Introduction

Milliman’s Consolidated Health Cost Guidelines™ (HCG) Sources Database (CHSD) contains a national group commercial health insurance claims experience database, representing approximately 71 million members and $315 billion in medical allowed charges in 2022. We reprice this experience data, along with the 2021 Merative MarketScan® data, to Medicare fee-for-service (FFS) payment rates using the Milliman Medicare Repricer™.¹ The Milliman Medicare Repricer contains a full Medicare FFS adjudication engine for all service types, including Medicare severity diagnosis-related group (MS-DRG) and ambulatory payment classification (APC) groupers, allowing for a full comparison of the commercial reimbursement to the Medicare-allowed amounts. We calculate a percentage of Medicare FFS rates as the commercial allowed divided by the repriced Medicare FFS allowed to provide a more consistent payment rate benchmark.

Percentage of Medicare FFS rates is one of the most widely accepted commercial reimbursement benchmarks when evaluating provider reimbursement and comparing contracts in the healthcare industry. It adjusts for the mix of services across providers² and plans while removing impacts from billed charges, which can vary widely across providers and areas.

Nationally, we estimate 2024 commercial reimbursement for medical services to be approximately 190% of fully loaded Medicare FFS rates,³ with a significant difference between facility reimbursement and professional reimbursement as shown in Figure 1. Figure 1 also shows that the overall reimbursement as a percentage of Medicare FFS rates has slightly increased from 2023 to 2024. The observed changes are driven by the updates to the underlying commercial claims data, refreshed Medicare fee schedules, and updated commercial unit price trends (discussed in the “Trending experience” section below).

“Percentage of Medicare FFS rates” and how it is calculated

Milliman’s 2024 commercial reimbursement benchmarks are based on nationwide commercial medical claims data aggregated from several sources, including Milliman’s CHSD, which reflects commercial claims incurred in 2022, and the Merative MarketScan® data, which reflects commercial claims incurred in 2021. The commercial allowed charges are trended to 2024.

The claims are repriced to the 2023 Medicare FFS fee schedule using the Milliman Medicare Repricer and trended to 2024. The percentage of Medicare FFS rates is the ratio of the total commercial allowed charges over the total Medicare-allowed charges. The data is summarized by metropolitan statistical areas (MSAs) and major service types: inpatient hospital (IP), outpatient hospital (OP), and professional (Prof) services. Statewide and nationwide totals are determined by weighting the MSA-level results to reflect the distribution of the under-65 population.

The Medicare FFS allowed charges are assigned with the Milliman Medicare Repricer. The Milliman Medicare Repricer supports the major Medicare fee schedules, including the inpatient and outpatient prospective payment systems (IPPS and OPPS), and can be set to include or exclude payment components like disproportionate share hospital (DSH) payments and indirect medical education payments (among others).

Under Medicare, most acute hospitals receive additional DSH and uncompensated care payments, and many receive indirect medical education (IME) payments for inpatient stays. These additional payments make up approximately 21.2% of the total Medicare FFS payments under IPPS nationally. For this study, we include these payment components, except for inpatient pass-through payments and we apply PPS rates to non-PPS facilities including critical access hospitals, cancer and children’s hospitals, and Maryland waiver hospitals.

The professional Medicare reimbursement includes the standard adjudication adjustments, but does not reflect any adjustments for Merit-based Incentive Payment System (MIPS), healthcare professional shortage area, or professional bills through critical access hospitals.

To help ensure consistency, we exclude skilled nursing facility (SNF) and home health claims, where the availability of the required coding for assigning Medicare FFS payment varies by geography.

The Milliman Medicare Repricer is validated against Medicare FFS claims to ensure consistency with the allowed payments under Medicare FFS.

Trending experience

The experience data reflect calendar year (CY) 2021 and 2022 incurred claims data, from MarketScan and CHSD respectively, with Medicare FFS allowed amounts assigned through the Milliman Medicare Repricer software. The commercial allowed and Medicare allowed amounts are trended forward to 2024. These trends—approximate values shown in Figure 2—exclude service mix and intensity changes.

