In my last post, I noted that some insurers fielding narrow networks plans in the ACA marketplace appear to be paying providers at rates as low or even lower than a strong public option would have. That left me wondering why those lower payment rates don't translate into much lower costs for plan holders willing to put up with the limited choice of providers. (One part of the answer may be that the ACA subsidy and benefit structure partly insulates subsidized buyers from the actual cost of care, potentially for worse as well as for better.)
The broader question is, what would be the effect on US healthcare if insurers generally paid a reasonable multiple of Medicare rates -- say, Medicare plus ten or twenty percent? And I just came across a short answer of sorts in a study that's having a swift impact on healthcare scholars' understanding of what drives healthcare prices. That's The Price Ain't Right? Hospital Prices and Health Spending on the Privately Insured, by Zach Cooper, Stuart Craig, Martin Gaynor and John Van Reenen, which analyzes a huge new database of payments to hospitals for privately insured patients. Here is one conclusion that bears on the broad question:
The difference between Medicare and private-payer payment rates is substantial. Figure 1 shows that Medicare payments are 53 percent of private rates for inpatient care, 55 percent for hip replacement, 56 percent for knee replacement, 67 percent for cesarean delivery, 65 percent for vaginal delivery, 52 percent for PTCA, 39 percent for colonoscopy, and 27 percent for MRI. As an illustration of the magnitude of this difference, we estimate that if (rather than using the true private-payer prices) private prices were set 20 percent higher than Medicare rates, inpatient spending on the privately insured would decrease by 17.4 percent. 26According to Richard Mayhew, some managed Medicaid insurers offering plans on the exchanges are paying less than 110% Medicare (some may be paying less than Medicare rates). While their networks may in some cases be unacceptably narrow, perhaps it's a camel's nose in the tent. As Mayhew points out, the ACA marketplace insures just 4% of the U.S. population -- so it's certainly not a given that the lowest payers in this small private market segment would have a strong impact either on the overall nongroup market or the much larger employer-sponsored market. In competitive ACA markets, however, they may put downward pressure on prices. That, at any rate, is the theory underpinning the ACA marketplace. If those rates somehow became a norm, in ESI as well as in the nongoup market the Cooper study suggests that healthcare spending by the privately insured would be reduced by nearly a quarter.
The footnote: (26): This thought experiment holds quantity constant (i.e., assumes no behavioral response). If inpatient care was paid at 100 percent of Medicare rates, it would lower spending by 31.2 percent. Similarly, paying at 110 percent of Medicare, 130 percent of Medicare, and 140 percent of Medicare would lower spending by 24.2 percent 10.5 percent and 3.7 percent, respectively.
Meanwhile, though, the study fingers hospital and provider consolidation as a major force driving prices up. And the ACA, by incentivizing coordinated care, has given a powerful boost to an already-powerful trend toward consolidation, providing a justification/excuse if not an actual business case for it.