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Published in Health Care

Michigan ranks second-lowest for hospital payments in RAND Corp. study

BY Sunday, October 11, 2020 06:10pm

Michigan ranked second-lowest in the nation for what employers and insurance carriers paid hospitals for care compared to payments hospitals received from Medicare from 2016 to 2018.

The findings come from a study on U.S. hospital pricing by the Santa Monica, Calif.-based RAND Corp. and the Employers’ Forum of Indiana. The analysis found self-insured employers and health insurers on average paid hospitals in Michigan 190.1 percent of the Medicare rate for inpatient and outpatient care. That compares to the national average of 247 percent.

Bret Jackson, president of the Novi-based business-labor coalition Economic Alliance for Michigan, views the report as “both good and awful all at the same time.”

While Arkansas was the only other state to rank better than Michigan, hospitals here are still paid at nearly twice the Medicare rate than what self-insured employers and health insurance carriers pay for the same care, Jackson said.

“We are very competitive being the second-lowest in the country for hospital prices,” he said. “At the same time, we pay 90 percent more than what the hospitals receive from Medicare and we’re getting nothing substantially different than those patients that have Medicare coverage.” 

Given the wide difference between what Medicare pays hospitals in Michigan and the average they receive from private payers, Jackson asserts that self-insured employers and private health insurers “are getting hosed,” although “other states are much worse off than we are.”

The 190 percent of the Medicare rate that employers and insurers paid on average from 2016 to 2018 is also an increase from the 156 percent identified in a 2019 RAND study based on data from 25 states.

“That should obviously ring alarm bells everywhere,” Jackson said. “That is very concerning.”


Still, the Economic Alliance for Michigan is “thankful” that the state ranks so well, which Jackson attributes to a combination of factors including good competition compared to other states, particularly in urban areas like Detroit, Grand Rapids, Lansing, Flint and Saginaw.

The state also has an “aggressive” insurance carrier in Blue Cross Blue Shield of Michigan that controls about two-thirds of the market, he said.

“While that may not be great for some, it has allowed prices to stay down,” Jackson said. “And the other insurers in Michigan get to ride the wave a little bit.”

Because of its large market share, Blue Cross Blue Shield carries significant negotiating power in crafting reimbursement contracts with hospitals, he said.

Jackson also cites Michigan’s strong certificate of need (CON) program that’s intended to avoid costly redundancies in care within a market, and the state’s “very successful” Medicaid expansion in 2014 that eased cost-shifting to private insurers to cover losses incurred when providing care to people who previously lacked health coverage.

The Michigan Health & Hospital Association also cited CON as a contributor to comparatively lower hospital prices in Michigan and how it “continues to play a key role in keeping costs low and quality high in our state,” CEO Brian Peters said in a statement.

“At the same time, COVID-19 has shown that the same efficiencies that save employers and patients on costs can make crises even more difficult to navigate,” Peters said. “Overall, the RAND study shows that health care pricing is a delicate and difficult balancing act. Our member hospitals and health systems will continue to provide the highest quality care possible to every person who walks through their doors, and will continue to be good stewards of the dollars they receive, regardless of who is paying the bill.”

Hospitals criticize report

The RAND report, which is based on an analysis of 2016-2018 claims data from 3,112 hospitals in 49 states, shows payments to hospitals nationally averaged 231 percent of the Medicare rate for inpatient care and 267 percent for outpatient care.

In Michigan, payments to hospitals for inpatient care averaged 204.4 percent of the Medicare rate and 176.6 for outpatient care.

The American Hospital Association was quick to criticize the RAND report. In a statement the same day the report was released on Sept. 18, AHA Executive Vice President Tom Nickels countered that “RAND continues to make broad claims about pricing based on a cherry-picked and limited data set.” RAND collected data from a “hand-picked sample of employers and insurers whose claims represent just 0.7 percent of inpatient admissions and 1.8 percent of outpatients visits,” Nickels said.

The RAND study also “again perpetuates erroneous suggestions that Medicare payments should be used as a benchmark for private insurers, in spite of Medicare reimbursing well below the cost of providing care,” Nickels said.

Arkansas was the lowest-cost state from 2016-2018 for hospital payments at 186.2 percent of the Medicare rate, and West Virginia the highest at 350.7 percent, according to RAND.

In the report, authors wrote that Medicare “sets hospital rates to approximate hospital operating costs.” The authors also questioned whether “it is reasonable and necessary for employers to be paying prices that are nearly 2.5 times as much as Medicare rates, especially when there are hospitals with similar quality scores that have lower prices.”

Direct contracting

The report suggests self-insured employers may want to consider contracting directly with care providers. Authors cite the contract between General Motors and Henry Ford Health System for 24,000 salaried employees in the Detroit area as an example of direct contracting.

“This process may require employers to think more judiciously about the prices that are being negotiated on their behalf, rather than outsourcing much of the work to brokers and TPAs (third-party administrators). As illustrated in this report, there are large potential savings at stake,” according to the RAND study.

Jackson said making that kind of major change in employee health benefits may prove difficult for many employers that lack the scale needed.

“What I’m concerned about is that especially medium or small businesses just don’t have the leverage that a larger employer has to try and make a direct contract work,” he said.

In markets that have only one health system and lack competition for care, there’s also “not even the ability or the incentive to make those types of arrangement work,” Jackson said.

“When we solve the health care problem, we need to solve it for everybody. We can’t have a situation where there’s haves and have nots, even in the business community,” he said. “We are paying too darn much and not getting enough value for it.”

West Michigan hospitals

Among West Michigan hospitals, Spectrum Health was paid 282 percent of the Medicare rate for inpatient and outpatient care, according to the RAND report. Mercy Health Saint Mary’s was at 191 percent while Metro Health was at 163 percent.

Lakeland Medical Center in St. Joseph, which Spectrum Health acquired two years ago, was paid 200 percent of the Medicare rate, and private insurers paid Lansing’s Edward W. Sparrow Hospital during the 2016-18 period at 173 percent.

In a statement to MiBiz, Spectrum Health said it believes data in the RAND study “to not be fully representative and was based on a very small data set for a very small percentage of our patients,” and that it was “not aware of any Michigan-based insurance provider that participated in the study.”

“Health care pricing is a complex topic,” Spectrum Health said. “However, we caution that when comparing payments between commercial payers and Medicare, it is widely accepted that Medicare reimburses well below the cost of providing care. While cost studies are important, Spectrum Health strongly believes that price transparency should be paired with corresponding quality care and out-of-pocket-cost data. Without the full picture of cost and quality of care, consumers may make poor health care choices and pay higher costs, without seeing improvements in the care provided.”

Dr. Rakesh Pai, president of Metro Health’s medical group and chief population health officer, said “many patients are financially harmed by receiving health care in the United States.” Metro Health is “doubling down on the quadruple aim” that includes a focus “on getting our cost structure right so that we can deliver cost effective care to our patients,” Pai said in a statement. “We strive to be a high value partner to employers and payers.”

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