This week: Many health plans use “% of Medicare” as a benchmark for hospital pricing. It sounds straightforward—but depending on how it’s applied, it can lead to very different results and, in some cases, misleading comparisons.
The Assumption Behind % of Medicare
Using a percentage of Medicare as a pricing benchmark is common in health plan contracting because it creates the impression of a standardized and objective reference point. When a contract specifies reimbursement at 200% of Medicare, it feels like a clean and consistent way to compare providers.
In practice, this often leads to simple comparisons. If one hospital is at 150% and another is at 200%, the natural assumption is that the first is less expensive and the second is more costly. That conclusion seems logical, but it depends on something that is rarely examined closely—the underlying Medicare rate itself.
Medicare Is Not a Single Number
Medicare does not pay every hospital the same amount for the same service, even when the procedure falls under the same Diagnosis-Related Group. Under the Inpatient Prospective Payment System, payments begin with a base DRG amount but are then adjusted based on a number of hospital-specific factors.
These adjustments can include Indirect Medical Education payments for teaching hospitals, Disproportionate Share Hospital payments for facilities serving low-income populations, and wage index adjustments tied to local labor costs. Additional policy-driven adjustments may also apply depending on the hospital’s characteristics and role in the community.
Because of these factors, two hospitals performing the same procedure can receive significantly different Medicare reimbursements. What appears to be a single benchmark is, in reality, a set of individualized calculations.
(Source: Centers for Medicare & Medicaid Services, IPPS methodology)
Same Percentage, Different Outcome
Once it is clear that Medicare payments vary by hospital, the limitations of using a percentage become easier to understand. Applying the same multiplier to different base amounts will naturally produce different results, even when everything else appears to be equal.
A hospital with a lower Medicare rate will generate a lower payment at 200%, while a hospital with a higher Medicare rate will generate a higher payment at that same percentage. The multiplier has not changed, but the underlying numbers have, which leads to a wide variation in actual dollars paid.
This is why it is important to recognize that % of Medicare is not a price. It is a ratio built on a variable foundation, and the variability of that foundation is what ultimately drives the outcome.
Does This Mean Teaching Hospitals Always Cost More?
Not necessarily. Teaching hospitals and safety-net hospitals often receive higher Medicare payments due to adjustments such as IME and DSH, and when a commercial contract is tied directly to total Medicare reimbursement, those higher baseline amounts can translate into higher commercial payments.
However, the outcome depends entirely on how the contract is structured. Some agreements rely on specific components of Medicare, such as the base DRG rate, while excluding certain adjustments. Others move away from percentages altogether and use case rates or bundled pricing to establish consistency.
Because of these differences, it is possible for a plan sponsor to pay more at a teaching or public hospital under a % of Medicare arrangement, but it is not guaranteed. The result is driven by the details of the contract, not just the type of hospital.
Why This Matters for Brokers and Employers
For brokers and plan sponsors, the key takeaway is not that % of Medicare is inherently flawed, but that it requires context to be used effectively. Relying on percentages alone can lead to incomplete or misleading conclusions when comparing hospitals or evaluating network performance.
A lower percentage does not automatically mean a lower cost, and a higher percentage does not necessarily indicate a worse deal. What ultimately matters is the allowed amount—the actual dollars paid for a specific service—and how those numbers compare across providers.
Taking the time to understand how those amounts are derived can lead to better decisions around network selection, pricing strategy, and overall plan design.
Practical Takeaways
When evaluating hospital pricing, it is important to focus on allowed dollars per episode rather than relying solely on percentages. This provides a clearer picture of what a plan is actually paying.
It is also important to understand what version of Medicare is being used as the benchmark and whether adjustments such as IME or DSH are included in the calculation. These details can significantly affect the outcome.
Finally, % of Medicare should be viewed as one tool among many. It can be useful when applied correctly, but it should not serve as the sole basis for decision-making.
Final Thought
Healthcare pricing is often presented in ways that feel precise, but those numbers depend heavily on how they are constructed. A percentage of Medicare is one of those cases. It can be helpful, but only when the underlying assumptions are clearly understood.
In many situations, the comparison is not just between prices, but between the methodologies that produced those prices. Recognizing that distinction can change how network decisions are evaluated and communicated.