This paper compares the hospital payment rates of three larger insurers’ commercial plans and Medicare Advantage plans with Medicare’s fee-for-service rates. It also examines the variation of those rates across and within markets.
By Jared Lane Maeda (CBO) and Lyle Nelson (CBO)
Prices for hospital admissions have received considerable attention in recent years, both because they are an important component of health care spending and because they can vary widely. In this paper, we use 2013 claims data from three large insurers to examine the hospital payment rates of those insurers in their commercial plans and their Medicare Advantage plans and compare them with Medicare’s fee-for-service (FFS) rates; we also examine the variation of those rates across and within markets. We found that the average commercial payment rate for a hospital admission was about $21,400, but the prices for common types of admissions usually varied widely. By contrast, we found that the average payment rate in Medicare’s FFS program for the same mix of admissions and hospitals was about $11,400 (including Medicare’s additional payments for admissions to teaching hospitals and certain other supplemental payments). On average, therefore, commercial rates for inpatient services were 89 percent higher than Medicare’s FFS rates—or Medicare’s FFS rates were 47 percent lower than commercial rates, on average. The ratio of commercial rates to Medicare’s FFS rates varied greatly across metropolitan areas and across hospitals within metropolitan areas.
By contrast, we found that Medicare Advantage rates for hospital inpatient services were roughly equal to Medicare’s FFS rates, on average. In our preferred comparison, we excluded Medicare’s additional payments for admissions to teaching hospitals from the FFS rates, because the Medicare program makes such payments directly to hospitals for Medicare Advantage enrollees. Those additional payments were thus excluded from our estimated payment rates for both FFS and Medicare Advantage. But including those additional payments in the FFS rates affected the comparison only modestly. We also found that the ratio of Medicare Advantage rates to Medicare’s FFS rates varied much less across hospital stays, across metropolitan areas, and across hospitals within metropolitan areas than the corresponding ratio for commercial rates. Finally, we found that hospital payment rates in Medicare Advantage plans do not increase or decrease noticeably as the share of enrollees in those plans grows—a finding that has informed the Congressional Budget Office’s analysis of proposals to change the terms of competition between Medicare Advantage plans and Medicare’s FFS program.