Friday, March 15, 2013

Fwd: qotd: Are hospitals underpaid by Medicare?

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-------- Original Message --------
Subject: qotd: Are hospitals underpaid by Medicare?
Date: Fri, 15 Mar 2013 11:39:32 -0700
From: Don McCanne <>
To: Quote-of-the-Day <>

The New York Times
March 15, 2013
What Hospitals Charge the Uninsured
By Uwe E. Reinhardt

Steven Brill's exposé on hospital pricing in Time magazine predictably
provoked from the American Hospital Association a statement seeking to
correct the impression left by Mr. Brill that the United States hospital
industry is hugely profitable.

In this regard, the association can cite not only its own regularly
published data, but also data from the independent and authoritative
Medicare Payment Advisory Commission, or Medpac, established by Congress
to advise it on paying the providers of health care for treating
Medicare patients.

As shown by Chart 6-19 of Medpac's report from June 2012, "Health Care
Spending and the Medicare Program," the average profit margin (defined
as net profit divided by total revenue) for the hospital industry over
all is not extraordinarily high, although for a largely nonprofit sector
I would rate it more than adequate.

The hospital association also correctly points out that under the
pervasive price discrimination that is the hallmark of American health
care, the profit margin a hospital earns is the product of a complicated
financial juggling act among its mix of payers.

Payers with market muscle — for example, the federal Medicare and state
Medicaid programs — can get away with paying prices below what it costs
to treat patients (see, for example, Figure 3-5 and Table 3-4 in Chapter
3 of Medpac's March 2012 report).

With few exceptions, private insurers tend to be relatively weak when
bargaining with hospitals, so that hospitals can extract from them
prices substantially in excess of the full cost of treating privately
insured patients, with profit margins sometimes in excess of 20 percent.

It is noteworthy that in its critique of Mr. Brill's work, the
association statement is completely silent on this central issue of his
report. A fair question one may ask leaders of the industry is this:

Even if one grants that American hospitals must juggle their financing
in the midst of a sea of price discrimination, should uninsured, sick,
middle-class Americans serve as the proper tax base from which to recoup
the negative margins imposed on them by some payers, notably by public

NYT posted comment:

Don McCanne
San Juan Capistrano, CA

Regarding Medicare paying prices below costs, the 2013 Medpac report was
just released, and it states, "We find that costs do vary in response to
financial pressure and that low margins on Medicare patients can result
from a high cost structure that has developed in reaction to high
private-payer rates."

Thus the failure of private insurers to adequately control spending in
hospitals paradoxically has resulted in excess spending on Medicare
patients due to a high cost structure.

Under a well designed single payer system, not only would this price
discrimination be eliminated, but global budgeting of hospitals would
replace this wasteful, fragmented system of financing health care.

Imagine our police and fire departments billing indiscriminately for
their services. What a mess that would be. We receive a far greater
value by using global budgets based on department needs. In the same
manner, our hospitals should be globally budgeted based on the health
care needs of the community.


If you wish to be able to participate effectively in informed
discussions of Medicare spending, you should download Medpac's March
2013 Report to Congress an "Medicare Payment Policy" (435 pages):

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