People in the United States routinely cite health care and health care costs as top concerns.1, 2, 3, 4 For the more than 160 million people who get insurance from their employer, the cost of health care is high, growing, and outpacing growth in wages.5, 6, 7 Across the country, health care costs show up in the form of higher premiums and higher out-of-pocket costs (for services that are both in-network and out-of-network). The Health Care Cost Institute's (HCCI) Health Care Cost and Utilization Report found that, from 2014 to 2018, prices accounted for about 75 percent of the increase in spending above inflation.8 Accordingly, without addressing high and growing prices, efforts to make health care more affordable will be incomplete at best and fruitless at worst.
Policymakers have considered a range of proposals to address the affordability of health care many of which benchmark payments for the commercially insured to Medicare rates. For example, state and federal lawmakers have proposed capping what people have to pay out of pocket for seeing a clinician or provider out of their insurance company's network. In some proposals, these caps could be determined as a percent of Medicare rates for similar services. Legislators and some presidential candidates have supported expanding access to insurance through introducing a public option (that could use Medicare rates as their basis of payment) or creating a new public program (such as Medicare for All). Comparing prices paid in employer-sponsored insurance (ESI) to Medicare can help illustrate possible impacts of policies tying commercial prices to Medicare rates. This comparison can clarify the potential sources and magnitude of resistance to such policies, and variation in the effect of such policies by location, type of provider, and specialty.
We use data from HCCI to compare the negotiated rates paid by commercial payers for professional (clinician) services to the Medicare payments for the same services in different areas of the country. Professional services represent the most common category of health care services performed among the commercially insured, and account for almost 37% of commercial health care spending annually.9 Using a sample of nearly 210 million claims for ESI individuals in 2017, we measure the average commercial prices paid for a standard basket of services across 271 metro areas and across 48 states and Washington, DC. We subsequently compare, on average, the prices paid for professional services with what Medicare would have paid for the same services per the Physician Fee Schedule (Medicare rates).
We find that commercial prices for professional services were, on average, 122% of Medicare rates nationally in 2017. Average commercial prices vary dramatically across states, though, from below Medicare rates in Alabama (98% of Medicare) to nearly twice Medicare rates in Wisconsin (189% of Medicare). We find that the difference between commercial and Medicare prices was largest in northwestern states.
Further, we find that the comparison of commercial prices to Medicare also varies across metro areas – even within the same state. For example, within California, commercial prices averaged 95% of Medicare in Bakersfield but 181% of Medicare in Santa Cruz. The variation both across and within states suggests that policies related to benchmarking commercial prices to Medicare rates may have a varied impact across different local areas. As such, though both in California, a policy capping commercial rates for out-of-network providers at 150% of Medicare may have a differential impact on providers in Bakersfield, than providers in Santa Cruz, CA.
It is well documented that the prices paid by commercial insurers are, on average, higher than the prices paid by Medicare for the same services.10 This, in part, reflects the fact that the prices paid by commercial insurers are the result of negotiations between insurers and providers, whereas Medicare prices are set administratively. For example, previous work has provided evidence that average commercial professional service prices tend to be higher in areas with less competitive physician markets.11
We compare the prices paid by commercial insurers for the same professional (clinician) services to what Medicare would have paid for the same services on average. Using our sample of professional services, we identify the average allowed amount paid across all claims for a set of common services in each geographic area (metro area, state).12 The allowed amounts reflect the sum of all insurer and individual out-of-pocket payments. We then map the amount Medicare would have hypothetically paid for the same service based on the location of the provider using the Medicare Physician Fee Schedule (PFS).13
For example, consider an established patient office visit received in Atlanta, GA (specifically, CPT Code: 99213). We observe that the average price paid by commercial insurers is $93. By comparison, according to the PFS, Medicare would have paid $74 (non-facility rate). By taking the ratio of the average price paid by commercial insurers and what Medicare would have paid, we see that for an established patient office visit commercial insurers paid an average of 126% of Medicare rates.14
We repeat this process - computing the ratio of average commercial and Medicare service prices - for a set of the 500 most common professional services in each metro area and in each state (across metro areas). We then take a weighted average across services according to their frequency nationally to summarize the average ratio of commercial to Medicare prices in each geographic area (metro area, state). This allows us to have a standardized comparison of the average commercial and Medicare prices across different geographic areas. Continuing with our previous example, we find that on average commercial insurers paid 133% of Medicare prices across all 500 professional services in our basket in Atlanta.
