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Health Policy
June 13, 2019

State Efforts to Lower Health Care Prices Paid by Private Insurers

Author Affiliations
  • 1Department of Health Policy and Management, Johns Hopkins Bloomberg School of Public Health, Baltimore, Maryland
JAMA. 2019;322(3):201-202. doi:10.1001/jama.2019.7028

Since the mid-1990s, the differential between what public and private health insurers pay for hospital and physician services has widened considerably. While Medicare establishes rates administratively, private insurers operate within the market to set prices; in part because of increasing consolidation of hospitals, these negotiated private rates have risen faster than Medicare rates over time. For example, between 1996 and 2001, private prices for inpatient hospital stays were 10% greater than Medicare rates, but by 2012 this had increased to 75%.1 These high and rising prices have forced employers to devote a larger share of compensation to health benefits, which constricts wage growth, and to pass on costs to employees in the form of higher premiums and cost sharing.

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    1 Comment for this article
    Why States Can't Act Alone
    Paul Hewitt, MPA | Council for Affordable Health Coverage Foundation
    According to the Bureau of Economic Affairs, labor compensation accounts for 83% of value-added in hospitals and 78% of value-added in ambulatory care. This means, simply, that curbing healthcare spending means curbing payrolls. Yet because pay scales for health professionals are set in national labor markets, states that unilaterally curb costs face an outflow of doctors, nurses and technicians. In fact, the most highly paid health professionals serve the least desirable markets. The state of Colorado found that, in one rural market, commercial rates were 10 times more than Medicare's. If a state clamps down too heavily on commercial prices, rural areas like this will be the first to feel the pinch.

    The reverse is also true. Rural hospitals overwhelmingly are monopolies (for example, the nearest competitor to the lone hospital in Bozman, Montana is 117 miles away) and hence able to raise prices to whatever level is needed, in order to attract skilled professionals. When rural communities drive costs this way, it bleeds into national labor markets, driving up healthcare labor costs in urban communities. Nor do the unfortunate consequences stop there. For workers, commercial insurance works like a payroll tax: premiums are deducted from pay (to secure tax advantages). Payroll levies are known to suppress economic activity. When this happens disproportionately in rural areas (where incomes are lower and hence more vulnerable to tax effects), it fuels the downward spiral of urban/rural income disparity.

    Interactions between rural and urban healthcare labor markets underscore the importance of national approaches to bringing down medical payrolls. Medicare-for-All would do this, by bringing all payments under Medicare's administered rate setting process. But so, too, would the much simpler solution of Medicare prices for all.