Jane Dotson
Private insurers' payments for physicians' services tend to follow Medicare's lead. A $1.00 increase in Medicare's fees increases corresponding private prices by $1.16. A RAND study found that in 2020, private health insurance plans paid hospitals 224% more than Medicare for inpatient and outpatient services, with wide variation in prices among states. Private insurers paid 222% of Medicare prices in 2018 and 235% in 2019. The gap between Medicare and private insurance rates in a given market is a function of the market power of hospitals relative to that of local insurers.
| Characteristics | Values |
|---|---|
| Private insurers' payments for physicians' services | Private insurers tend to follow Medicare's lead. A $1 increase in Medicare fees results in a $1.16 increase in private prices. |
| Medicare's influence on private payments | Medicare's influence is strongest in areas with concentrated insurers and competitive physician markets. |
| Medicare and private insurance rates | The gap between Medicare and private insurance rates depends on the market power of hospitals relative to local insurers. |
| Private insurance payment rates | Private insurance plans paid hospitals 224% more than Medicare for inpatient and outpatient services in 2020. |
| Medicaid and Medicare payment rates | Medicaid rates are generally well below Medicare rates, which are themselves below commercial rates. |
| Impact of payment rates | High commercial rates are sometimes justified as necessary to compensate for lower Medicaid and Medicare rates. |
| Coordination of benefits | If a patient has Medicare and other health insurance, the "primary payer" pays up to its coverage limit, then the "secondary payer" covers the remaining balance. |
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What You'll Learn
Private insurers pay hospitals more than Medicare
The high private-to-Medicare payment ratio reported by White's 2017 study (358%) is partly attributable to the fact that the analysis was limited to hospitals in Indiana, which has an exceptionally high degree of hospital consolidation compared to other states. If this study is excluded, the overall average for outpatient hospital services drops to 240% of Medicare payment rates.
Several factors may contribute to variations in estimates across studies, including the representativeness of hospitals and private insurers, the relative market power of hospitals and insurers in the markets included in the analysis, the types of hospital services examined, and the treatment of out-of-network payments.
Medicare has adopted several payment systems to manage spending and encourage providers to operate more efficiently, which has helped slow the growth in premiums and other costs for beneficiaries. For example, Medicare adopted its prospective payment system in 1983, which sets payment rates for hospitals in advance based on categories of hospital services known as diagnosis-related groups (DRGs).
Proponents of proposals to broaden the use of Medicare rates argue that such an approach would help make expanding coverage more affordable and reduce excess costs in the U.S. healthcare system. Critics, however, contend that bringing private insurer payments closer to Medicare rates could threaten providers' financial viability.
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Medicare's influence on private insurers' payments
Medicare has had a profound influence on the payment systems of private insurers. Medicare's vast enrolment numbers and the high proportion of revenues it represents have made its payment systems and licensure requirements the de facto standard for the private industry. Private insurers generally pay more than Medicare, and this gap is a function of the market power of hospitals relative to local insurers. Hospitals with more negotiating leverage can obtain higher payment rates from insurers.
Private insurers' payments are influenced by the payment rates set by Medicare, the federal insurer of the elderly and disabled. A $1 decrease in Medicare fees induces a $1.12 decrease in private payments, and a $1 increase in Medicare fees increases corresponding private prices by $1.16. Medicare's influence is particularly strong in areas with concentrated insurers and competitive physician markets.
Medicare has also influenced private insurers in the areas of standards for participating providers of care and for what services can be performed by what providers. Medicare's original "usual, customary, and reasonable" rules for paying physicians marked an advance over the relatively arbitrary fee schedules used by private insurers at the time. Medicare's experiment with global rates and its venture to set a capitation amount for end-stage renal disease (ESRD) patients have influenced private insurers to move away from fee-for-service towards capitation and other new payment arrangements.
Some US states have adopted proposals to establish public options that would set payments as a percentage of Medicare rates. Critics of these proposals contend that bringing private insurer payments closer to Medicare rates could threaten providers' financial viability.
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Medicare's relative rates and their impact
The RBRVS, along with MACRA, aimed to address reimbursement challenges but introduced complexities and disparities. For instance, Medicare has struggled to keep up with inflation, resulting in declining reimbursement rates and financial strain on medical practices. This has led to concerns about the impact on patient access and the viability of physician practices. Medicare's reimbursement rates are determined by pre-determined payment amounts, known as diagnostic-related groups (DRGs), for hospital stays.
The gap between Medicare and private insurance rates depends on the market power of hospitals relative to local insurers. Hospitals with more negotiating leverage can secure higher payment rates. Studies have found that in markets with a high degree of hospital concentration, private insurance payment rates are significantly higher than Medicare rates. For example, White's 2017 study reported a 358% private-to-Medicare payment ratio for hospitals in Indiana, a state with a high level of hospital consolidation.
