My last post spoke of the cost shift hospitals invoke when their reimbursement fails to cover expenses. The thinking goes, Medicare pays $800 for a bed day, and it cost $1000, so charge commercial plans $1200 to balance the ledger.
It is a simple case and the math is obvious, right?
I also cited a number of studies and reviews that challenge this thinking.
In health care, nothing is simple and many external forces determine costs and rates. Remember, Medicare does not bargain; they pay one fee, adjusted for regional and labor trends—to the tune of 40% of hospital revenue, on average. Medicare is always on the radar and is omnipresent.
However, hospitals invest in their lines of business differently, compete with neighboring systems, and negotiate rates with payers based on their market power. They also service patients with varying affluence levels.
Our family members may prefer one hospital to another because of reputation, deserved or not, and their amenities. Large employers must offer these hospitals as choices to satisfy the needs of their employees, and often, pay commensurately higher rates as a result. This dynamic likely affects their cost structure.
Hospitals assiduously study their bottom lines (with their costly regulatory requirements we all know about), certainly, but how efficient are they, even after respecting their fixed and local market outlays.
Consider whether hospitals in concentrated markets, i.e., with market power and ability to command high rates from commercial payers, profit from Medicare patients? Remember again, Medicare pays one adjusted rate, whether it is Miami or Duluth.
Many of you are familiar with the phrase, “Medical Industrial Complex,” a derivation of Eisenhower’s Military-industrial complex, which connotes the need for hospitals to build and invest—in perpetuity, with technological grandiosity, and boundless scale. If Medicare cannot “accommodate” this investment, hospitals reconcile with those who will. It is of interest then, to investigate whether institutions with this market power “lose” with Medicare, and those without it turn a profit—out of necessity. Two recent studies are instructive in this regard.
I will forgo long descriptions, but the more recent of the studies compares two groups of hospitals, with and without market power (defined by HHI), and the commercial and Medicare reimbursement they receive for seven invasive procedures. See table #1 below:
I have highlighted stenting. Contrasting the costs of Medicare and private insurance, they are similar at $13K versus $11K (from hospital level data). Now, compare the payments–$16K versus $26K, and the profit: $2K versus $14K. This disparity is consistent throughout. Now glance at table #2:
You logically assume the “paltry” payment from Medicare will break the backs of all hospitals. However, if you examine hospital profits in competitive markets, it is plain that Medicare margins are consistently positive, and compared with private payments obtained yield a higher ratio than those of their (concentrated or “non-competing”) counterparts.
In other words, hospitals in a competitive space will cost reduce and operate more efficiently. No “dollar for dollar” cost shifting and “passing the losses” on to commercial payers.
But then, how are hospitals in dominant markets (here and here—hint to San Franciscans and Bostonians), obtaining these favorable rates? More notably, will it continue, can our market sustain it, and how will it affect us, the docs on the front lines? I will rejoinder this in Part 3.
I hope the befuddling notions of cost following price, versus price following cost, are now becoming sharper.