The government shutdown fight has brought America’s outrageous healthcare costs back to the top of the news cycle. One of the fastest, most straightforward steps Washington can take to lower them meaningfully is publishing the Medicare rates it pays for patient care.
This information can empower employer health plans to negotiate better prices with providers and enable patients to avoid overcharges. Medicare price transparency can also provide grounding for a competitive healthcare marketplace that puts downward pressure on costs.
Medicare pays more than $1 trillion (or 21 percent) of the nation’s $5 trillion of annual health expenditures, the vast majority of which is for direct healthcare services, including hospitals, professional services, prescription drugs, durable medical equipment and other care.
The Centers for Medicare & Medicaid Services sets Medicare prices to cover the costs of relatively efficient care delivery. Medicare’s formulas factor in provider costs, care setting, patient complexity, geographic variations, and local wages. Think of Medicare rates as roughly equivalent to the wholesale price of healthcare.
Yet, Medicare prices are not transparent. National and regional estimated prices are available with detailed methodologies buried in thousands of pages of dense rulemaking tables, spreadsheets and technical codes. Actual prices paid to specific hospitals are hidden.
Taxpayers have a right to know what their tax dollars are paying for, just as we already know detailed revenue and cost information about other government programs, budgets and expenditures. Courts have repeatedly held that the public’s right to government transparency outweighs special interests’ desire to keep such information secret. Medicare prices should be part of the public record.
Medicare prices have far broader implications than only the nation’s seniors. States are using Medicare rates to establish benchmarks for hospital price targets and craft statutes and regulations to rein in healthcare costs. Vermont recently passed legislation directing the state Green Mountain Care Board to establish reference-based pricing levels as payment caps for services provided by Vermont hospitals.
The Montana Employee Health Plan contracted with Montana providers to pay a multiple of Medicare prices beginning in 2016. The move saved 21 percent on inpatient services and 11 percent on outpatient services. Oregon implemented a multiple of the Medicare upper payment limit for public employees and educators, saving $112 million in 2021.
Employer group health plans, which cover more than 165 million Americans, are also increasingly setting payment rates as multiples of Medicare prices (e.g., 200 percent). These plans are built on the assumption that Medicare’s payment formulas reflect a rational, cost-based benchmark.
Since Medicare prices are not public, states and employer group health plans must rely on costly consultants to produce Medicare price estimates. Firms such as Milliman, AON and Willis Towers Watson have developed Medicare price calculations, yet the results vary by consultant.
For example, Indiana contracted with Milliman for a two-year project to benchmark hospital inpatient, outpatient and practitioner service prices to a percentage of Medicare, using Milliman’s proprietary Medicare pricing tools and analysts — the cost: $3.8 million.
By publishing Medicare prices, CMS can immediately empower states and employer health plans to benchmark provider and pharmaceutical prices (and monitor adherence) without hiring expensive middlemen. Doing so can reverse runaway employer health plan costs, average annual family premiums for which are now $27,000. The ensuing savings can be used for business expansion, increased productivity and employee pay raises.
Just as airline deregulation in 1978 ended the need for costly travel agents and slashed airfares, Medicare transparency can end the reliance on pricey middlemen and lower premiums. CMS already has this information. It’s time to release it.
Medicare prices can also help patients in the same way wholesale prices help consumers make major purchases, from vehicles to jewelry and kitchen remodels. This information enables us to be savvy customers, avoiding excessive markups and false promotions.
The result would be a grounded healthcare market that resembles other cost-plus commodity marketplaces. Competition can converge and reduce upcharges so the actual prices paid by employers and patients are reasonable. Medicare price transparency can finally anchor America’s unmoored healthcare market.