Editor’s Note
This article is the latest in the Health Affairs Forefront series, Provider Prices in the Commercial Sector, featuring analysis and discussion of physician, hospital, and other health care provider prices in the private-sector markets and their contribution to overall spending therein. Additional articles will be published throughout 2025. Readers are encouraged to review the Call for Submissions for this series. We are grateful to Arnold Ventures for their support of this work.
The primary driver of growing commercial health care spending in the US is rising prices, driven in part by consolidation and the formation of “megaproviders.” New data from Oregon suggest that price limits referenced to traditional Medicare rates can be an effective solution with a light administrative burden. We propose that a similar scheme could be implemented more broadly, with state or national legislation setting Medicare-referenced price limits. To prevent offsetting, lawmakers may consider separate caps for inpatient facility fees, outpatient facility fees, professional fees, and pharmaceutical-derived revenue, set below each service line’s mean price. We also consider the enforcement mechanism, sufficiency of payments, and potential for a reduction in price variation.
Background
The United States’ high health care expenditures are associated with wage stagnation, unemployment, and deaths from suicide and overdose, with effects concentrated among workers earning $20,000-$100,000 annually. The seminal paper on the cause of the country’s spending, published in 2003, is titled “It’s the Prices, Stupid.” While the rise of new medical technology and increased use of health care services contribute to rising costs, the US spends more than peer countries because it does not regulate prices. Subsequent studies confirm that prices are primarily responsible for the dramatic rise in US health care spending, not input costs, quality, utilization, lack of price transparency, nor upcoding. Consolidation in the industry has accelerated this trend.
Strategies To Control Costs
In theory, commercial payers should guard our wallets, but they have not shown a strong ability to negotiate lower prices from the most successful private hospital systems. Even when insurers operate at near monopoly power, they tend not to pass savings extracted from hospitals on to their enrollees. In fact, per the majority of studies, insurers tend to use higher market power to raise premiums.
Current government efforts to curtail price growth in health care can be categorized into eight approaches: (1) federal and state merger review, (2) mandatory price transparency, (3) prohibition of anticompetitive contracting practices, (4) public option plans with expenditure limits and some degree of mandated provider participation, (5) price setting in the traditional Medicare program, (6) rate review via state board, (7) price limits in public plans referenced to Medicare rates, and (8) price setting through a hospital system revenue cap (that is, global hospital budget). Others have described the evidence of efficacy (or lack thereof) for each policy option. All have pros and cons. This article focuses on price limits.
Price limits referenced to Medicare rates were first demonstrated to produce savings after implementation by the Montana state employee health plan in 2016, which imposed a moderate cap on inpatient facility fees, outpatient facility fees, and physician payments. This study did not assess how relative valuations for different service lines were impacted. Unfortunately, since these limits were not set by law, but by a large employer, external pressures appear to have defeated the policy. Program administration was handed to Blue Cross Blue Shield in 2022, and little has been written about Montana’s public employee plan since then.
In 2019, Oregon implemented a price limit in its state employee plan, representing roughly 15 percent of the privately insured population in Oregon. Unlike Montana’s negotiated solution, Oregon codified the limit into law. The limit applied to facility fees and exempted small, rural, and critical-access hospitals. A separate, lower limit was applied to out-of-network charges. The policy appeared to save 4 percent of total plan spending in net. Interestingly, as higher inpatient and outpatient facility fees decreased to comply with the cap, all previously lower inpatient facility fees rose to meet the cap (exhibit 1). The impact on professional fees was not assessed.
Exhibit 1: Changes in inpatient prices per admission relative to Medicare payments for Oregon state employee plan enrollees, by hospital, 2014–21
Source: Excerpted, with permission, from Roslyn Murray and colleagues, 2024.
Notes: The 24 hospitals that were subject to the hospital payment cap (treated hospitals) are arrayed according to their relative prices for inpatient admissions in the pre-period (before the hospital cap was implemented in October 2019 and January 2020 for the two groups of state employees). Relative prices are measured as the commercial price per admission divided by the Medicare payment times 100. Average relative prices per admission by hospital are volume weighted, based on diagnosis-related groups.
