Can Employers Negotiate Hospital Costs?

What interested you in self-insurance and employers’ ability to negotiate hospital pricing?

I’ve been interested in this for a while. What drew me to this topic was, I think about six years ago, people started to pull the full data together to show how much higher cost is for payers aside from Medicare. People are focused on the coverage gap primarily, but lots are concerned about underinsurance and people being exposed to a lot of financial harm from high prices even with insurance.

Self-funded insurance is interesting because there is limited research in this space because plan data isn’t often easy to find. Recent evidence is out there that self-insured plans pay higher prices than fully funded plans for care, which is interesting as well.

In your most recent study, you looked at hospitals’ cash prices, chargemaster rates and negotiated fees. How do those all relate?

The chargemaster price is one that the hospital comes up with and is a negotiating baseline. Insurers can work from that for their contracted rate for insurance plans. Network pricing is typically based on that price.

The cash price is what people who are uninsured pay or what is paid if someone is insured but chooses to pay cash. It’s not negotiated by the insurer and is unilaterally determined by the hospital. It’s different from the chargemaster fee. But in our research, we saw that cash rates were very clearly a multiple of five of the chargemaster prices—like 50%, 55% or 60%—so cash prices are being determined as a percentage of the chargemaster rate, too.

Chargemaster rates mostly matter indirectly to employers because of how they determine all of these other things. Negotiated rates and cash prices are often based off the chargemaster price. They are mostly important to negotiation.

You found that hospital cash prices were lower than or equal to insurance-negotiated rates about 47% of the time. Does this mean there is room for self-insured plans to improve their rates?

Commercial negotiation rates were pretty clearly set off of chargemaster rates. Thirty-two percent of the time, they were set at an exact multiple of five from the chargemaster.

A lot of the time, cash prices are lower than what commercial insurers are negotiating for plans—both employer-sponsored and those in the marketplace. That is somewhat surprising because one of the value arguments insurers make is that they are good at negotiation and are able to do so and get a lower price for their employer clients. So this can be another data point for employers to think about and ask why their prices are higher than if someone just paid in cash.

But the difference isn’t entirely surprising if you think about it logically. A hospital might be willing to take money up front in cash and get a slightly lower amount because they won’t have to be dealing with the long adjudication process with insurers and the administrative burden associated with negotiated prices from insurance companies.

There was some outcry a few years ago when data came out showing that employers’ insurance rates at hospitals were about two times what Medicare was paying. That got people to demand more from their insurers. Now, they can see these cash prices and may think even when no one is negotiating they are getting lower prices.

[A 2020 report from the Kaiser Family Foundation reported that, depending on the services, private insurance rates for hospitals were between 1.6 and 2.5 times higher than Medicare rates.]

Cash prices may also be lower because they are typically being paid by uninsured or underinsured individuals. Private insurance is often supposed to make up for private-pay and bad debt hospitals incur, correct?

Cash prices, which are unilaterally determined by a hospital, do seem to be somewhat sensitive to economic conditions. They were lower in areas with lower income and higher uninsurance rates. [The study also found cash prices tended to be lower at government-owned and nonprofit hospitals and ones outside of metropolitan areas.] I think we haven’t had a lot of data on cash prices, so those costs were unknown to some extent. I think a lot of people would have guessed cash rates are random. In the many thousands of data points we had, some were random, but some were linked to economic factors—and enough were that we were able to see that in this data.

In the report you found that commercial rates were, on average, 58% of chargemaster rates. Does that give self-insured employers a good spot to aim for when negotiating rates?

I think it is better to look at the prices paid by other plans [via transparency] and/or negotiate as a multiple of Medicare prices. The issue with requesting 58% of the chargemaster is that hospitals could then raise the chargemaster price.

In a study from a couple of years ago, you found that self-insured employers, even those with a lot of market power, have very little negotiating opportunity when it comes to hospital pricing. Why is that?

Insurers, in theory, should be able to negotiate based on market power. But hospitals, especially in rural areas and concentrated hospital markets, have all the market power. Insurers have some concentration but less than hospitals. So, for instance, an employer—even like a Boeing in Seattle—has some leverage against a major hospital system. But it is much smaller than the hospital has as a provider of services. Even there, a hospital has a lot more bargaining power. We really don’t see many instances where employers have a substantial counterbalance to increase negotiation power. There may be some when they band together in purchasing coalitions, but even there, the evidence is slight.

In this other study, you also talked about self-insured employers, many of whom have administrative services only (ASO) contracts with their insurers. There has been some research showing these employers may be paying more at hospitals than do fully insured plans, correct?

There have been some findings here, though the issue isn’t totally settled that employers insured and using ASOs are paying higher rates than fully funded plans. One study found, in Massachusetts, that employers with ASOs were paying 4% higher prices than fully funded groups.

If you talk to people who have been there negotiating, they aren’t so surprised by this finding. In plans offered for self-funded employers, they may want broad networks and end up selecting those plans which also have higher prices. There are lots of reasons why that might occur.

One concern is that the incentive to negotiate lower rates is attenuated because a fully insured carrier is on the hook for the financial risk. Where in an ASO, the employer is working with the insurer to negotiate rates and manage the network and administer claims but the employer is paying all of the expenditures. So you can see how the impetus to negotiate lower rates by the carrier, or ASO, would be attenuated.

There should still be an incentive to lower rates for ASOs because of potential competition. But in reality, there are lots of other things to compete on, like network disruption and fees. And most of a carrier’s competitors won’t disclose rates, anyway. It may not be worth it for a large employer to solicit other ASOs, because the bidding process is lengthy and expensive and they would likely have to work with a vendor to do so.

How important has the increased transparency been for price negotiations with hospitals?

One silver lining with data transparency is that it is one input that can make negotiating easier. Now employers have some information that they didn’t have before. They don’t need to analyze all of the data, but now they have some information that they can try to leverage when asking for lower prices.

Some hospitals still aren’t posting their rates. What can self-insured employers do during negotiations if hospitals in their area aren’t disclosing this information yet?

Compliance has been getting better over time and is about 70% with some price information at this point, to my knowledge. The bigger, system-affiliated hospitals have been more likely to post. Employers should be able to find out the prices they are paying from third-party administrators, and they could look at competitor hospitals to compare.

If self-insured employers have difficulty negotiating lower rates with hospitals, what are other ways to lower costs?

Before going the avenue of direct contracting with hospitals, employers could first look to their plan selection. Plans with narrower networks, for example, will often have lower prices (and thus lower premiums). The fear is that this could disrupt care continuity for their beneficiaries, but carriers can often perform a network disruption analysis to help employers understand how much current care would be out of network if the network changed.

More broadly, employers should be asking TPAs what their prices are. They can solicit bids from competitor TPAs with their prices so that they can enforce price competition.

Finally, purchasing coalitions with other employers are common and could be a way to jointly lower prices either through direct contracting with hospital systems or indirectly through a TPA. Some examples of this include the Employers’ Forum of Indiana and Peak Health Alliance, which is more of a public-private partnership.