“If your plan design is built on “% of Medicare” and you are using it to steer members toward lower-cost hospitals, you may be steering them toward the wrong ones…………”
By Brian Cotter
A plan sponsor locks in 200% of Medicare at two Dallas hospitals. Same DRG. $38,790 at one. $184,902 at the other.
Post 1 in this series showed that CMS FY2026 pays two Dallas teaching hospitals very different amounts for the same hip replacement (DRG 470):
- Baylor UMC: Medicare pays $19,395
- Parkland Health: Medicare pays $92,451
Now imagine you are a plan sponsor and both hospitals are in your network at a flat “200% of Medicare” commercial rate. Your contract language is identical. Your multiplier is identical. Here is what your plan actually pays out: - At Baylor: 200% × $19,395 = $38,790
- At Parkland: 200% × $92,451 = $184,902
A $146,112 spread between two hospitals 3 miles apart, on a single joint replacement, from the exact same contract language.
Now flip the problem around. Imagine the plan sponsor negotiates a flat $50,000 allowed amount at both hospitals instead: - At Baylor: $50,000 ÷ $19,395 = 258% of Medicare
- At Parkland: $50,000 ÷ $92,451 = 54% of Medicare
Same contract. Same dollars out the door. Identical value to the plan. - One hospital looks like price gouging
- One looks like a bargain
- Neither is true
The problem is that “% of Medicare” is a ratio, not a price.
It describes the denominator as much as the numerator. And when the denominator swings 4.77x between two hospitals across the street from each other, the ratio is no longer a reliable signal of how much a hospital actually costs.
One commenter on Post 1 put it perfectly: “We’re not comparing prices. We’re comparing policies.”
Here is what to use instead when you are evaluating hospitals: - Compare in allowed dollars per episode, not in multiples of Medicare
- If you must use a ratio, normalize against the Operating Federal Base DRG only, the part that is uniform within a CBSA
- Never use Total Medicare Payment as a benchmark denominator without first asking why the denominator is that high
If your plan design is built on “% of Medicare” and you are using it to steer members toward lower-cost hospitals, you may be steering them toward the wrong ones, for reasons that have nothing to do with negotiated price. This single distinction changes how hospital network decisions should be made.
Be honest: if your benefits consultant put “54% of Medicare” at Parkland next to “258% of Medicare” at Baylor in a network evaluation deck, which one would look like the better deal to you?
Bright Spot Insights. – Opening the Blackbox on Claims, MRF, & Medicare Data
Brianism:“Uniform pricing can be achieved by applying % of Medicare against Operating Federal Base DRG only, the only part that is uniform within a CBSA (Core Based Statistical Area).”
MORE FROM BRIAN:
$52,109 gap. One hip replacement. One hospital. Same DRG. Same contract. Multiple inpatient DRG benchmarks exist. This week we walk through 5 of them. The spread between them is 184%.
If your benchmark or contract does not specify which version, the number means whatever the person running the repricing decides. At 200% of Medicare, that decision swings from $28,378 to $80,487 on a single joint replacement.
This week I am walking through 5 of the most common inpatient DRG benchmarks across a 7-post series. How they differ, when to use each one, and where each one misleads.
Post 1: The overview. Five benchmark versions side by side. Why the vocabulary problem costs real money.
Post 2: The National Rate. $14,068 at every single one of 3,200 hospitals.
Post 3: The Market Rate. $6,334 more in San Francisco. Not the hospital. The zip code.
Post 4: Hospital Rate (no supplemental). $38,000 for a hip replacement. 183% of Medicare at one hospital. 276% across town.
Post 5: Hospital Rate (with supplemental). $431 in CMS penalties quietly changed the benchmark. Nobody told you.
Post 6: Claim-Specific Rate. Two hip replacements, same hospital. Medicare paid $20,715 for one. $34,198 for the other.
Post 7: The decision framework. Which benchmark, when, and why.
The first post drops tomorrow morning.
Repost for anyone benchmarking inpatient rates to Medicare.
Follow Brian Cotter for the full series.
#HealthPlan#SelfFunded#TaftHartley#Medicare#DRG#HealthcareAnalytics#PlanSponsors#PriceTransparency#Benchmarking#IPPS
Glossary:
CMS — Centers for Medicare and Medicaid Services
DRG — Diagnosis-Related Group
FY — Fiscal Year
IPPS — Inpatient Prospective Payment System
HOMEWORK READING ASSIGNMENT
How does a DRG determine how much a hospital gets paid?
