The Congressional Budget Office recently published a report that compares prices for hospital and physicians services paid by commercial insurers and fee-for-service Medicare.
The report was in response to a request from the House of Representatives Committee on Budget to better understand the health care cost drivers and how to lower them. The original set of questions was broad and some were focused on hospital prices. Yet CBO focuses exclusively on hospitals and physicians, relegating the contributions to health spending from the most concentrated and expensive health care industries like commercial health insurers and drug companies to practically a footnote.
This exclusive focus on hospitals’ prices was surprising and, frankly, confusing. Long-term trends make clear that hospital prices are not the source of upward cost pressure. Notably, hospital spending as a share of health consumption has decreased from 43% in 1980 to 32% in 2020. The Bureau of Labor Statistics found that hospital prices have grown by 2.1% annually, on average, over the last decade. This stands in stark contrast with commercial health insurance, which was grown by 5.8% annually, on average, over the same time period. These premium increases come at the same time that commercial health insurers are requiring enrollees to pay more for care out of their own pockets.
The CBO report lacks important context and thus raises many questions. Here are just a few of them:
- Why didn’t CBO consider doing a more comprehensive analysis? For inpatient prices, CBO determined that commercial payments are 223% higher than Medicare fee-for-service payments by averaging findings from five sources. Some of the studies included in this analysis are flawed. For example, CBO used data from the RAND hospital price transparency study, which relies on data from a largely handpicked and self-selected sample of employers and insurers and does not differentiate between in- and out-of-network claims. Moreover, the studies CBO cites use very different approaches. One study compares commercial prices to Medicare prices, another uses commercial and Medicare revenues as reported on audited financial statements, and another relies on comparing payment-to-cost ratios. CBO takes these findings based on different analyses, and mashes them together by simply averaging them. Does the reported average accurately reflect the difference in commercial and Medicare fee-for-service prices, given that it is based on flawed data and is measured across different methods?
- Do Medicare fee-for-service prices adequately reimburse providers? The CBO report describes in detail the administrative process used to set Medicare fee-for-service inpatient rates. The process Medicare uses to set rates results in payments that are below the cost of providing care to Medicare beneficiaries. For example, in 2020 Medicare payments were $75.6 billion less than the cost of providing care to Medicare patients. As a result, Medicare fee-for-service inpatient payments are negative in the aggregate (-8.7% in 2019, according to MedPAC). Negative operating margins can create financial pressures for hospitals and health systems, and limit their ability to invest in new technology, expand capacity or services, and improve the delivery of care.
- Does federal policy that limits Medicare fee-for-service price growth exacerbate the price disparities between commercial health insurers and Medicare? Medicare fee-for-service rate growth is restricted under current law, whereas commercial rates can grow with inflation to better reflect expense growth that providers incur. For example, the Budget Control Act of 2011 requires, among other things, mandatory across-the-board reductions in certain types of federal spending, also known as sequestration. Medicare claims with dates-of-service or dates-of-discharge on or after April 1, 2013, incur a 2% reduction in Medicare payment. CBO compared average annual price growth (2.7% for commercial payers compared to 1.3% for Medicare), but does not address the fact that Medicare price growth has been limited. When comparing trends and the disparity in payment rates, why doesn’t sequestration play a critical role in explaining differences? And, how would these trends compare if Medicare rate growth was not limited?
- Why isn’t commercial insurers’ massive market power examined? The fourth chapter of the report describes how hospitals’ market power may affect the rates that commercial insurers pay for hospital services. However, the description lacks key data points. For example, the report does not take into account the fact that 73% of insurance markets were highly concentrated, or that in 46% of markets, one insurer controlled half or more of the market.
Moreover, insurers have been engaged in vertical consolidation that affects hospitals’ expenses, as well as broader health care spending. For example, UnitedHealth Group, through its Optum subsidiary, is one of the largest employers of physicians in the country and one of the largest providers of IT health care services through OptumInsight’s data analytic services. Hospitals must increasingly pay for such services in order to effectively work with payers. In addition, three of the largest pharmacy benefit managers are owned by health insurers: Caremark (CVS Health), Express Scripts (Cigna), and OptumRx (UnitedHealth Group). Collectively, these three control 89% of the market and serve more than 238 million Americans. This activity raises questions about the effect of insurers’ vertical consolidation on health care providers’ costs and consumers’ costs.
- Why aren’t factors affecting hospital prices examined in more depth? CBO found that wages were correlated with hospital prices. The focus on wages and salaries is important, because they account for over half of the costs in the Medicare inpatient hospital market basket. However, CBO did not probe further. Prescription drugs, supplies and medical devices, administrative costs associated with claims submission and prior approval, and contract staffing account for substantial portions of hospital prices, and the costs for all of these is currently increasing. Prescription drug costs increased 26.3% in 2021 compared to 2019. And, as hospitals deal with the effects of the COVID-19 pandemic, nearly every hospital has hired temporary contract staff to maintain operations. According to a survey by AMN Healthcare, 95% of health care facilities reported hiring staff from contract labor firms, with respiratory therapists being the primary need for many hospitals. Contract labor firms are charging exorbitant prices for nurses as supply is scarce and demand is at an all-time high. For example, average pay for hospital contract nurses has more than doubled compared to pre-pandemic levels. Given the trends in these costs, and the upward pressure they place on hospital prices, it raises questions about why CBO did not examine these factors in more depth.
- Does the report suffer from an echo chamber effect? Prior to publication, CBO solicited comments from external reviewers. However, some of these reviewers have previously over-relied on data voluntarily provided by commercial health insurers, which almost never include data from the Blue Cross and Blue Shield plans that dominate virtually every commercial insurance market in the United States. The absence of those data render most of the underlying research in this report entirely unreliable. Sometimes these arrangements extended beyond data sharing agreements and included coordinating communications strategies. These prior relationships raise even more questions about whether sufficient input or data were sought out, and how useful the report is for members of the committee that requested it.
America’s hospitals and health systems have worked hard to reduce costs and improve the quality of care for patients, and the numbers reflect this. The failure to address these trends, along with the flawed data sources used, makes this report incomplete. We hope policymakers will take a broader, more comprehensive view as they seek to untangle what’s driving health care costs in the U.S.
Benjamin Finder is director, policy research and analysis at American Hospital Association
 AHA, “Fact Sheet: Underpayment by Medicare and Medicaid”, in process.
 Fee-for-service rates paid by Medicare to hospitals that participate in the inpatient prospective payment system. https://www.medpac.gov/wp-content/uploads/2021/10/mar21_medpac_report_ch3_sec.pdf.