The key question for price limits is at what level to set the cap. With an eye toward minimal government intervention, one might be tempted to target just high-price outliers or high-price service lines, for example, outpatient facility fees. The data from Oregon’s public plan price cap, however, tell us that commercial prices will rise to meet a price cap. In other words, if the cap were set at the 90th percentile price, then all prices previously below the 90th percentile might be pushed upwards to that level, paradoxically increasing total spending. Therefore, to guarantee a cap will produce net savings and not a net rise in the average price, the cap must be set below the mean price across regulated health systems.
The Oregon experience also demonstrates that price caps need to target all sources of hospital system revenue to prevent hospitals from offsetting with higher prices for the less profitable service lines. In states that permit direct physician employment, sources of revenue include physician fees in addition to inpatient facility fees, outpatient facility fees, and pharmaceutical markup. If one service line were excluded from the cap, it would serve as a pressure release valve.
Our Proposal
Health care practice revenue can be divided into four large buckets: inpatient facility fees, outpatient facility fees, professional fees, and pharmaceutical mark-up. Knowing that an effective price limit must be below the average price, one can minimize consequent distortions in pricing by setting different caps for each revenue stream. Caps should be introduced gradually to minimize disruptions and facilitate health system planning. For example, drawing from multiple sets of national data, with the general goal of starting each cap just above the average commercial price and reducing it gradually by 5 percent annually to just below the current average commercial price, we would start with a cap of 300 percent of the Medicare rate on outpatient facility fees and slowly lower to 250 percent. Based on the work of James Robinson and colleagues, pharmaceutical-derived revenue should be capped at 300 percent of what Medicare pays for the same drug and lowered to 250 percent. Inpatient fees should be capped at 250 percent and lowered to 200 percent. Given lower price variability, professional fees should be capped at 225 percent and lowered to 200 percent.
To help visualize the potential impact of price caps on total spending, exhibit 2 describes inpatient and outpatient commercial price distributions as a percentage of Medicare rates.
Exhibit 2: Distribution of commercial inpatient and outpatient hospital charges, as a percentage of Medicare rates, US, 2020–22
Source: Authors’ analysis of RAND Corporation, Hospital Price Transparency Study Round 5.1 Supplemental Materials, December 2024.
Notes: “X” indicates the mean; the median is the dark line; the interquartile range is the box; the minimums and maximums are the whiskers; and the circles are the outliers. The RAND Corporation analyzed employer-volunteered claims data (that is, bills) from more than 4,000 different health systems across the US. The average inpatient price for each health system was calculated from a sample size of at least 50 claims. The average outpatient prices were derived from at least 100 claims from each system. Inpatient prices represent summed professional and facility fees for a given service divided by a simulated sum of Medicare payments under the Inpatient Prospective Payment System and Physician Fee Schedule. Relative outpatient prices similarly represent the sum of professional and facility fees. Relative prices were obtained by comparing claims sent by employers against theoretical payments for the same service according to Medicare’s Ambulatory Payment Classification, which groups professional fees with outpatient facility fees.
For practices engaged in a payment model different from fee-for-service, for example, a capitated model, the cap should apply to the sum of charges over a year relative to the sum traditional Medicare would reimburse for the same set and volume of services. If implemented at a state level, caps should target average prices for that state.
Enforcement
A key advantage of price limits is that an oversight agency is not required. Violations of the price limit would be a matter of civil litigation, with penalties set by law. Precedent is available in other legal fields: for example, the “treble damages” clause in antitrust law awards a tripled payout meant to deter violations. A 5 percent margin of error should be permitted when assessing compliance.
The decision to place enforcement in the hands of payers and courts lowers the price tag of the legislation; however, the decision would shift the administrative burden of policing compliance to providers and payers. While vetting our proposal, colleagues raised the concern that this burden would be too great, as many payers lack the technical sophistication to compare their bills against Medicare rates. To this commercial problem, a commercial solution can be found. The RAND Corporation has already demonstrated it can compare private claims data with Medicare rates in multiple rounds of its transparency study data. Additionally, many insurers serve both Medicare and private markets. Surely, these organizations could develop and sell a tool to assess potential overcharges.
Payment Sufficiency And Access
The American Hospital Association reports that higher commercial prices are necessary to offset poor reimbursement from Medicare and Medicaid. While Medicaid underpays professional fees, the program can reimburse large facilities up to the average commercial price through state directed payments. Hospitals that serve a higher percentage of Medicare patients tend to have lower operating margins and an increased rate of closure or acquisition; however, true “cost-shifting” to private payers occurs only to a small extent.