Variances in reimbursement rates across geographic areas and type of service

Provider reimbursement rates vary significantly by geography and type of service. Milliman reimbursement benchmarks are available by state and MSA to drill down to market-specific reimbursement. The interactive chart below shows a state-level view of total 2024 reimbursement as a percentage of Medicare FFS rates, excluding retail pharmacy claims (gray states indicate results are unavailable). This chart supports toggles to show the average statewide reimbursements as a percentage of Medicare FFS rates for inpatient, outpatient, and professional services. The chart also includes benchmarks from other studies for reference. See detailed discussion in the “Comparison to other benchmarks” section.

As shown, most states are within a narrow range; however, some states have a very high or low overall reimbursement relative to Medicare. For example, we estimate that Alaska has total commercial reimbursement of 277% of Medicare FFS, while Alabama has low commercial reimbursement relative to Medicare FFS at 140%. We also observe significant variations by market (defined by MSA) within states as well (not shown in the interactive chart). For example, the MSA-level results in California range from 160% of Medicare in Madera to 261% in Vallejo. There are several reasons why reimbursement can vary widely across markets, including the relative negotiating power of providers or payers, and the variation in regional Medicare FFS rates.

Commercial reimbursement also varies by type of service. The nationwide reimbursement by this measure is lowest for professional services, at 143% of Medicare, and highest for outpatient services, at 263% of Medicare. Commercial inpatient reimbursement averages 205% nationwide.

Milliman reimbursement benchmarks are also available at more granular service levels, e.g., inpatient maternity, outpatient emergency, anesthesia, and professional surgical procedures. The additional service category detail allows for more detailed review of specific elements of provider reimbursements, and a better understanding of where reimbursement contracts are relative to the market. As an example, Wisconsin’s professional Medicare fee schedule is approximately 4% below nationwide, but the overall commercial reimbursement is 242% of Medicare (compared to 143% nationwide). This is driven by the average commercial reimbursement for professional radiology services (approximately 429% of Medicare). Additional granularity e.g., procedure code level benchmarks, are also possible via ad-hoc reporting.

Comparison to other benchmarks

We validated our benchmarks by comparing our results to other publicly available data. Specifically the Health Care Cost Institute (HCCI) study⁴ on 2017 professional reimbursement, and the 2024 RAND study⁵ “Nationwide Evaluation of Health Care Prices Paid by Private Health Plans”, as mentioned above.

The HCCI study is limited to professional claims and is based on 2017 commercial and Medicare fee schedule levels. The Milliman benchmarks are based on 2021 and 2022 incurred data, trended forward to 2024 charge levels.

Figure 3 compares the Milliman results to the HCCI results. The Milliman results are consistently higher than the HCCI results; however, both studies show similar variation among the states measured, and the relativity between states is consistent. For example, Wisconsin has the highest reimbursement, and Alabama and Maryland are among the states with the lowest reimbursement. The HCCI study includes approximately 23% of the allowed claims volume included in our study and focuses on metropolitan areas. In contrast, the Milliman benchmarks are inclusive of urban and rural areas. Urban and rural areas can have very different reimbursements as a percentage of Medicare FFS rates due to differences in Medicare reimbursement rates as well as commercial market dynamics that can impact provider contracts, e.g., there are typically fewer provider competitors in rural areas. The Milliman benchmarks show the ratio of commercial allowed to the Medicare PPS allowed, including claims for non-PPS providers. The benchmarks are available at the MSA level, enabling comparisons to urban and rural areas separately.

Figures 4 and 5 compare the Milliman benchmark results to the RAND study for inpatient and outpatient services, respectively. The RAND study estimates are slightly higher than our results for inpatient reimbursement rates and slightly lower than our results for both outpatient reimbursement rates. The RAND study is an estimate of the average commercial reimbursement rates for 2020 through 2022, whereas our results are 2024 estimates.

We excluded professional results from our comparison as our professional reimbursement benchmarks include all professional settings, and the RAND study focuses on services provided in a hospital setting.

