Employers pay hospitals about two and a half times Medicare rates for the same services, and the variation between states is larger than the average.
The Medicare course established how Medicare prices are set. That makes Medicare a natural yardstick for commercial prices, because the same service at the same hospital has a known administered price, and the ratio between the two isolates what negotiation produced.
The headline finding
An employer-led transparency initiative analyzing claims from 2020 through 2022 found that in 2022, “employers and private insurers paid, on average, 254 percent of what Medicare would have paid” for hospital services.
The components differ:
| Service category | Percent of Medicare |
|---|---|
| All hospital services | 254 |
| Outpatient facility services | 279 |
| Professional services | 184 |
| Ambulatory surgery centers | 170 |
Two patterns stand out. Outpatient facility care carries the largest premium, which is part of why site of service has become a central employer strategy. And professional services, where physician practices negotiate with far less leverage than hospital systems, carry a much smaller one.
The variation is the story
The average conceals enormous spread. States averaging below 200 percent of Medicare included Arkansas, Massachusetts, Michigan, Mississippi, and Rhode Island. States above 300 percent included California, Delaware, Florida, Georgia, New York, South Carolina, West Virginia, and Wisconsin.
That is a difference of more than 100 percentage points for the same services in the same country, under the same federal law, often delivered by hospitals with similar cost structures.
The obvious explanation would be cost shifting, the idea that hospitals with many Medicare and Medicaid patients charge private payers more to make up the shortfall. The data does not support it. The researchers found “very little variation in prices is explained by each hospital’s share of patients covered by Medicare or Medicaid, although a larger portion of price variation is explained by hospital market power.”
Worth remembering: the cost-shifting story is the most common defense of high commercial prices, and it is testable. If it were the main driver, hospitals with the highest public payer share would have the highest commercial prices. They do not. Market power tracks the prices; payer mix largely does not. That does not mean public payment rates are adequate, which is a separate question the Medicaid course examined. It means high commercial prices are not primarily an accounting consequence of low public ones.
What employers can do with this
A ratio to Medicare is the most useful analytic tool an employer benefits team has, because it is comparable across hospitals, across markets, and over time in a way that raw allowed amounts are not. It converts an unreadable fee schedule into a single number that a chief financial officer can act on, and it is the basis for reference-based pricing, tiered networks, and the direct contracts covered later in this course.
Key takeaways
- Private plans paid hospitals 254 percent of Medicare on average in 2022.
- Outpatient facility services averaged 279 percent, professional services 184 percent, and ambulatory surgery centers 170 percent.
- State averages ranged from below 200 percent to above 300 percent.
- Market power explains the variation far better than Medicare and Medicaid payer mix does.
Sources
Check your understanding
Roughly what did private plans pay hospitals relative to Medicare in 2022, according to the RAND employer-led transparency study?
Employers and private insurers paid on average 254 percent of Medicare rates. Because Medicare rates are set by rule for the same services at the same facilities, the ratio is a clean measure of the commercial premium.