Why Medicare Advantage Plans Pay Hospitals Traditional Medicare Prices

Abstract

The policy community generally has assumed Medicare Advantage (MA) plans negotiate hospital payment rates similar to those for commercial insurance products and well above those in traditional Medicare. After surveying senior hospital and health plan executives, we found, however, that MA plans nominally pay only 100-105 percent of traditional Medicare rates and, in real economic terms, possibly less. Respondents broadly identified three primary reasons for near-payment equivalence: statutory and regulatory provisions that limit out-of-network payments to traditional Medicare rates, de facto budget constraints that MA plans face because of the need to compete with traditional Medicare and other MA plans, and a market equilibrium that permits relatively lower MA rates as long as commercial rates remain well above the traditional Medicare rates. We explored a number of policy implications not only for the MA program but also for the problem of high and variable hospital prices in commercial insurance markets.

Prices Paid to Hospitals by Private Health Plans Are High Relative to Medicare and Vary Widely: Findings from an Employer-Led Transparency Initiative

“…The most obvious and common examples are physician contracts that specify private prices as a multiple of the Medicare prices (Clemens and Gottlieb, 2017). Other examples include Medicare Advantage contracts in which hospital prices are determined, albeit indirectly, by Medicare fee-for-service prices (Berenson et al, 2015;Trish et al, 2017). Some private health plans also use Medicare prices as the basis for setting payments for out-of-network care (FAIR Health, undated).…”

Hospital Prices in Indiana: Findings from an Employer-Led Transparency Initiative

“…(Clemens and Gottlieb, 2017). Other examples include Medicare Advantage contracts in which hospital prices are determined, albeit indirectly, by Medicare fee-for-service prices (Berenson et al, 2015;. Some private plans also use Medicare prices as the basis for setting payments for out-of-network care (FAIR Health, 2013).…”

“…For such limits to be effective, they have to apply to total payments, including from the plan and the patient-if the limits are applied just to the patient cost-sharing for out-of-network care, the effect can be to inadvertently strengthen hospitals' negotiating leverage and drive up prices. Total payments for out-of-network care are limited in private Medicare Advantage plans, and those limits have been shown to subtly, but dramatically, reshape negotiations between plans and hospitals and drive down negotiated prices (Berenson et al, 2015;.…”

Variation in Payment Rates under Medicare's Inpatient Prospective Payment System

“…For instance, Medicare payment rates can affect prices in other markets (Frakt , ; Clemens and Gottlieb , ; White ; White and Wu ; Berenson et al. ). Separately, research by the MedPAC and others has raised concerns that payment adjustments, while in principle legitimate, are too large in the aggregate and poorly correlated with hospitals’ resource needs (Nguyen and Sheingold ; Chandra, Khullar, and Wilensky ; Grover, Slavin, and Willson ).…”