qotd: For-profit hospitals lead the way in price gouging

Health Affairs
June 2015
Extreme Markup: The Fifty US Hospitals With The Highest Charge-To-Cost
Ratios
By Ge Bai and Gerard F. Anderson

Abstract

Using Medicare cost reports, we examined the fifty US hospitals with the
highest charge-to-cost ratios in 2012. These hospitals have markups
(ratios of charges over Medicare-allowable costs) approximately ten
times their Medicare-allowable costs compared to a national average of
3.4 and a mode of 2.4. Analysis of the fifty hospitals showed that
forty-nine are for profit (98 percent), forty-six are owned by
for-profit hospital systems (92 percent), and twenty (40 percent)
operate in Florida. One for-profit hospital system owns half of these
fifty hospitals. While most public and private health insurers do not
use hospital charges to set their payment rates, uninsured patients are
commonly asked to pay the full charges, and out-of-network patients and
casualty and workers' compensation insurers are often expected to pay a
large portion of the full charges. Because it is difficult for patients
to compare prices, market forces fail to constrain hospital charges.
Federal and state governments may want to consider limitations on the
charge-to-cost ratio, some form of all-payer rate setting, or mandated
price disclosure to regulate hospital markups.

From the Discussion

Markups of the fifty hospitals with the highest charge-to-cost ratios
are 9.2–12.6 times the Medicare-allowable costs. While publicly insured
patients typically pay comparatively close to actual cost, uninsured
patients, out-of-network patients, and casualty and workers'
compensation insurers do not have comparable bargaining or regulatory
power and thus are charged either the full amount or a high percentage
of the full amount, unless the hospitals voluntarily offer discounts.
Hospitals' high markups, therefore, subject many vulnerable patients to
exceptionally high medical bills, which often leads to personal
bankruptcy or the avoidance of needed medical services. Furthermore,
privately insured patients may also pay a greater premium because high
markups give hospitals greater bargaining power with private insurers in
price negotiations. As a result, high markups play a role in the rise of
overall health care spending.

Simply speaking, a patient wanting to compare hospital prices faces a
substantial information asymmetry for an elective procedure, and the
time necessary to conduct price and quality comparisons is certainly not
available in most medical emergencies. The result is a market failure
that forces uninsured patients, out-of-network patients, and casualty
and workers' compensation insurers to pay charges that are marked up
multiple times above costs and are much higher than what publicly
insured and privately insured in-network patients pay. The current
regulatory environment, unfortunately, does little to correct this
market failure. The extent of this market failure is especially salient
in these fifty hospitals.

From the Policy Implications

There are several possible solutions to this market failure.

First, federal and state policy makers could require hospitals to post
their overall charge-to-cost ratios on their website, or the Medicare
program could post them.

A second option is to legislate a maximum markup over cost that a
hospital can charge to any patient.

The third solution is for legislatures to require all insurers to use
the same payment system but not necessarily pay the same rates.

One variant is to have the fee schedule negotiated periodically between
representatives of health insurers and representatives of health care
providers. Several countries, such as Germany, Japan, and Switzerland,
use this type of system. Another variant is to have the government
determine the rate — a system that the State of Maryland has been using
for four decades. To implement these two variants, admittedly, would
require fundamental changes to the current payment system and would be
subject to considerable political challenges. While the larger political
challenge is to get all insurers to pay the same rates, an easier
political challenge might be to get all insurers to use the same payment
system.

http://content.healthaffairs.org/content/34/6/922.abstract

List Of The 50 Hospitals With The Highest Charge-To-Cost Ratios, 2012
http://content.healthaffairs.org/content/suppl/2015/06/03/34.6.922.DC1/2014-1414_Bai_Appendix.pdf

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Comment by Don McCanne

The single payer model of health care reform supported by Physicians for
a National Health Program (PNHP) requires that the for-profit elements
of the health care delivery system be converted to nonprofit status.
This report provides a prime example of the rationale of that proposed
policy.

Of the fifty hospitals with the highest charge-to-cost ratios in the
nation, forty-nine of them are for-profit. This article explains how
these high charges create financial hardships for far too many
individuals with health care needs while driving up private insurance
premiums and driving up total health care costs for the nation.

Although this report is receiving wide coverage in the media, there are
a couple of points buried in the text which warrant special attention.

The article states, "Public disclosure of hospital markup information is
useful only if patients have a real option to choose among competing
hospitals. This is clearly not the case when patients are in medical
emergencies. Even for elective services, the ability to comparison shop
is severely limited by imperfect information about what specific
services will be ordered by the physicians, what physicians will be
providing the services, and how the services will be billed (for
example, bundled or unbundled)."

One of the most common recommendations today is to improve price
transparency to assist patients in becoming better health care shoppers.
Even the recommendations in this article do not do much to inject price
considerations into the health care shopping experience. Other nations
use the government or a quasi-public process to establish appropriate
pricing. The patient is relieved of the price shopping task since their
stewards have already fulfilled that role in advance of need.

The article also states, "…the Medicare program requires hospitals to
limit their charges to Medicare Advantage plans to the Medicare
fee-for-service (FFS) levels. This protection greatly strengthens
Medicare Advantage plans' negotiating position."

Although private insurers, such as those offering the private Medicare
Advantage plans, sell us expensive, intrusive administrative services
which we really don't want, their most important role for us is to
negotiate lower payment rates with the providers in the health care
delivery system. But the Medicare program has already done this for the
Medicare Advantage plans, according to this report. So we are paying
extra funds to these mostly for-profit Medicare Advantage intermediaries
for doing not much more than restricting choice to their provider
networks and wasting resources on excessive administrative services. The
only reason they are popular is that they sucker patients in with their
lower premiums.

Also from the article, "California's Hospital Fair Pricing Act, for
example, requires all California hospitals to charge uninsured patients
with an annual household income below 350 percent of the federal poverty
level no more than what Medicare would pay. In most hospitals, the
Medicare rate is within 90 percent of costs, not 200 percent or, in the
case of these fifty hospitals, 1,000 percent of costs. This approach is
likely to benefit not only uninsured patients, out-of-network patients,
and casualty and workers' compensation insurers, but also in-network
patients."

The point is, the government can ensure that charges are fair by
limiting them to Medicare rates (adjusted to cover legitimate costs).
But why should these controls apply only to those with incomes below
350% FPL, as California does? Under a single payer model, they would
apply to everyone, thus eliminating price gouging.

At any rate, the PNHP single payer model of reform is incorporated into
Rep. John Conyers' HR 676, "The Expanded and Improved Medicare for All
Act." Amongst its many other provisions, it "prohibits an institution
from participating unless it is a public or nonprofit institution." If
it were enacted, these forty-nine for-profit hospitals (with one black
sheep nonprofit) would no longer be the source of headlines expressing
outrage at our unique health care injustices.


H.R. 676, "The Expanded and Improved Medicare for All Act"
https://www.congress.gov/bill/114th-congress/house-bill/676