Health care spending continues to grow, and prices are the primary driver. Without addressing high and growing prices, efforts to make care more affordable will not be successful. One way to understand what is going on with prices in employer-sponsored insurance (ESI) is to compare negotiated rates paid in that market to Medicare payments for the same services. New analysis from the Health Care Cost Institute finds that, in 2021, ESI payments for outpatient services were, on average, 287 percent higher than Medicare payments.
For this analysis, we used HCCI's unique commercial claims dataset to measure the average ESI prices paid for more than 1,000 distinct outpatient services. We then compared those prices to what Medicare would have paid for the same services. Medicare payment rates serve as a meaningful benchmark because CMS annually publishes a complete listing of rates for outpatient services that account for the resource requirements associated with each service. Note that outpatient costs associated with physician services are not included in these payment schedules – for a comparison of professional service prices, see our previous work.
We grouped outpatient services into the following categories: Evaluation & Management, Imaging, Labs & Tests, Procedures, and Treatments. Differences between ESI and Medicare payments were generally greatest among Imaging and Labs & Tests with ESI prices averaging 314% of Medicare for X-rays and 348% of Medicare for General Labs. In contrast, ESI payments were generally closer to Medicare, although still higher, for Evaluation & Management claims (115% of Medicare for Outpatient/Office Visits).
Among the 10 most commonly used health services, 8 had ESI reimbursement that was more than double Medicare reimbursement. These included general laboratory tests (rank 1), x-rays (rank 4), and ultrasounds (rank 6). Among the 10 services that that make up the most ESI spending, 5 had ESI reimbursement that was more than double Medicare reimbursement. These included general laboratory tests (rank 2), MRIs (rank 5), and chemotherapy (rank 6). Use the sliders in the figure above to filter on use and spend rankings.
Total ESI Outpatient Spending Would Have Been $76 Billion Lower in 2021 if Outpatient Services were Reimbursed at Average Medicare Rates.
By combining the data on price per service relative to Medicare with volume of services and total spending, we simulated the amount by which ESI spending on outpatient services would decrease if reimbursed at Medicare rates. For example, if X-rays, with an average ESI payment rate of $936, were instead paid at the average $298 Medicare payment rate, adjusting for service volume and weighted to national spending, total ESI outpatient spending on X-rays is estimated to be $1.2 billion lower.
Across all the outpatient service categories we examined, ESI spending in 2021 would have been $76 billion lower. The greatest decrease in spending would occur in emergency department services ($19 billion), general outpatient laboratory services ($9.5 billion), and chemotherapy ($5.2 billion).
Most of the overall savings would be concentrated among the 10 most commonly used outpatient services. Among the top 10 services, ESI outpatient spending would be $52 billion lower in one year if ESI paid average Medicare rates. Even if ESI reimbursement for those 10 services were limited to twice what Medicare pays, ESI outpatient spending would be $4 billion lower.
Consideration for Policymakers
Medicare payments are designed to reflect the cost of providing a particular service and can be a useful tool for contextualizing prices in the commercial market. Medicare payments are calculated with complexity, effort, and resource utilization in mind. As a benchmark, they can point policymakers and stakeholders to areas worthy of additional attention.
The findings from this analysis that ESI outpatient prices are 287% of Medicare are consistent with previous research - including professional and facility services - that have found ESI payments are generally higher than Medicare payments for the same services. These findings warrant additional analysis and policy consideration. We show that payment differences between Medicare and ESI for outpatient services varies by type of service. What drives the overall difference in prices and why is it not consistent across services? For example, the differences between ESI and Medicare rates for the Imaging and Labs & Tests categories were particularly large even though there is less potential for inputs and clinical quality to vary. Understanding what is driving that payment difference, whether higher rates might be justified, and what financial incentives are created by differences in commercial and Medicare reimbursement should shape policymakers' and stakeholders' future actions.
Additional information on differences between Medicare and ESI payments by state can be found in the downloadable data as an index for a common basket of services.
We used 2021 outpatient claims data from both HCCI employer-sponsored insurance and Medicare fee-for-service. We limited our data to outpatient hospital department (HOPD), non-Ambulatory Surgical Center (ASC) claims, where the claim was for the primary payer. Additionally, we included payments to Critical Access Hospitals (exclusive of physician payments) in our payment rate calculations. To ensure comparability between both Medicare FFS and ESI claims data, we removed the following claims from both datasets: home health, skilled-nursing facility, hospice, inpatient claims, Federal Qualified Health Clinics, dialysis, ambulance, durable medical equipment, and therapy. These services are paid under substantively different payment rules, which limits our ability to meaningfully compare prices between Medicare and ESI. We further limited our ESI claims data to final adjudicated claims. Medicare claims were limited to those with allowed amounts greater than $0; Medicare data include outlier payments in average rate calculations, but no other adjustments based on case mix were made.
We leveraged the 2021 Ambulatory Payment Classifications (APC) crosswalk from Center for Medicare and Medicaid Services (CMS) to evaluate our 2021 ESI outpatient claims groupings. All items and services paid under the Hospital Outpatient Prospective Payment System (OPPS) are assigned to APC payment groups that are similar in clinical and resource use. For this analysis we aggregated payments for services following APC logic on OPPS claims. We limited our analysis of ESI and Medicare reimbursement amounts to services found in both ESI (> 1500 ESI claims) and Medicare claims. ESI use and allowed amounts were weighted using ESI weights to develop estimates that were representative of the national ESI population under 65 years old. ESI weights were calculated using the American Community Survey (ACS) 2021 5-year estimates Public Use Microdata Sample (PUMS).
State outpatient price index is a composite price ratio of ESI to Medicare reimbursement amounts on a basket of outpatient services for each state + DC. Basket of outpatient services is defined as top 150 services by use among the ESI population in 2021. The reimbursement amount for each service-state must contain at least 200 services to be included as part of index, otherwise the average reimbursement amount was imputed at the national level. Imputation of reimbursement amount for services with small count allows us to smooth data volatilities attributed to small counts. The price index is then computed and is weighted by national share of use.