Nationally, we found that the commercial prices paid for the average professional service were 122% of what would have been paid under the Medicare Physician-Fee-Schedule (PFS). Figure 1 compares our findings to those from previous studies measuring commercial service prices relative to Medicare rates by broad category of service (Inpatient, Outpatient, Professional) summarized in a recent Kaiser Family Foundation literature review.15
The national average observed in our sample is similar to previous estimates from the most comparable studies – namely those using data from large national insurers and focused on office visits.16, 17 While our sample is not limited to office visits, we measure a weighted average of price ratios across a sample of common services in which office visits tend to be heavily weighted (as they are among the most frequently used services). As office visits tend to have commercial prices closer to Medicare than other professional services, this may explain why we observe a lower commercial to Medicare price ratio.
Consistent with previous studies, though, we find that commercial professional services are on average closer to Medicare rates than inpatient and outpatient services. Previous estimates of inpatient service prices range from 151% to 222% of Medicare rates and estimates of outpatient service prices range from 161% to 358% of Medicare (Figure 1). All of these estimates would be towards the highest end of state and metro area average commercial professional service prices observed in this study.
There is substantial variation across states, ranging from average commercial prices below Medicare (98% of Medicare rates) in Alabama to 189% of Medicare rates in Wisconsin (Figure 2). Seven states had prices that were, on average, higher than 150% of Medicare while eleven states had average prices within 10% of Medicare. The states with largest price differences from Medicare tended to be in the northwest of the country and along the great plains.
Looking at a more granular level, we also explore how commercial and Medicare professional service prices vary across metro areas. Not surprisingly, there is even more extreme variation across metro areas than across states. As seen in Figure 3, commercial prices range from almost 10% below Medicare rates in Chambersburg, PA (93% of Medicare) to more than double Medicare (231% of Medicare) in LaCrosse, WI. Among metro areas in our sample, 11% (31 out of 271) had prices that were on average higher than 150% of Medicare rates whereas 29% of metros (79) had average commercial prices within 10% of Medicare.
While no states have average commercial prices more than 200% of Medicare, five metro areas have prices above this threshold. Conversely, 23 metro areas have average commercial prices below Medicare rate compared to only one state average. As seen across states, metro areas with commercial prices substantially higher than Medicare tend to be in the north and west, as well as in the areas around large cities (e.g., Boston, Chicago, San Francisco).
In addition to variation across metro areas nationally, there is also wide variation across metro areas within each state. Figure 4 plots average commercial service prices as a percentage of Medicare for each sample metro area within each state compared to the state average. In some states, most metro areas have similarly, low price levels with a few outliers. For example, in Louisiana and Kansas almost all metro areas have average commercial prices between 100% and 120% of Medicare. In other states, like Oregon, all metro areas have average prices above 150% of Medicare. States like Texas and California, on the other hand, have relatively wide distributions of prices across metro areas. In California, for example, some metro areas, like Bakersfield, have average prices below Medicare, where others have average prices that were well in excess of Medicare (Santa Cruz, 181% of Medicare).
This variation in how commercial prices compare to Medicare across metro areas suggests that a policy aimed at benchmarking commercial prices to Medicare rates may have substantially different impacts both across and within states. For example, consider a policy of capping commercial prices at 150%. As seen above, in a state like Louisiana, there may be little impact, as commercial payers in most metro areas within the state paid prices close to Medicare on average. In a state like Oregon, there may be a large impact because commercial insurers paid on average more than 150% of Medicare in most metro areas. In a state like Alabama, benchmarking commercial prices to Medicare may actually raise prices for professional services as providers negotiate commercial prices higher toward the 150% cap. Finally, in places like California or Texas, there will be a disproportionate impact across different areas of the state because of wide variation in commercial prices relative to Medicare. While beyond the scope of this current report, it is also possible (if not likely) that there is further variation within metro areas across types of providers (e.g., Primary Care and Specialists) and even across similar providers.
Among substantial variation in how commercial prices compared to Medicare rates both across states and within states across metro areas, we find that nationally commercial payers paid prices that were, on average, 122% of Medicare. These estimates are somewhat smaller than other similar estimates of how the prices paid by commercial insurers for inpatient and outpatient services compare to Medicare.
