“As Congress and states consider ways to address affordability, they should consider policies that address the underlying cost problem—the high prices being charged by providers—and extend those to the employer market. One possible approach is capping prices based on a percentage of Medicare rates.”
Why do we need government to mandate price controls? Plan sponsors can simply pay whatever they deem appropriate and providers can accept or reject the offer. That’s called free market and it works. More and more employers are doing this with good success. The rest remain on the managed care plantation – Bill Rusteberg
Making Employer-Sponsored Insurance More Affordable
MAY 17, 2021
Job-based coverage is central to the US health care system. It’s the most common source of coverage, providing insurance to more than 150 million Americans. It’s also increasingly unaffordable for families and businesses.
Premiums for people who get coverage from their employer have risen rapidly over the past decade. Since 2010, the average premium for a family plan has increased 55 percent—nearly three times the rate of inflation and more than twice as fast as wage growth. Average family premiums exceed $20,000. That’s roughly the cost of buying a new Honda each year. The number of people in high-deductible health plans and the average deductible have also risen substantially. More than one in every four workers with single coverage now has a deductible of at least $2,000, a substantial increase from one in every 10 workers in 2010.
The high cost of health care creates affordability challenges for families and employers. As employers seek to deal with rising costs, workers ultimately shoulder the burden. Research suggests employers deal with increased health care costs in multiple ways, including by limiting wage growth, increasing workers’ premium contributions, decreasing the generosity of their benefits, and reducing employment.
Workers often end up paying more for less generous coverage while at the same time their wages are stagnating. Even for people with job-based coverage, many struggle to afford care. Four in 10 adults enrolled in coverage through their employer reported difficulty affording health care or health insurance costs. Half reported someone in their family delayed needed care or prescription drugs because of the cost.
As policy makers consider reforms to our health care system, reducing the financial burdens increasingly faced by people with employer insurance should be a priority. Truly improving the affordability of this coverage will require addressing the irrational and excessive prices we pay for care, including by directly limiting prices resulting from the most egregious market failures. Reducing prices in the employer market would make families better off, lower the health care costs employers face and allow them to pass along some of the savings to workers in the form of higher wages, and reduce the federal deficit, largely by increasing tax revenues.
A Lack Of Competition Allows Providers To Raise Prices
The privately insured are paying more and more for health care because of the high and rising prices providers charge. Health care markets in the United States often lack competition. Over the past few decades, large health systems have combined with other hospitals and physician practices at a rapid pace, leading to many markets with dominant health systems or “must-have” hospitals.
The evidence is clear that provider consolidation leads to higher prices for people with private insurance with little to no effect on the quality of care. Unlike in Medicare and Medicaid, insurers in the private insurance market must negotiate payment rates with providers. Dominant health systems can exert their market power in these negotiations to demand higher prices. Private payers’ tools to lower these payment rates are relatively limited.
On average, hospitals charge privately insured patients nearly 2.5 times what Medicare pays for the same service. Prices vary considerably—both within and between states. In some states, average hospital prices exceed more than three times Medicare rates with individual providers charging even more.
Higher prices translate into higher premiums and out-of-pocket costs for people with job-based coverage. Price growth accounted for nearly three-quarters of the increase in spending per person between 2014 and 2018. By comparison, increases in use accounted for a little more than 20 percent.
Efforts To Reduce Prices Have Been Limited
The Affordable Care Act led to major expansions in coverage and put in place important new protections, including protections for people with preexisting conditions. However, it left the employer insurance market—where most non-elderly Americans receive coverage—relatively untouched.
Some employers, realizing the toll health care costs are taking on their business and workers, have tried to constrain prices. There are some success stories, such as in Montana where the state employee health plan was able to limit prices based on Medicare payment rates saving the state and its employees money. But overall, employer-led efforts to limit prices have met with limited success so far.
An important limiting factor is that most employers don’t have the market power needed to counteract providers. Because large employers often have workers dispersed throughout multiple states, the bargaining leverage they have in any given health care market is limited.
There may be exceptions. For example, state employee health plans may be able to amass enough enrollees in their local market to counteract the market power of health systems that won’t agree to lower rates. Collaborative purchasing models that combine market power across employers have also shown initial promise. Purchasers should explore these types of models. However, the success of these approaches still depends on having sufficient combined enrollment and enough competition in the market to be able to credibly tell a high-price health system “no.”
Policy Action That Directly Limits Prices Is Needed To Improve Affordability For People With Job-Based Insurance
Policy makers will ultimately need to step in to achieve widespread, meaningful reductions in the price of health care for the privately insured. Policies to improve competition (for example, by banning health systems’ ability to prevent insurers from steering patients to lower-price providers) are good policy and would help curb some of the practices dominant health systems are using to increase prices. But they won’t be sufficient alone to address the problem.
As Congress and states consider ways to address affordability, they should consider policies that address the underlying cost problem—the high prices being charged by providers—and extend those to the employer market. One possible approach is capping prices based on a percentage of Medicare rates. The idea is that market-based negotiations should function as usual where they are working reasonably well. But in instances where a large health system is able to extract rates that exceed, for example, 200 percent of Medicare, it is an indication that the system is exploiting excessive market power. There may be some legitimate concerns around the adequacy of Medicare rates and differences in quality. However, limiting what hospitals can charge to twice what Medicare pays seems like one place to draw the line between a fair reimbursement and curbing the abusive pricing practices we are seeing now. Prices limits could also be based on a multiple of negotiated private-sector rates, as some have proposed.
For illustration, what would a system that limited hospital rates to no more than twice Medicare mean for the health care system? Analysis published by the Committee for a Responsible Budget suggests capping rates for non-rural hospitals would result in employers and families collectively saving nearly $900 billion in premiums and patients saving nearly $100 billion in cost sharing over the next decade. Ten-year savings to the federal government would total roughly $200 billion. Capping hospital rates would lower federal premium subsidies for plans purchased in the Affordable Care Act Marketplaces. However, most of the federal savings would come in the form of increased revenue, as lower health care costs, and therefore premiums allow employers to shift more money from health benefits to wages.
Recent analyses by the Urban Institute, the RAND Corporation, and the Henry J. Kaiser Family Foundation of the effects of limiting payment rates suggest similar levels of savings and highlight the effects of capping payments at different multiples of Medicare. Curbing excessive prices means we would see higher wage and job growth, lower premiums and cost sharing for families, and reduced burden on taxpayers. Capping payment rates should be on the table as Congress and states consider ways to ensure broad access to more affordable health care.
