How Much More Than Medicare Do Private Insurers Pay?

It is known that America spends a lot of money on health care. That percentage was especially high during the Covid-19 pandemic.

Private insurers dominate this field with about 40% of expenditures on physician services and hospital care. On the other hand, Medicare accounted for a significantly smaller share of these expenditures.

While private insurers’ payment rates are negotiated with providers, Medicare sets payment rates in advance based on categories of hospital services known as diagnosis-related groups (DRGs). At the same time, that system is experiencing many modifications of this methodology, such as in 2010, the ACA adopted a change that adjusts the annual updated payments to Medicare hospitals for the supposed increase in productivity. This leads to lower payment rates AND savings.

Thus, Medicare has been able to limit the growth of costs per enrollee more effectively than private insurers on several counts.

On the one hand, proponents of the Medicare system believe that it would increase coverage and reduce the costs of the health system, while others believe that Medicare does not meet the costs of service providers. This would result in hospitals not being able to operate profitably.

The law for physician payments, known as the Sustainable Growth Rate (SGR), has been amended several times by Congress to avoid annual reductions in Medicare payments. It also raised concerns to a higher level. Some have argued that lower payment rates and the associated pressures could compromise patient care and make medical practice unsustainable. Thus, the ability of service providers to successfully perform their work would depend on the difference between Medicare and private payment rates.

Studies conducted from 2010 to 2017 compare the payment rates of private insurers and Medicare service providers. At issue are payments for hospital services and physician services, as well as methodologies that explain variations in estimates in different studies.


Eleven studies were conducted, seven of which did not differentiate between hospital and outpatient services. Private insurance rates in all seven studies averaged 199% of the Medicare rate. The greatest variation was observed in Florida. A study done there reveals that private insurance payouts range from 170% to 1400%. There are also many variations at the level of individual hospitals, which suggests that within the market there are hospitals that demand extremely high reimbursements.


Based on eight studies comparing private insurance with Medicare payment rates for hospital services, private payment rates were found to average 189% of the Medicare rate. Large variations were observed in, for example, hospital services for vaginal births (400%), and for lower extremity MRI 484%.


The largest fluctuations were recorded in five studies conducted for outpatient hospital services. The ratio of private insurance rates to Medicare rates ranged from 150% to 358%. On average 264%, but it should be noted that in one of the studies private-to-Medicare payment ratios for outpatient services ranged from 50% to as high as 2958%.


Hospital and Insurer Market Power.  Those hospitals that have greater bargaining power influence, achieve higher payment rates. Studies have found that hospitals with greater market concentration (eg, San Francisco and Richmond) receive a higher percentage of private insurers’ payment rates than Medicare rates, whether for outpatient or inpatient services. The same results were obtained in studies where several different hospital markets were examined.

On the other hand, studies in which private insurers had more market power had lower private insurance payment rates relative to Medicare rates. A 2013 analysis of hospitals in Michigan found them to have the lowest average prices across all services. The authors attribute this to Blue Cross Blue Shield of Michigan’s large market share of the state’s insurance market, which the authors say gives the insurer extremely strong bargaining power over Michigan hospitals.

Hospital Type. One of the Florida studies described short-stay hospitals that have a high proportion of for-profit hospitals compared to the national average. They thus contribute to higher private insurance payments compared to Medicare. On the other hand, the AHA analysis, which included several thousand hospitals, including academic medical centers, non-profit hospitals, and community hospitals, may explain the lower estimates of the private-to-Medicare hospital payment ratio than for-profit hospitals.

Selection of Insurers. A few studies used data from only a few large private insurers. They do not include the payment rates of other insurers who may have less market power. Other study authors use a claims database representing over 300 private payers, reflecting a more diverse range of insurance markets. But there are also studies in which the authors use data from state all-payer claims databases or state hospital financial statements, which include private payments for hospital care across all commercial insurance companies.

Types of Hospital Services. The ratio of private insurance to Medicare payment rates depends on whether they are procedural services or routine evaluation services, as well as their representation in the study. Some studies analyze services for which patient cost-sharing components are roughly comparable for both Medicare and private insurers (imaging services and surgical procedures). In contrast, some analyzes include a higher proportion of claims for nonprocedural services that likely generate lower estimates of Medicare rates.

Payment Components. In addition to directly calculating private insurance rates and Medicare payments from claims reimbursement or hospital payments, studies differed in the types of payments that were included in these amounts. This is especially important because of the variety of hospital payments allowed under the Medicare prospective payment system (hospitals with IME charges or DSH status). There are also contingency payments and one-time equity payments, which are not included in all studies, which, as might be expected, contribute to the relatively low ratio of private to Medicare payment rates.

Out-of-Network Claims. Payments for out-of-network services are usually much higher than in-network payments for the same services. Most of the studies in this summary exclude out-of-network claims, but these may also affect private insurance rates.


Several studies have compared private insurance and Medicare payment rates for physician services. Private insurance rates averaged 143% of total Medicare rates.

In all studies, private insurance rates for physician services are significantly closer to Medicare levels than private insurance rates for hospital services, suggesting that physician groups generally have less bargaining power over private insurers than hospital groups. However, the reviewed studies still show marked variation overall.

