Increasing profits far above actual costs. Think Medicare Advantage as compared to Medicare. Over the past 20 years, the prices of hospital services have grown faster than any other sector of the US economy. Unfortunately, the federal government recently issued a regulation intending to address underpayment of hospitals by Medicaid. However, the new rule could push hospital prices higher for 66 percent of the US population who have commercial health insurance coverage. The growing evidence shows wide hospital price variation is driven by hospital market power rather than underlying costs of care or the level of payment by Medicare and Medicaid. In spite of this federal regulators are allowing states to compensate hospitals at “average commercial
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Angry Bear considers the following as important: Healthcare, hospitals, Medicaid, US EConomics
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Increasing profits far above actual costs. Think Medicare Advantage as compared to Medicare.
Over the past 20 years, the prices of hospital services have grown faster than any other sector of the US economy. Unfortunately, the federal government recently issued a regulation intending to address underpayment of hospitals by Medicaid. However, the new rule could push hospital prices higher for 66 percent of the US population who have commercial health insurance coverage.
The growing evidence shows wide hospital price variation is driven by hospital market power rather than underlying costs of care or the level of payment by Medicare and Medicaid. In spite of this federal regulators are allowing states to compensate hospitals at “average commercial rates” under Medicaid managed care (MMC) plans.
Until recently, MMC rates were subject to a federal upper payment limit pegged to Medicare rates. Now the MMC upper-payment limit may be set to “average commercial rates.”
The commercial market for hospital services is not a competitive market. It therefore holds no validity as a benchmark for this kind of price setting. Consolidation, anticompetitive contracting terms with payers, and out-of-network “surprise billing” practices among hospital-based physicians are just a few of the causes and symptoms of hospital market failure.
Weak antitrust enforcement has also been an issue. Michael Chernew and colleagues plus Zack Cooper and colleagues as well as others have highlighted wide variation in commercial hospital prices across and within states. In a 2020 Health Affairs paper, the authors and co-authors note such variation in prices “is indicative of market failures.”
The new Medicaid rule exacerbates the problems of the hospital commercial market failures.
Before the Medicaid rule change, states had many options for paying hospitals adequately from their Medicaid programs. Each state has a federal allotment for Medicaid disproportionate share payments. Many states added hundreds of millions (in some cases billions) of additional “supplemental” hospital payments. These were subject to an aggregate upper-payment limit tied to Medicare.
Medicaid managed care rules and state decisions put Medicaid beneficiaries into private managed care plans. Ny doing such, the placement created challenges for paying supplemental hospital payments outside of the managed care contract.
The Centers for Medicare and Medicaid Services (CMS) decided to create a new type of “state-directed payment (SDP)” for Medicaid. Payments could be channeled through contracted managed care plans and not run afoul of other federal rules. CMS also decided not to define an upper-payment limit on these SDPs when first allowing them in 2016. In other words, CMS left the cookie – jar open to the whims of commercial healthcare. This is similar to what CMS did with Medicare Advantage plans in allowing them to Code their patients.
The same as Medicare Advantage plans, the growth in these payments has exploded. Gee what a surprise, commercial healthcare has a profit motive. A May 2024 Medicaid financing rule now seeks to rein payments in by placing an upper-payment limit of average commercial rates on SDPs paid to hospitals and skilled nursing facilities by MMC plans.
The new rule intended to address a Medicaid problem has the unintended consequence of increasing premiums and out-of-pocket costs for 153 million workers and their families dependent on employer-sponsored health plans. In 2023 alone, family premiums reached almost $24,000. Hospitals raising their prices result in employees and families facing higher premiums and cost sharing coupled with downward pressure on wages. Little evidence points to higher quality healthcare being delivered by higher-price hospital systems.
To wit, the new Medicaid rule increases hospitals’ market power relative to commercial payers by tying Medicaid rates to commercial rates. Who would have thought such could occur? We have already witnessed such practices with Medicare Advantage plans plus CMS pays an incentive to balance payments above original Medicare.
Information publishes information about state-directed payments from MMC plans. But the information is in a form that does not enable interested stakeholders and oversight organizations to track and analyze these payments. CMS can not be entirely sure how many states have taken advantage of their new ability to set upper hospital payment limits in accordance with the new rule. I say CMS because like Medicare and Medicare Advantage, CMS is responsible to monitor these programs also.
Many of the state forms are incomplete. However, even based on incomplete information, the authors were able to identify 12 states using an average commercial rate for setting the total limit on various hospital payments made through MMC plans. This includes large states such as Texas and New York. I suspect greater resources are available in these states.
Given the size and dominance of these healthcare systems in some states, increasing the commercial rates have an outsize impact on the state average commercial rate. With the new rule these healthcare systems have an added incentive to raise their commercial rates. When they do the impact of the increase will likely raise the average commercial rate used for setting their maximum Medicaid rates. This is found to be likely, at least in the 12 states identified in their reports
In short, CMS has given big hospital systems that already have the means to command unreasonable commercial prices greater power and motivation to squeeze the US’s working families harder.
“New Medicaid Rule Adds Fuel to the Fire of Commercial Hospital Price Inflation,” Health Affairs