Health care

Private Sector Health Care Prices—Defining The Terms Of The Policy Debate

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Editor’s Note:

Today, Health Affairs is pleased to launch a new Forefront series, Provider Prices in the Commercial Sector, featuring analysis and discussion of physician, hospital, and other health care provider prices in the private-sector markets and their contribution to overall spending therein.  The series kicks off with this article by Erin Fuse Brown and another piece by Michael Chernew and Victoria Berquist. Additional articles will be published throughout 2023.  Readers are encouraged to review the Call for Submissions for this series. We are grateful to Arnold Ventures for their support of this work.


Health care spending is high and rising, consuming an ever-larger share of the national economy.  Private sector spending represents the single biggest slice of the U.S.’s health care spending pie. About half of the population is covered by a private health plan. For those with private health coverage, health care is treated largely as a consumer good, where the prices of health care goods and services are determined by market forces. Yet, the market for health care is imperfect and health care costs consume an increasing amount of household budgets.

The total amount spent on health care, like any consumer good, is a function of price and utilization. Utilization refers to the volume and intensity of health care items and services used. Over the past decades, much policy effort has been devoted to constraining utilization in the form of payment and delivery reforms, such as value-based purchasing. These reforms have been unable thus far to meaningfully control rising health spending.

The U.S. cannot contain health spending by focusing on utilization alone, particularly in the commercial market. As economists have long pointed out, it’s the prices, stupid. Thus, Health Affairs’ new Forefront series, Provider Prices in the Commercial Sector, focuses on the price-side of the equation. The series also focuses on the commercial market, which includes those with employer-based coverage, individual coverage, or no coverage.

The policy debate about how to control private health care prices is obscured by an array of overlapping terms whose meanings are often confused and conflated, including: costs, prices, billing, spending, margins, and affordability.

A common set of definitions can provide clarity by helping to identify which policy levers are being pulled and to assess the impact of any proposed policy change. For instance, policymakers or purchasers tout efforts to reduce insurance premiums for consumers as a win for affordability, but those consumers may not experience savings if their out-of-pocket spending on deductibles or cost-sharing increases. This article defines key terms to provide a common language and explains how these concepts are relevant to the commercial pricing policy debate.


Health care spending describes the total amount purchasers spend on health care. Purchasers include employer plan-sponsors, individual households, taxpayers, and the government. Aggregate calculations of U.S. health spending refer to the macroeconomic expenditure of our collective health care consumption. In 2021, national health spending totaled $4.3 trillion, or $12,914 per person, and represented 18.3% of the gross domestic product. These calculations capture purchasers’ aggregate expenditures for health care products and services, government administration, insurance plan profits and administrative costs, government public health activities, investment in research, and capital expenditures.  Even the eye-popping figure of $4.3 trillion does not capture all health spending, because it excludes foregone wages and tax expenditures in the forms of tax breaks, credits, and subsidies for the provision of health coverage.


“Prices”—when used by economists and policymakers—refer to the total amount a health care provider or supplier requires as payment for a health care item or service, i.e. not the “list” price, also known as a “charge,” but the “real price.”  It is the total amount the provider expects to receive from both the insurer and the patient (or just the patient if uninsured). Health care prices are difficult to pin down because of the fragmented health care system and the intermediation of third-party payers to negotiate rates and process claims to pay for members’ health care. Moreover, health care prices are further complicated because they encompass several related billing terms, which themselves need unpacking.

Billing Terms

In the commercial market, providers negotiate with health plans over their prices and for inclusion in health plan networks. Typically, in-network status or preferred tier placement within a health plan network means the provider has agreed to lower prices in exchange for lower cost sharing for patients seeking their services, which will result in the provider receiving a higher volume of the health plan’s patients. The prices that in-network providers accept under a given contract with a health plan are the negotiated rates. If the provider and the plan cannot reach agreement, the provider does not participate in the plan network and there is no negotiated rate.

Negotiated rates vary by payer, provider, and patient needs —which contributes to the difficulty of determining the real price for a given service, say the cost of giving birth. Moreover, facilities and physicians usually generate separate bills for each component of a service, such as when patients are charged facility fees as a “cover charge” for showing up at an ER or hospital outpatient department, or when patients’ bills are unbundled to charge for every item and service a la carte.  

A health plan’s explanations of benefits contain yet more billing terms. The provider first sends a bill to the payer for a billed amount, which can be its undiscounted charges (see below) or the highest negotiated rate it has with any payer, i.e., an inflated asking price.  The maximum amount the plan will pay for any covered service is the allowed amount, usually reflecting its negotiated rates for in-network providers. This is the same as the “real” price referred to above. Often, the patient is also responsible for a sizeable portion of the bill in the form of cost-sharing, which varies by the provider’s network status and tier placement. The amount the plan actually pays, excluding individual cost-sharing, is the amount paid.  For example, a provider may bill a health plan $100 for a lab test, but the allowed amount negotiated by the plan is $60, the individual is responsible for 20% co-insurance or $12, and the amount the plan pays is $48.