Benchmarking commercial reimbursement

Commercial provider reimbursement arrangements can take many forms, ranging from discounts from billed charges and fee schedules to complex calculation methodologies and risk-sharing arrangements. Many commercial fee schedules utilize Medicare-like reimbursement structures based on diagnosis-related groups (DRGs), ambulatory payment classifications (APCs), and the resource-based relative value system (RBRVS). Commercial FFS payment contracts often use a combination of fee schedules and a percentage of billed charges.

Recently, payers and providers have recognized the predictability and administrative simplicity of utilizing Medicare fee schedules as the basis for commercial reimbursement arrangements. Additionally, shared risk models, including bundled payments and shared savings arrangements have become more prevalent. The Health Care Payment Learning and Action Network⁵ (HCP-LAN) estimates that alternative payment models increased from 22% of commercial payments in 2016 to 34.6% in 2021.

Comparing provider contracts is difficult without a standardized benchmark. Differences in billed charge levels limit the value of comparisons of relative percentages of charges, and differences in membership and service mix complicate the results when comparing different providers, such as a large urban hospital and a critical access hospital.

Comparing the total commercial reimbursement to the Medicare FFS rates is a widely used method for evaluation provider reimbursement and has several benefits when compared to other comparison methods:

• Percentage of Medicare FFS rate comparisons do not rely on billed charges, which can vary widely between providers and areas.
• Medicare payment rates are well understood by payers and providers, making comparisons acceptable to all parties.
• The repriced Medicare allowed rate reflects the actual mix of services provided, which eliminates the need for a market basket and reflects the actual care provided.

The primary drawbacks of this method are:

• The requirement of the expertise and/or software to price claims to the Medicare fee schedule.
• The Medicare definition should be precise and, for reimbursement rate contracts, specify how to account for updates to the Medicare fee schedules.

In addition to enabling an apples-to-apples comparison between specific provider or payer contracts, comparing contracts as a percentage of Medicare FFS rates also eases comparison of aggregate reimbursement rates across geographic regions or to area reimbursement benchmarks.

An additional comparison point, the Milliman Price Transparency Solutions for Payers and Providers⁶, is now available, and with it prices for services from individual hospitals and networks. This data can be coupled with market data to understand market price position by network and hospital.

In addition to the reimbursement benchmarks captured here, provider and payer contracts may have additional shared savings or pay-for-performance provisions that are not captured here. These contract features often result in additional payments between providers and payers. When benchmarking those types of arrangements, the payment transfers outside of the claims experience should also be taken into consideration.

Conclusion

Comparing commercial-allowed amounts to Medicare FFS rates requires either specialized expertise, including an understanding of the complex Medicare FFS reimbursement rules, or software to assign the Medicare-allowed amounts.

Provider reimbursement as a percentage of Medicare FFS rates provides a consistent and well-understood basis for comparing reimbursement rates. Using this common basis enables comparison to reimbursement benchmarks. Provider contracts can also be compared to Milliman’s commercial reimbursement benchmarks to provide a better understanding of their position to the market average reimbursement.

---

¹ See https://www.milliman.com/en/products/Medicare-Repricer.

² For considerations regarding using Medicare to adjust for service mix, please see: https://www.milliman.com/en/insight/percent-of-medicare-comparisons-payment-rates-as-benchmark.

³ We define the fully loaded Medicare FFS rate as the Medicare prospective payment rates, including add-on payments for outlier, disproportionate share, indirect medical education, uncompensated care, sole community hospitals, and Medicare-dependent hospitals. Pass-through payments are excluded. For non-PPS providers (e.g., critical access hospitals, Maryland waiver hospitals), we develop PPS rates using the market PPS pricing factors published by the Centers for Medicare and Medicaid Services (CMS).

⁴ Johnson, B. et al. (August 13, 2020). Comparing Commercial and Medicare Professional Service Prices. HCCI. Retrieved November 7, 2023, from https://healthcostinstitute.org/hcci-research/comparing-commercial-and-medicare-professional-service-prices.

⁵ Whaley, C.M. et al. Prices Paid to Hospitals by Private Health Plans. RAND. Retrieved May 31, 2024, from https://www.rand.org/pubs/research_reports/RRA1144-2.html.

⁶ See Milliman Price Transparency Solutions for Payers and Providers.