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