Study Says For-Profit Hospitals Dominate List of Those With High Markups

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By Kate Magill

June 9 — Forty-nine of the 50 hospitals with the highest charge-to-cost ratios in 2012 were for-profit hospitals, according to a study released in the June issue of the journal Health Affairs.

The 50 U.S. hospitals with the highest charges relative to their costs were charging, on average, more than 10 times their Medicare-allowable costs, according to the article. In comparison, the article stated that the national average for markups is 3.4 times the allowable cost.

The study noted that 46 of the 50 are owned by for-profit hospital systems, and 20 of the hospitals operate in Florida. The study authors noted that one for-profit hospital system—Community Health Systems—operates half of the 50 hospitals with the highest markups, while Hospital Corporation of America operates more than one-quarter of them. The title of the article is “Extreme Markup: The Fifty US Hospitals With The Highest Charge-To-Cost Ratios.”

The study said that uninsured patients, “who lack bargaining power, are commonly subject to the full hospital charges,” and their medical bills may be sent to bill collectors.

In terms of what it means for insured consumers, the study said that patients with health insurance who receive care at out-of-network hospitals “generally do not benefit from their private insurers’ negotiated rates with in-network hospitals and, therefore, may be expected to pay a high proportion of the full hospital charges.” Casualty and workers’ compensation insurers are usually obliged by law to allow the insured person to go to any hospital, “which means that they cannot use selective contracting to get lower rates and thus often pay a high percentage of hospital charges,” the study found. It added that, since most American workers have casualty and workers’ compensation insurance, “exposure to these high markups adds to their insurance premiums.”

Ge Bai, an assistant accounting professor at Washington and Lee University and one of the authors of the report, told Bloomberg BNA June 3 “It’s wrong to charge the highest prices to people who are vulnerable and have no bargaining power.” The article was embargoed until June 8.

Bai and her co-author Gerard F. Anderson, a professor at the Johns Hopkins Bloomberg School of Public Health, used data from 2012 cost reports from the Centers for Medicare & Medicaid Services to complete the study. The study focused on the top 1 percent of hospitals in terms of markups.

Transparency Lacking 

The authors attribute the high markups and the consumer cost associated with them to a lack of transparency over the price of services, and an inability for consumers to easily compare procedure prices at different hospitals. This leads to a market failure in which consumers must pay more.

“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,” according to the article.

The Federation of American Hospitals, a trade group for investor-owned hospitals and health-care systems, responded to the article's findings. In a June 8 statement, FAH President and Chief Executive Officer Chip Kahn criticized the study for not taking into account the discounts offered by these hospitals to uninsured and underinsured patients. Kahn said the discounts would have had a dramatic impact on the reported charge-to-cost ratios.

A hospital industry group faults the study's “myopic” focus on costs without taking into account the discounts offered to patients lacking insurance.

If the authors had included the discounts in the study, Kahn said that the difference between the markups for the top 50 hospitals and the national average would have been minimal—the ratio for the hospitals on the list would be 1.3 times the allowable cost, compared with the national average of 1.2 times the allowable cost.

“These figures illustrate, in part, the significance of discounts, and more broadly, why a myopic focus on charges misses the mark on what matters and is no justification for the menu of policy options offered,” Kahn said in the statement.

Kahn also noted that the listed hospitals offered almost $450 million in uncompensated care in 2012.

Policy Recommendations 

The authors made three recommendations to cut costs and increase transparency. The first recommendation is for federal and state policy makers to require hospitals to post their overall charge-to-cost ratios online so that patients can easily see the prices of their services. The authors also said “the Medicare program could post” such information.

Another option, the article said, “is to legislate a maximum markup over cost that a hospital can charge to any patient.” Bai told Bloomberg BNA she sees this as the most realistic option.

A third policy option “is for legislatures to require all insurers to use the same payment system but not necessarily pay the same rates.”

Kahn's statement criticized the recommendations as a repetition of old arguments, and said that they could have negative consequences for patients. “It is not the time to embark on the major policy changes suggested, which could have unintended consequences or disrupt recent positive trends, especially for patients,” Kahn said.

In contrast, Bai said that if the public becomes more aware of the problems with markups and raises its concerns, changes in the system are likely to be made.

“It’s a must to protect patients’ interests,” Bai told Bloomberg BNA. “Hospitals will charge high if they can, that’s why we need the policy makers to step in for the patients' interests.”

To contact the reporter on this story: Kate Magill in Washington at kmagill@bna.com

To contact the editor responsible for this story: Brian Broderick at bbroderick@bna.com