“We strongly discourage anyone from taking seriously the Arnold Ventures misinformation campaign and the flawed conclusions in (the Third Way report.)”
With that, the American Hospital Association (AHA) seeks to dismiss a very credible analysis on the truth about hospital costs and finances.
Hospital lobby playbook
If you follow the AHA’s and other hospital lobbies’ script, it goes a little like this:
- We are efficient healthcare providers, but you cannot ask us how this is so. You must take our financial analyses at face value.
- We are the most compassionate of providers as well. We give so much to the community, but please do not look at our record of suing patients for obscene amounts based on our exorbitant charge masters.
- We are pillars in our community and often can be the biggest employer in a given town or city. Mess with us and it could cost a huge number of jobs.
- Government programs radically under-reimburse, causing financial pressures almost every year for us (again, please take this at face value and don’t ask us to prove this).
- Because of this, we must transfer costs to the commercial world and demand much higher reimbursements. We have no choice.
- Spending more always means better quality. And cuts of course will mean poorer quality. Again, you must take this at face value.
- And, oh by the way, insurers are the real culprits. Hospitals should not be constrained by managed care. We alone know what is good for patients and the healthcare system.
But in came center-left think tank Third Way’s report, which fundamentally challenges these assumptions and consequently triggered the AHA’s visceral response above. Apparently, anyone questioning the hospitals’ playbook does not deserve a thoughtful response.
There are a number of previous analyses that show that truly efficient hospitals can earn margin in government programs. Because commercial rates are higher, it stands to reason that the entire enterprise can be healthy. I read about the hospital inefficiency phenomenon in Marty Makary’s books – Uncontrollable and The Price We Pay. As well, I had my personal experiences as a board member of two hospitals – one a children’s medical center and the other an academic health center. I recognized that hospitals make unique contributions, but at the same time financials always appeared much more focused on the revenue than cost side. We were more focused on when we could get the next dollar from government and not tightening our own belts or economizing.
What did Third Way conclude?
Third Way’s findings crush hospitals’ fundamental argument that government programs under-reimburse. The Third Way analysis, which in part relies on work by the Lown Institute and the National Academy for State Health Policy, argues that a significant number of hospitals, particularly those that manage their costs effectively, are profitable even under Medicare and Medicaid reimbursement. This conclusion was derived from hospitals’ Medicare cost reports themselves, so it is hard for the AHA to refute with anything but personal attacks and innuendo.
Third Way concluded that 55% of U.S. hospitals make money on Medicare payments, with 33% making money on Medicaid payments as well. The efficient hospitals made money in Medicare by keeping costs down, saving almost $4,000 per patient discharge ($12,000 for those making money vs. $16,000 for those that did not). Of those that made money, most of them made 10% or less on Medicare. In contrast, most hospitals that lost money on Medicare had significant losses of over 10%. So, the more you spend, the worse you do. MedPAC, the congressional policy arm, has weighed in on the subject too, stating: “When providers (particularly nonprofit providers) receive high payment rates from insurers, they face less pressure to keep their costs low, and so, all other things being equal, their Medicare margins are low because their costs are high.” Well said.
Graphic courtesy of Third Way. See link at end.
Third Way also gives us a glimpse of where commercial profitability might be for hospitals. At Duke Regional Hospital in Durham, N.C., the hospital makes money on both Medicare and Medicaid rates. The breakeven point for commercial might be somewhere about 154%. It charges about 258% of Medicare and makes a 35% profit on commercial insurance. That commercial charge is about the nationwide average of 254%. Extrapolated across the nation, that difference in rates (258% vs. 154%) could be worth hundreds of billions annually to the system. Now, hospitals deserve a margin, too. But let’s remember that health plans make 5% to 10% in a good year, so 35% margins are very high. But as the chart below shows, hospitals could make a margin on commercial that is reasonable at much lower commercial rates and huge savings to the nation.
Graphic courtesy of Third Way. See link at end.
Third way also found that 9% of hospitals pad their bottom line by collecting more money for charity care than they pay out. In my experience, part of that ties to lucrative Medicaid and Medicare funding for high Medicaid and Medicare caseloads as well as uninsured populations. A recent study published in Health Affairs found the cash reserves of nonprofit hospitals grew 68% from 2012 to 2019 while charity care spending dropped. Third Way concludes that hospitals that make money from Medicare patients provide more in charity care than hospitals that lose money.