The situation is a bit more complicated if the provider is out of network.  A provider that is out-of-network with a patient’s health plan or when the patient is self-paying without coverage will usually bill its undiscounted charges—or list prices. Sometimes these charges are called “chargemaster” rates or “gross charges.” However, preferred provider organization (PPO) plans offer some coverage for out-of-network providers, and all plans must cover out-of-network emergency services. Without a pre-negotiated rate, the payer and out-of-network provider must negotiate the payment after the fact, and they may not be able to reach agreement. In the past, the patient was often stuck in the middle, having to pay the balance between the provider’s full, undiscounted charges and what their health plan paid. However, after the No Surprises Act of 2020, providers may not balance bill patients for “surprise out-of-network” services, and providers and health plans can use dispute resolution to determine out-of-network payments. For self-pay patients, the No Surprises Act requires providers to supply an upfront, good-faith estimate of the patient’s expected price, including any self-pay discounts and what insured patients would typically pay.

For many years, the only “price” information publicly available from most providers was their undiscounted charges, even while providers acknowledged that most payers only pay a fraction of these rates. Until recently, negotiated rates were kept confidential, but now hospitals and health plans must publicly disclose their negotiated rates under the Hospital Price Transparency Rule and the Transparency in Coverage Rule. Despite spotty compliance, the implementation of these price transparency rules requires providers and payers to make negotiated rates public, potentially increasing stakeholders’ understanding of “real” prices that are paid.


Colloquially, the term “health care costs” is often used interchangeably with health care spending for purchasers and consumers. For health care providers, however, the term “costs” refers to the input costs of production.  These input costs include labor, overhead, energy, capital expenses, supplies, and equipment. Hospitals and other facilities must submit an annual cost report to the Centers for Medicare and Medicaid Services, which includes data on costs and charges for Medicare and in total and is available for public use. Information on providers’ costs is useful for policymakers, purchasers, researchers, and others to understand whether and to what extent the prices paid to specific providers are excessive. Publicly available cost information can be used to calculate a hospital’s “breakeven,” the rates a hospital must receive from its commercial payers to cover its costs without a profit (usually calculated as a multiple of Medicare rates).  Knowing the gap between a provider’s breakeven and its negotiated commercial prices, and how it compares to state-wide or national averages, can help stakeholders identify market outliers, address provider consolidation, identify a price range for rate negotiations, and other policy uses.


Margins” are the difference between revenues earned and the costs of production, divided by revenues, i.e., how much the entity earns after covering its expenses.  Total margins include non-operating revenues, such as investment income or government transfers. Operating margins are calculated based only on the revenues from providing patient care. When positive, the margin is often described as a profit margin, but providers can also earn a negative margin when they lose money on patient care. Like prices, margins often differ by payer type—Medicare, Medicaid, and commercial. Thus, a hospital may have negative margins on its Medicaid patients, break even on its Medicare patients, and earn a positive margin on its commercial business. It is, however, difficult to calculate accurate payer-specific margins because of the high fixed costs of operation and the challenges in attributing these costs to specific patients. In addition to endogenous factors such as provider’s prices, payer mix, and market share, hospital margins are affected by exogenous factors such as labor costs, a pandemic, inflation, or an influx of government spending.

Information on provider margins is a critical piece of the commercial pricing debate, as private payer revenues often dictate health care entities’ financial health. Any policy to rein in commercial prices will affect providers’ margins. But the effects will vary based on a provider’s size and market position. Some providers, such as rural or safety net facilities, will be hit harder by pricing reforms than providers with larger margins, perhaps requiring policy exceptions or adjustments to reflect these differences.  


Health care affordability (or unaffordability) is a key concern among consumers. Affordability lacks a precise definition because it reflects a sentiment—an individual’s subjective assessment of the ability to pay for needed health care expenses and the opportunity costs of such health care consumption. In terms of measurement, affordability has been defined variously as the percentage of income an individual or household spends on health care premiums and out-of-pocket expenses or as the percentage of the population that has room in their household budgets to afford health care expenses among other necessities. Regardless of how it is measured, health care affordability has declined over time as health care expenses have risen faster than wages. Health care affordability is affected by prices, but conceptually it is broader, including all the expenses an individual experiences associated with health care: premiums and cost-sharing, out-of-pocket spending on non-covered items and services, lost wages, lost opportunities, caregiving expenses, lower credit scores and higher costs of borrowing, and payments to creditors and debt collectors for past medical debts.


The complexity of the terminology around health care prices, billing, costs, spending, margins, and affordability reflects and results from the complexity of the way we pay for health care in this country. However, a common language is fundamental to this critical policy conversation.  Without it, policymakers, health care industry actors, purchasers, researchers, advocates, and the public will talk past each other about private sector prices, and we cannot afford that.

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