Can Employer-sponsored Insurance Be Saved? A Review of Policy Options: Price Regulation

“[..] spending on hospital care makes up the largest single component of personal health care spending, an estimated 39 percent of the total in 2023, compared to 24 percent for physician and clinical services and 10 percent for prescription drugs. National spending on hospital care is projected to exceed $1.5 trillion in 2023, and is expected to grow by about 5.6 percent per year over the coming decade (a rate likely to significantly exceed general inflation). Much of this growth is driven by consolidation among hospitals and health systems, which then use their size and local market power to demand higher prices from commercial payers.

[..] recent studies by the RAND Corporation and the Urban Institute indicate that, on average, private insurers and consumers pay hospital prices that are 224 to 240 percent of those paid by Medicare in the same hospitals for the same conditions. These prices vary widely across the country and across services, with insurers in some states paying over 300 percent of Medicare prices on average. Increasing investment in health care facilities by private equity may be accelerating prices even faster.

[..] there is some evidence that hospitals become more efficient when Medicare prices are decreased, while spending is only modestly correlated with clinical quality. These findings suggest that a bit of belt-tightening would not have the devastating consequences that hospital lobbyists often claim. Evidence also shows that enrolling more people in Medicaid, which generally pays even lower rates than Medicare, has strengthened the financial status of hospitals. This is the case because, although payments from Medicaid are significantly lower than private insurer payments, they are high enough to help hospital finances relative to the limited funds available for covering the costs of caring for the uninsured. [..]

Maryland is currently the only state that regulates hospital prices across all payers. However, Maryland’s experience demonstrates that the impact of price regulation is highly dependent on how such policies are designed, implemented, and enforced. For example, although Maryland has been generally successful at constraining hospital costs (commercial insurers pay on average 11 to 15 percent less for inpatient services in Maryland than in other states), the state has had to adjust its all-payer model over time to address hospitals’ efforts to maximize revenue, such as by shifting of services to settings not subject to price regulation. Any effort to regulate prices would also need to include a mechanism to monitor the effect of price changes on vulnerable people, especially the low-income, those with serious health problems, and racial/ethnic groups that have historically been discriminated against in the health care system.

Given the political challenges, some state policymakers have looked to policies that do not set provider rates, but try to constrain provider prices indirectly. These policies include:

There are other intriguing policy options that could help reduce provider prices and improve affordability. For example, the Bipartisan Policy Center has recommended capping hospital rates, but only in markets that are highly consolidated. Others have proposed capping the prices hospitals can charge for out-of-network services, noting that doing so has put downward pressure on in-network rates. Indeed, evidence suggests that states that have capped out-of-network prices as part of efforts to combat surprise medical bills have seen a decline in in-network prices, as well.

One thing that is clear: doing nothing about hospital prices will continue to erode the affordability of coverage and access to care, while also limiting our ability to invest in other public priorities and other key sectors of the economy.”

In an earlier post, the authors identified three policy options to improve employer-sponsored insurance affordability: regulating prices, reducing anti-competitive behavior and improving price transparency.

Full article, Center on Health Insurance Reforms at Georgetown University’s McCourt School of Public Policy, 2023.1.18