Our findings and review of the literature suggest that policies aimed at benchmarking the prices paid by commercial services may have a varied impact across the U.S. health care system – both across geographic areas and types of service categories (inpatient, outpatient, professional). Further, as previous studies provide evidence that prices not only vary across metro areas, but also within, more work is necessary to understand how prices vary within metro areas across types providers and services. At the same time, there are important policy conversations happening about reimbursement for certain services (e.g. primary care) versus others that this analysis does not address.18 Additionally, this study does not address Medicaid reimbursement, which tends to be lower than the Medicare rates.19, 20 Any policy that benchmarks commercial prices to Medicare rates would also need to take into account a provider's share of Medicaid patients to account for those substantially reduced rates.
If all commercial insurers paid Medicare rates for professional services, this analysis suggests there would be opportunity to lower costs. Those possible cost savings also indicate the potential for concern and pushback among providers whose payments would be reduced. Our findings clearly indicate that the impact of policies tying payment to Medicare rates would depend on geography.
Our analysis has several limitations that are important to consider when interpreting our findings. Our sample relies on data from three large national health insurers (Aetna, Humana, and United Healthcare). Although we do take steps to ensure HCCI has ample data in each reported geography, in some areas, the data from these contributors may capture a more representative sample of the commercial insurance market than others.
We compare commercial prices to Medicare rates by comparing what a given service in a given geographic area would have been reimbursed by Medicare using the Physician Fee Schedule. This comparison does not, however, account for all of the adjustments taken into account by Medicare when claims are actually paid. These consist of four broad categories: 1) across the board cuts to payments for all providers, namely sequestration, which is a 2% reduction in the PFS rate, 2) changes to PFS rates based on geography, namely the 10% Health Professional Shortage Area (HPSA) bonus payments made to areas with health care provider shortages in primary care, dental health or mental health, 3) provider-specific reductions or bonuses made to the PFS such as those being made based on provider performance with value based purchasing models, the electronic health record incentive program, or Method II CAH payments21 and 4) procedure-specific adjustments on the care delivered for certain procedures, including, for example, the 150% adjusted PFS payment for bilateral procedures or reductions to payments for certain care delivered in a CMS global period. Such adjustments could result in the prices paid by Medicare being higher or lower for certain types of services or in certain places. As a result, the comparison of commercial and Medicare rates may be biased by omitting adjustments to Medicare fees. To explore how this would affect our analysis we separately computed the ratio between average commercial payments for each service and average payments made by Medicare using a 100% sample of Medicare Fee-For-Service claims. We found that the measures computed using the two methods of measuring Medicare payments were broadly similar. For a more complete discussion see our methodology document.
While we provide a standardized comparison of prices across geographic areas, these findings do not directly speak to total spending by insurers or the revenue for providers. Importantly, there may be differences in utilization patterns that result in a different mix of services used in certain geographic areas. As a result, our findings may over or understate the true average price paid across the services geographic areas actually use.
Relatedly, another concern is that our analysis may be biased by different utilization patterns between the commercial and Medicare populations. For example, Medicare beneficiaries may receive comparable services as commercially insured individuals but have them billed as different (more expensive) codes on average. In this case, our analysis (because we compare services based on identical codes) may overstate the true price difference for ostensibly the same service because they are billed using different (more expensive) codes in Medicare than in the commercial population.22 Another similar concern is that the comparison of the prices paid by commercial insurers to Medicare rates for a sample of services used by commercially insured individuals may not provide a representative picture of Medicare prices. For example, if Medicare beneficiaries used, on average, different services or the same services in different proportions comparing Medicare and commercial prices on our sample set of services may provide a misleading picture. However, we find that our sample services account for a comparable proportion of services used and total spending in both populations and the rates at which services were used in both populations were highly correlated. For a more complete discussion see our methodology document.
1Cohrs, Rachel. “Healthcare Is Biggest Issue for Voters but Not for Congress.” Modern Healthcare, January 11, 2020. https://www.modernhealthcare.com/politics-policy/healthcare-biggest-issue-voters-not-congress.
2Carroll, Linda. “1 in 3 Americans Worry about Being Able to Afford Health Care, NBC News/Commonwealth Fund Survey Says.” NBC News. Accessed June 24, 2020. https://www.nbcnews.com/health/health-news/1-3-americans-worry-about-being-able-afford-health-care-n1144426.