The report has a great case study – it compares Duke Regional Hospital in Durham, N.C., with Mercy Hospital Southeast in Cape Girardeau, Mo. Duke is efficient, profitable in Medicare, and delivers quality care. Mercy loses money on Medicare, has higher prices, and has worse care. The Lown Institute studies cited in the Third Way analysis also point to the fact that lower costs, not higher ones, help improve quality.
Hospitals buck efficiency in favor of political power and activities
I argue, though, that most hospitals simply don’t want to be efficient. Hospital executives rule over vast empires and efficiency would mean a smaller footprint and influence. Hospital bureaucracies remind me of government, where change is slow, fiefdoms cripple innovation, and accountability is missing. More importantly, being efficient is a lot harder than the status quo of demanding more and more government money and higher and higher rates from employer coverage. Hospitals do this by misrepresenting their costs, margins, and financial health as well as setting very high charge masters from which to negotiate. This justifies the huge cost transfer to employer coverage. As Third Way notes, numerous studies show that employer coverage pays on average 2.5 times Medicare. As the report argues: “…hospitals persistently spread the myth that they are losing money on Medicare to justify large markups to patients with private coverage.”
While a small number of hospitals have taken to true reform and transformation, most have not. Instead, they have extended their efforts to bolster their political position to ensure their gravy train and fight reforms. Consider the following (some of which is cited by Third Way as well):
- Hospitals love the unaccountable traditional Medicare fee-for-service (FFS) system, which asks few questions of hospitals or providers when it comes to service provision or payment. As such, the FFS system has had unsustainable inflationary increases, waste, fraud, and abuse.
- Fearing the accountability provided by the Medicare Advantage (MA) world when it comes to utilization and the right place of service, the hospitals fought for MA prior authorization (PA) restrictions. MA plans now must follow physician certifications when it comes to whether someone needs an inpatient stay or certain post-hospital acute care. With a majority of physicians now owned by hospitals and health systems, that certification becomes easy and will drive hospital revenue. Hospitals also attack MA’s scrutiny of claims payments. Because of its political power, it has won friends on both sides of the aisle who will back the attacks on MA and water down MA’s cost-savings potential.
- Hospitals favor massive consolidation in their industry to raise prices. Quality tends to go down not up when this happens.
- Hospitals also buy physician practices to change practice patterns to more expensive inpatient and outpatient services. There has been a notable shift toward higher priced hospital-owned places of service, costing the system more and more money.
- Hospitals oppose efforts to reform hospital payments. Hospitals stand dead set against any site-neutral payments, whether for rates on the hospital campus or off.
- Hospitals argue that any rate increase in Medicare and Medicaid is simply inadequate. They cannot possibly survive.
- While many hospitals get huge advantages through the 340b drug discount program, studies tend to show these lower costs don’t go to help the lower income as designed but to pad the pockets of the hospitals.
- While hospitals blame plans for network contracting strategies, hospitals increasingly adopt out-of-network strategies to drive greater payments. They also are exiting contracts with insurers to stop the growth of MA in America, which wants to hold hospitals accountable.
Why hospital reform is needed
Hospitals are not hurting overall. A JAMA study found that before the pandemic, hospitals were operating at 2.8 percent margin. But during 2020 and 2021, that more than doubled to an all-time high of 6.5 percent.
Hospitals account for over 30% of all healthcare spending and tend to be the biggest inflation area along with drugs. This creates unsustainable growth into the future. Third Way points to a few studies covering this unsustainability. Others note that hospital prices have increased by 600 percent from 1990 to 2023. With COVID moving from pandemic to endemic, hospitals’ inflation and spending are now again the most robust out there.
Conclusion
Third Way has it right. The tale of two hospitals shows why hospitals need to become efficient and in doing so they would deliver better care. Bloat is both unprofitable and means poor quality.
Hospitals, though, don’t seem to care about their bloat. It has served them well over the years and guided their political engagement. But patients, employer groups, and the system will continue to suffer until regulators and Capitol Hill get the courage to reform hospital payments and demand accountability. It is key to lowering future costs in both the government and private healthcare sectors.
Links:
https://www.thirdway.org/report/tale-of-two-hospitals-why-some-hospitals-succeed-and-others-do-not
https://www.beckershospitalreview.com/finance/aha-fires-back-at-arnold-ventures-again.html
https://familiesusa.org/wp-content/uploads/2024/03/VAL2023-174_IncomeInequality_v4.pdf
#hospitals #employercoverage #medicare #medicaid #payments #margins #rates #medicareadvantage
— Marc S. Ryan