However, evidence suggests that cost-shifting to private payers to compensate for alleged underpayment by Medicare may be more related to market power than actual shortfalls. Hospitals in competitive markets tend to focus on cutting costs rather than raising prices for private insurers. Additionally, the adoption of RUC recommendations by CMS has been criticised for exacerbating primary care shortages by favouring specialists. As a result, Medicare's rates and their impact are a highly debated topic, with proposals to broaden the use of Medicare rates as a benchmark to curb rising healthcare costs and improve affordability.
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Private insurers disregard Medicare's GAFs
Medicare and private insurance can work together to cover healthcare costs. When an individual has both Medicare and private insurance, each type of coverage is called a "payer". The "primary payer" pays up to the limits of its coverage and then sends the remaining balance to the "secondary payer". If the secondary payer does not cover the remaining balance, the individual may be responsible for the remaining costs.
Private insurers have been observed to follow Medicare's lead when it comes to payment rates for physician services. A $1.00 increase in Medicare’s fees, for example, increases corresponding private prices by $1.16. However, despite this influence, private insurers have been found to disregard Medicare's GAFs (Geographic Adjustment Factors). Geographic Adjustment Factors are used to adjust Medicare payment rates based on the location of service. While Medicare has been able to limit growth in expenditures per enrollee more effectively than private insurers, private insurance payment rates are often higher than Medicare rates. This is due in part to the market power of hospitals relative to local insurers, as hospitals with more negotiating leverage can obtain higher payment rates from insurers.
The Blue Cross and Blue Shield of Texas (2010), for instance, explicitly disregards geographic adjustments, while other provider manuals (Anthem Blue Cross and Blue Shield 2012; Blue Cross Blue Shield of Michigan 2013) do not mention these adjustments. This disregard for Medicare's GAFs by private insurers can result in higher out-of-pocket costs for individuals, especially when seeking care outside of their insurance network.
To improve price transparency and help individuals make informed decisions when choosing insurance, the Center for Medicare and Medicaid Services (CMS) has mandated that most plans and issuers of group or individual health plans disclose their pricing models to the public. This includes providing information on in-network rates, allowed out-of-network billing amounts, and tools for individuals to estimate their cost-sharing responsibilities.
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Coordination of benefits when using Medicare with other insurance
If you have Medicare and other health insurance (such as a group health plan, retiree coverage, or Medicaid), each type of coverage is called a "payer". The "primary payer" pays up to the limits of its coverage and then sends the rest of the balance to the "secondary payer". If the "secondary payer" doesn't cover the remaining balance, the patient may be responsible for the rest of the costs. This order of payment is called "coordination of benefits" (COB).
COB allows plans that provide health and/or prescription coverage for a person with Medicare to determine their respective payment responsibilities. This includes determining which insurance plan has primary payment responsibility and the extent to which the other plans will contribute when an individual is covered by more than one plan. COB ensures claims are paid correctly by identifying the health benefits available to a Medicare beneficiary, coordinating the payment process, and ensuring that the primary payer, whether Medicare or other insurance, pays first. It shares Medicare eligibility data with other payers and transmits Medicare-paid claims to supplemental insurers for secondary payment.
An agreement must be in place between the Benefits Coordination & Recovery Center (BCRC) and private insurance companies for the BCRC to automatically cross over claims. In the absence of an agreement, the person with Medicare is required to coordinate secondary or supplemental payment of benefits with any other insurers they may have in addition to Medicare. The COB process provides the True Out of Pocket (TrOOP) Facilitation Contractor and Part D Plans with the secondary, non-Medicare prescription drug coverage that it must have to facilitate payer determinations and the accurate calculation of the TrOOP expenses of beneficiaries.
If you have questions about who pays first, or if your coverage changes, you can call the Benefits Coordination & Recovery Center at 1-855-798-2627 (TTY: 1-855-797-2627).
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Frequently asked questions
Private insurance and Medicare are two different types of health coverage. If you have both, each type of coverage is called a "payer". The "primary payer" pays up to the limits of its coverage and then sends the rest of the balance to the "secondary payer".
Private insurers do not always follow Medicare rates. Private insurers have been shown to pay more than Medicare for inpatient and outpatient services. However, Medicare does influence private insurers' payments for physicians' services. A $1.00 increase in Medicare’s fees increases corresponding private prices by $1.16.
The relationship between private insurance and Medicare rates has implications for healthcare costs and access. High commercial rates are sometimes justified as necessary to make up for lower Medicare rates. However, studies show that facilities that rely heavily on Medicare may be paid lower commercial rates.
