Why is American health care so expensive? A study by the Rand Corp. offers some possible insights into this increasingly urgent question. It also offers new evidence of the particularly acute health care challenges in Indiana.
Rand's analysis compared what private insurers paid 1,598 hospitals for health care services to what Medicare might have paid those hospitals for the same services. That private insurers paid more than Medicare should not surprise anyone. But the size of the disparity is startling.
Overall, Rand found that private insurance plans were paying hospitals an average of 241% of what Medicare reimburses. Of $13 billion in payments in the study, Rand estimates, $7.7 billion of those charges would have been saved if those private insurers had paid at Medicare rates.
While the rate disparity has gone down in Michigan and several other states studied, the gap in Indiana has gone up over the past two years, according to Rand. Indiana hospitals included in the study were reimbursed by private insurers for outpatient service at more than 400% of Medicare rates, the highest of any state in the survey.
Indiana's inpatient rates were under less than twice Medicare rates but also higher than many states.
Parkview Health billed private insurers included in the study at nearly four times Medicare rates, the report found – one of the highest listed in the nationwide survey. Indiana University Health and Lutheran Health Network were also listed as among the hospital systems with the highest reimbursement rates – IU at 2.8 times Medicare rates, and Lutheran at 2.5 times Medicare.
The study is an attempt to break open a payment system hidden from public view. As Parkview CEO Mike Packnett noted last week, the dealings between hospital systems and insurance companies traditionally have been confidential. “We had no idea where we stood versus others,” he told The Journal Gazette's Sherry Slater. Sharing data with other hospitals, he added, could even be an antitrust violation.
Thus, there are lots of caveats in interpreting these numbers:
• Rand acknowledged that this sampling – which covered just 2% of the privately insured population – may not be statistically representative. In some states, some of the data Rand was able to access was from officially maintained all-payer-claims databases. Otherwise, the study relied on data from insurance companies and self-insured employers that were willing to participate.
• Data from Indiana, which does not have an all-payer-claims database, may have been particularly sketchy. Packnett noted only two insurance contracts of more than 400 statewide and just three regional employers were part of the study.
• Medicare rates, determined under a formula set by law, provide a steady baseline for comparison. But Medicare reimburses hospitals 87 cents for every dollar of the cost of care, according to the American Hospital Association. Hospitals that billed all customers at Medicare rates “would not have the resources to keep our doors open,” Melinda Hatton, the association's general counsel, said in a statement last week. The study also does not evaluate the quality of care at systems such as Parkview, which has been ranked among the nation's best.
If rates at Parkview and other Indiana hospitals are farther above the Medicare baseline than other states, the problem may not be one those institutions can solve by themselves. Indeed, some of the disparity in Indiana is likely a result of the costs of dealing with some of the nation's most serious health problems. One response to the disturbing numbers in the Rand report would be for Hoosiers to demand adequate public health spending and to get serious about fighting the state's outsized tobacco, alcohol, obesity, drug and mental health problems.
Hospital-by-hospital, the exact dimensions of the problem may be debated. But the Rand study – the first time such data about individual health care systems has been revealed on a large scale – illuminates what must certainly be a significant cause of cost increases.
The report suggests ways to ensure transparency and consistency in the way health care reimbursements are determined. Hospital leaders here and elsewhere should take the lead in demanding such reforms.