The Medicare Payment Advisory Commission (MedPAC) calculated that, averaged across all hospital service lines from 2021 to 2022, hospitals’ gross profit margin from Medicare payments was -6 percent to -13 percent, with a marginal profit of 5 percent to 8 percent per additional patient seen. Operating margins for Medicare professional fees are unknown. Recently, MedPAC advised a 2.5 percent to 5.0 percent increase to professional fees but noted that Medicare beneficiary access to care remains equal to or better than private payers’. Last, when billing Medicare, drug markup is either packaged in a service bundle or permitted up to 106 percent of the drug’s average wholesale price. So, while Medicaid and Medicare payments rates may be inadequate, price caps at 200 percent to 250 percent of the Medicare rate would clearly allow sufficient profit.
Following implementation of Oregon’s public plan price cap, the employee plan saw a 25 percent reduction in per-procedure outpatient facility fees. Enrolled patients saw a 10 percent reduction in out-of-pocket spending per procedure, leading to a 5 percent increase in use. In the short term, the price cap increased access to care by reducing a financial barrier. Long term, the effects of the price cap on access are unknown. Foreseeably, reductions in health care infrastructure spending may result. Adjunct to price caps, lawmakers could allow health care systems to apply to the appropriate state or federal agency for temporary raises of the cap. In exchange, the health system should be required to invest the added revenue into workforce training programs.
Suitability Of The Medicare Code Set
Critics of this approach could rightly point out that Medicare does not have a robust fee schedule for pediatric, obstetric, and gynecologic care due to the limited number of Medicare-eligible patients using these services. Accordingly, Congress should fund development of these codes, and any state or federal price cap should exclude these services until this work was completed. Others have noted that, by indexing a price cap to the Medicare fee schedule, lawmakers could amplify problems with its fee schedule across private markets. Frankly, the argument is moot. Components of the traditional Medicare fee schedule are already widely copied by commercial insurers.
Reduction Of Price Variation
Wide price variation is a hallmark of the US health care system. While in general, hospital systems’ absolute size and relative market power are related to higher prices (and lower quality), a more competitive market does not always predict lower prices or lower profit margins. Most of the highest-price megaproviders are found in relatively competitive markets. Moreover, prices do not appear to be related to the quality of care or the medical complexity of the population served, and prices can even vary dramatically within a hospital. It is unknown if hospitals’ prices correlate with direct-care expenditures. In short, US health care’s dramatic price variation does not have any known rhyme or reason to it.
In contrast, Medicare fee-for-service rates vary because they adjust for regional labor costs, payer-mix, and patient characteristics. One of the curious results of the Oregon policy was the reduction of facility fee price variation between hospitals to the level of variability present in the Medicare program. If this policy were applied on a larger scale, a similar effect may be observed. The highest-price providers would naturally be the most impacted by this policy. As noted, price is not a marker for quality. It would be a mistake to assume a reduction in prices charged by high-price providers would reduce the quality of care. The largest health systems tend to have higher prices. Foreseeably, the elimination of price variation could reduce the importance of market power in price negotiations, and health systems might reduce their investment in consolidation. Instead of competing with one another on size, perhaps hospitals would instead compete on quality and efficiency.
Given the relative uncertainty surrounding the importance of price variation, the Oregon policy cautiously excluded small, rural, and critical-access hospitals from its price cap. A similar policy could be considered in future price limit legislation.
Final Thoughts
Consumers in the US have failed to demand lower prices from megaproviders. A representative government can negotiate on their behalf. Medicare-referenced price limits are not the only mechanism, nor a perfect solution, but they are feasible. To be effective, limits should be established in law, apply to all sources of health systems’ clinical revenue, and lie below the mean price. Such a cap leaves enough grease to keep the system moving forward.
At some point in time, the United States will be forced to confront its health care cost crisis. The catalyst may be a war or natural disaster that demands the re-allocation of national resources. The push may come from students and teachers protesting chronic underinvestment in public education. Or perhaps the business community will seek to address the unsustainable, rising cost of employees’ health care. For now, we hope to impart that controlling health care prices is achievable. In fact, it can be done with a relatively straightforward piece of legislation.
Authors’ Note
Although Health Affairs receives support for this Forefront series from Arnold Ventures, the authors of this piece do not receive any support from, and have no ties to, Arnold Ventures.
https://www.healthaffairs.org/content/forefront/negotiate-megaproviders-and-lower-health-care-prices
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