The variation may be explained by methodological differences, some of which mirror those seen in the hospital payment studies reviewed. These include the market power of physicians and insurers, the types of physician services being compared, the calculation of payment rates, and the author’s treatment of out-of-network payments.

Physician and Insurer Market Power. Study results indicate that physician payment rates vary significantly due to differences in the market potential of medical practices versus private insurers. It found a lower rate of private insurance versus Medicare payments in major metropolitan areas, where medical practices face more competition and have less market power than insurers. Higher physician payment rates relative to Medicare have been observed in rural areas, where the demand for physician services gives practices stronger leverage in negotiations against insurers. Private insurance payments for primary care specialties are also lower than Medicare. On the other hand, regions with higher private insurance payouts in the US reflect the greater market power of physicians relative to local private insurers.

Types of Physician Services. The studies differ in the types of services examined. Some describe services that require large resources, such as surgery and imaging, while some studies are based on office visits and routine examinations. In the first case, the analysis found a higher ratio of private insurance payments compared to Medicare, while studies limiting their analysis to doctor visits showed relatively low rates of private services compared to the overall average.

Most of the studies did not take into account the difference between services in outpatient facilities from those in hospital clinics. Under current Medicare policy, payment rates for some procedures performed in hospital outpatient clinics are often much higher than payments for identical services provided in a physician’s office.

Private Insurance Claims Data. Researchers have limited access to all private insurance payments from all insurers, making it difficult for them to obtain a representative sample that could be compared with publicly available Medicare data. Studies using data from larger insurers that have extremely strong market power over physicians in many markets (Ginsburg 2010 study) may observe relatively low private payments.

Payment Components. Medicare physicians may receive additional payments based on geographic variation in costs, areas of health care shortages, and other merits established by the Medicare Merit-Based Incentive Payment System and the CHIP Reauthorization Act of 2015. Studies that include many of these additional payments may produce higher Medicare rates and lower rates of private medical services.

Out-of-Network Claims. These claims can also contribute to the ratio of private and Medicare rates. A study in which out-of-network claims make up a significant part of total claims may show a higher rate of private insurance than the real situation. On the other hand, studies that exclude out-of-network claims may report a lower private insurance rate than Medicare when looking at the overall average.

MedPAC’s findings show that in all hospitals from 2010 to 2018, costs to treat Medicare beneficiaries exceeded Medicare payments, resulting in negative and declining Medicare gross margins. Analyzes by MedPAC and the American Hospital Association show that aggregate all-payer hospital margins remained positive between 6% and 8% during the same period due to contributions from private payers. Some hospital industry groups and researchers see the data as evidence that higher payment rates from private insurers are necessary to offset the financial pressure of relatively low Medicare rates.

MedPAC argues that hospitals could do more to reduce their costs. They suggest that hospitals preserve their stability and market power by charging private payers what the market will bear.

Physician groups also pointed to disparities between their practice costs and Medicare payments. Because there is no mandatory national cost reporting for physician offices as there is for hospitals, CMS and researchers rely on small, ad hoc surveys of physicians and practice managers.


Studies report that private insurance payments are consistently higher, averaging 199% of the Medicare rate for inpatient services overall, 189% of the Medicare rate for inpatient services, 264% of the Medicare rate for outpatient hospital services, and 143% of the Medicare rate for physician services. Yet, the mentioned variations in the studies make a contribution to the final results.

Some providers argue that Medicare payment rates are too low to cover the reasonable cost of care. That further leads them to increase prices for private payers. However, the literature finds that providers negotiate prices with private insurers regardless of Medicare rates.

The costs of operating a hospital or medical practice are not fixed and vary depending on factors such as disposable income. If private insurer payments were to approach Medicare levels, even providers whose market power has so far shielded them from financial pressure would have a strong incentive to limit their costs, potentially leading to significant reductions in national health spending on hospital and physician services.

Proposals that would expand Medicare rates to a broader population could also contribute to lower costs. Lower payments to providers can lead to lower per capita spending, which in turn leads to lower out-of-pocket costs. Employers could also realize savings under proposals that extend Medicare rates to private insurers, which could allow them to divert some funds currently spent on employee health insurance, including wages.


Reimbursements for psychiatrists can often be lower than Medicare rates, while reimbursements for other physicians may be higher than Medicare rates for the same codes.

The Mental Health Parity was changed in 2021 by Congress.

Plans are now required to begin providing detailed analyzes of their non-quantitative treatment limitations (N-QTLs). N-QTLs are strategies that health plans use to limit benefits, such as prior authorizations, fail-first policies, step therapy protocols, and in-network enrollment standards.

A review by the Department of Treasury, Labor and Health and Human Services found that none of the health plans were in compliance with the law. Officials have issued dozens of enforcement letters to health plans identifying the plans’ mental health parity violations. The report also recommended that Congress amend the parity laws to ensure that all benefits are defined in an objective and uniform manner.


1. Eric Lopez , Tricia Neuman, Gretchen Jacobson , and Larry Levitt. How Much More Than Medicare Do Private Insurers Pay? A Review of the Literature. Published: Apr 15, 2020.

2. Linda M. Richmond. Psychiatric News. Members Report Uptick in Plans’ Claim Denials, Scrutiny, and Hassles. Volume 57 number 6 June 2022.

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