Medicare Price Negotiation: Next Steps for Healthcare Reform

Patrick Carr is a staff writer and second-year MPP student.

Signed into law by President Joe Biden in August 2022, the Inflation Reduction Act (IRA) updated Medicare drug purchasing policies to bring down costs without cutting benefits or reducing funding. Medicare will now limit out-of-pocket drug expenses to $2,000 per year, require drug manufacturers to pay rebates for steep price hikes and most notably, negotiate prices with drug manufacturers. 

These changes have been a long time coming. Americans pay significantly higher drug prices than people in most other nations and millions forgo prescriptions because of the expense. Allowing the federal government to act as a robust negotiating partner rather than a passive price taker will save Medicare $287 billion and enable more Americans to access prescription medications.

However, drug prices are not the only area in which Americans face unusually high healthcare costs. While prescription drug prices grew by 3% in 2020, hospital care costs grew by 6.4% and physician expenses grew by 5.4%, Prescription drugs accounted for only 8% of American healthcare spending in 2020; hospital care made up 31% and physician and clinical services made up 20%.

Some of Medicare’s worst coverage gaps pertain to the two latter categories. In her book Trapped in America’s Social Safety Net, professor Andrea Louise Campbell calls Medicare “incomplete insurance” due to the high out-of-pocket hospital costs that many patients endure. Campbell writes: “In 2013, Medicare enrollees who were hospitalized had to pay a deductible of $1,184 for each hospital stay, plus daily coinsurance of $296 per day for days 61 to 90,” with daily costs increasing with the duration of the hospital stay. Fidelity Investments estimates that a 65-year-old couple retiring in 2022 will spend an average of $315,000 in health care expenses throughout their retirement, even after taking Medicare into account.

While the IRA doesn’t address rising hospital costs, its strategy for lowering drug prices provides a model for addressing rising costs in other areas. As with the pre-IRA relationship between Medicare and drug manufacturers, Medicare bases reimbursements to hospitals on the average cost of treatment, unlike private insurers who negotiate hospital payment rates.

The market for hospitals is extremely concentrated, allowing providers to raise prices with no corresponding increase in the quality of care. Furthermore, in a practice known as “upcoding,” hospitals can simply submit bills for more expensive treatments than those provided to patients. According to research by the Center for Public Integrity, this practice of “charging for more extensive and costly services than actually delivered” is due in part to “lax government oversight.” Because of the cost-sharing component of Medicare, in which patients and Medicare split the total bill, this can increase out-of-pocket expenses for patients. 

Changing hospital billing procedures is difficult; only medical professionals performing complicated procedures can attest to the time and resources required. Nevertheless, changes can be made to prevent upcoding and reign in hospital expenses. Medicare could rely on an alternative system of evaluating the cost of medical procedures and recently commissioned the RAND Corporation to develop one for surgical procedures. The RAND model estimated the real value of surgeries to be significantly lower than the prices currently charged.

Medicare could limit out-of-pocket costs for hospital stays as the IRA did for prescription drugs. Under current policies, Medicare patients continue to pay coinsurance at a fixed percentage regardless of how high the bill becomes; both out-of-pocket expenses for patients and Medicare reimbursements would decrease with these cost limits.

Addressing high hospital costs will help patients on private insurance as well. Research shows that as Medicare payment rates decline, so too do private payment rates, meaning that all Americans can benefit from stronger Medicare negotiation regardless of their insurance provider. The federal government could cap hospital prices for commercial health plans at 200% of the Medicare rate. Per a proposal by the Committee for a Responsible Federal Budget, no hospital would be paid more than twice as much by private insurance as under Medicare for a given service. The proposal estimates this will bring down private-sector healthcare costs by over $980 billion over ten years.

All three of these proposals will save Medicare money, maintain or improve insurance quality and lower commercial healthcare costs. The IRA, which is expected to achieve this goal in the prescription drug market, should set an example for how policy should be crafted to decrease health costs moving forward. If policymakers are serious about continuing to bring down exorbitant healthcare expenses, they cannot ignore the high cost of hospital care.

This piece was edited by Deputy Editor Annie Robey and Executive Editor Lancy Downs.

Photo by Natanael Melchor on Unsplash

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