3Muñana, Cailey, Bryan Wu, and 2019. “Data Note: Americans’ Challenges with Health Care Costs.” KFF (blog), June 11, 2019. https://www.kff.org/health-costs/issue-brief/data-note-americans-challenges-health-care-costs/.
4Cancryn, Adam. “POLITICO-Harvard Poll: Health Care Costs Are Top Priority Heading into Elections.” POLITICO. Accessed June 24, 2020. https://www.politico.com/news/2020/02/19/poll-health-care-election-115866.
5through higher premiums and higher out-of-pocket costs (for services that are both in-network and out-of-network).
6Sara, Collins, David Radley, and Jesse Baumgartner. “Trends in Employer Health Care Coverage, 2008–2018 | Commonwealth Fund.” Accessed June 24, 2020. https://doi.org/10.26099/btqx-ed95.
7Sep 25, Published:, and 2019. “Benchmark Employer Survey Finds Average Family Premiums Now Top $20,000.” KFF (blog), September 25, 2019. https://www.kff.org/health-costs/press-release/benchmark-employer-survey-finds-average-family-premiums-now-top-20000/.
8Health Care Cost Institute. "2018 Health Care Cost and Utilization Report." (2020).
10In a recent literature review, Kaiser Family Foundation found that a previous estimates of commercial prices relative to Medicare averaged 189% of Medicare rates for inpatient services, 264 % for outpatient services, and 143% for professional services across studies.
11Baker LC, Bundorf MK, Royalty AB, Levin Z. Physician Practice Competition and Prices Paid by Private Insurers for Office Visits. JAMA. 2014;312(16):1653–1662. doi:10.1001/jama.2014.10921
12We define services based on the combination of Common Procedure Terminology (CPT) code and CPT code modifier. We define a claim as the unique combination of individual, service dates, and service codes (CPT code, CPT modifier). We compute the average price paid as the sum of allowed amounts divided by a count of service sprovided.
13 The Medicare PFS pricing amounts are adjusted to reflect the variation in practice costs from area to area. A geographic practice cost index (GPCI) has been established for every Medicare payment locality for each of the three components of a procedure's relative value unit (i.e., the RVUs for work, practice expense, and malpractice). The GPCIs are applied in the calculation of a fee schedule payment amount by multiplying the RVU for each component times the GPCI for that component. More information can be found here: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/PhysicianFeeSched
14Note that this amount does not take into account any adjustments to Medicare Physician Fee Schedule rates. To the extent that adjustments raise Medicare rates, we may overestimate the ratio of commercial to Medicare prices. For a more in depth discussion of this topic, see our methodology document.
15Lopez, Eric, Gretchen Jacobson, and 2020. “How Much More Than Medicare Do Private Insurers Pay? A Review of the Literature.” KFF (blog), April 15, 2020. https://www.kff.org/medicare/issue-brief/how-much-more-than-medicare-do-private-insurers-pay-a-review-of-the-literature/.
16Ginsburg, Paul. “Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Power.” Health Systems Change. Accessed June 24, 2020. http://www.hschange.org/CONTENT/1162/#ib2.
17Biener, Adam I., and Thomas M. Selden. “Public And Private Payments For Physician Office Visits.” Health Affairs 36, no. 12 (December 1, 2017): 2160–64. https://doi.org/10.1377/hlthaff.2017.0749.
18Reiff, Julie, Niall Brennan, and Jean Fuglesten Biniek. “Primary Care Spending in the Commercially Insured Population.” JAMA 322, no. 22 (December 10, 2019): 2244–45. https://doi.org/10.1001/jama.2019.16058.
19KFF. “Medicaid-to-Medicare Fee Index,” July 12, 2017. https://www.kff.org/medicaid/state-indicator/medicaid-to-medicare-fee-index/.
20Medicare Payment Advisory Commission. "Report to the Congress: March 2019." (2019).
21Method II allows the Critical Access Hospital (CAH) to receive cost-based payment for facility services, plus 115% of fee schedule payment for professional services. The designation of a CAH is made generally by CMS using HRSA designations, is facility specific, and is intended for rural facilities.
22Geruso, Michael, and Timothy Layton. “Upcoding: Evidence from Medicare on Squishy Risk Adjustment.” Journal of Political Economy 128, no. 3 (March 1, 2020): 984–1026. https://doi.org/10.1086/704756.