had the lowest relative prices, charging privately insured patients an average of 153% of what Medicare would pay. Other states on the low end were Pennsylvania (169%), New York (178%) and Kentucky (186%).

At the high end—in addition to Indiana—were Wyoming (302%), Maine (283%), Wisconsin (279%) and Montana (277%).

Medicare typically pays less than private health plans, and hospitals often count on privately insured patients for much of their revenue and profit. But employer groups in recent years have begun to push back, saying they unfairly are charged a higher amount and thus shoulder much of the burden for the nation’s health care.

A large portion of private health insurance contracting for hospitals is done on a discounted-charge basis where the insurer agrees to pay a percentage of billed charges. By contrast, Medicare issues a fee schedule that determines the price it will pay for each service, with adjustments for inflation, hospital location, the severity of a patient’s illness and other factors, the study said.

Rand researchers recommend that private insurers move away from discounted-charge contracting for hospital services and shift to contracting based on a percent of Medicare or another similar fixed-price arrangement.

The analysis was done in collaboration between Rand and the Employers’ Forum of Indiana, an employer-led health care coalition. The Forum participated in study design and recruitment, while the analysis was done by Rand researchers.

“The widely varying prices among hospitals suggests that employers have opportunities to redesign their health plans to better align hospital prices with the value of care provided,” said Chapin White, the study’s lead author and an adjunct senior policy researcher at Rand, a not-for-profit research organization. “Employers can exert pressure on their health plans and hospitals to shift from current pricing system to one that is based on a multiple of Medicare or another similar benchmark.”

If employers and health plans participating in the study had paid hospitals using Medicare’s payment formulas, total payments over the 2015-2017 period would have been reduced by $7 billion—a decline of more than 50%, the study said.

“The purpose of this hospital price transparency study is to enable employers to be better shoppers of health care on behalf of their employees,” said Gloria Sachdev, president and CEO of the Employers’ Forum of Indiana. “We all want to know which hospitals provide the best value—best quality at best cost. Numerous studies have found that rising health care costs are due to high prices, not because we are using more health care services.”

Some private insurers said they were not surprised by the findings.

Rob Hillman, president of Anthem Blue Cross and Blue Shield in Indiana, said: “The Rand study tells us what we’ve known for a long time: that the traditional fee for service system doesn’t work. Indiana is fighting unsustainable medical cost inflation, and the only way to address it is to fundamentally change the reimbursement system. That’s why Anthem Blue Cross and Blue Shield is developing high value networks made up of care providers in Indiana who agree to be accountable for delivering quality, cost-efficient care.”

He added that 65% of Anthem’s contracts with primary care physicians are value-based, representing care for more than 550,000 of Anthem consumers in Indiana. This shift to value-based reimbursement is generating cost savings and better health outcomes, he said.              

In response, the hospital industry in Indiana said it was taking many steps to keep prices low.

“Hospitals are some of the largest employers in their communities, which is why we understand the urgency around reducing health care expenditures,” said Brian Tabor, president of the Indiana Hospital Association. “Reining in costs is complex and will take the collective effort of all of us—insurance companies, drug companies, hospitals, and employers.  Hospitals are fully committed to bending the cost curve and delivering the highest quality care to Hoosiers.”

He added: “Today our health care system pays a fixed rate for each medical procedure. With vast improvement needed in Hoosiers’ health metrics, it is imperative that we move to a model that rewards providers for improving outcomes and reducing costs. Our members are preparing for this shift, but it will take all of us working together to build a health care system that is cost-effective and delivers superior outcomes.”

Indiana University Health, the largest hospital system in the state, said in a statement that it recognizes that  affordability of health care is a growing concern for individuals, families, employers and governments, “which is why IU Health is doing its part by pursuing a number of strategies to make care more affordable for patients by controlling costs and managing care more effectively.” It did not elaborate.

Community Health Network said the Randy study’s focus on the cost of procedures and its use of Medicare payment data “does not accurately reflect the total cost of care for employers.”

“When comparing Indiana health care costs to other states, it’s also important to consider the unfortunate truth that Indiana ranks poorly when it comes to smoking, obesity, opioid use and overall health,” Community Health said in a statement. “Additionally, Indiana ranks as one of the lowest states in government funding for health care as well as for employer reimbursement.”

The health system said it has “been at the forefront of issues” to improve public health, such as raising the cigarette tax, raising the smoking age, and reducing opioid abuse and infant mortality.

Franciscan Health said it continually evaluates and implements measures to deliver quality health outcomes and reduce costs and invests in new clinical devices and materials, technology, life-saving medications and upgrades to its electronic medical record system.

“To further reduce costs, the Franciscan Health system proactively has participated in accountable care organizations for several years,” said Keith Lauter, chief financial officer of Franciscan Health Central Indiana. “Our partnership with other health care providers, commercial payers and Medicare has been most effective in reducing overall costs, creating more efficiencies and offering coordinated care to the patients we are privileged to serve.”

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