Markups on Care Can Fatten Hospital Budgets—Even If Patients Don’t Pay Full Price

List prices do matter, study’s authors say

Few patients pay a hospital’s full price for a procedure or test, but a new study shows why those charges still matter, according to a report from Kaiser Health News. Economists at the Federal Reserve Board and the American Enterprise Institute found that list prices, often dismissed as meaningless by the hospital industry, are a critical gauge of which hospitals ultimately receive higher payments.

The new study, published in Health Affairs, found that an additional dollar in list price was associated with an additional 15 cents in payment to a hospital for privately insured patients. The study relied heavily on data from California, however.

The researchers, Michael Batty and Ben Ippolito, also found key differences in list prices across hospitals and how much they were marked up, compared with operating costs. A large, for-profit urban hospital that was part of a chain had list-price markups that were more than three and a half times higher than those of a small, independent nonprofit hospital in a rural area. (The hospitals weren’t named in the study.)

Consumers might assume that higher prices indicate better care and improved outcomes for patients. However, the authors looked at rates of hospital readmission—a potential indicator of poor outcomes—and couldn’t find any evidence that higher list prices corresponded with better quality of care.

“High list prices do matter for patients,” Ippolito said. “This directly contradicts the mantra you hear from providers that there’s no reason to pay attention to this.”

The new Health Affairs study builds on previous work by researchers at Johns Hopkins University. They examined costs and hospital list prices, also known as the “chargemaster,” and found that a one-unit increase in the price markup was associated with $64 in additional revenue per patient discharge.

“This confirms our observations that hospitals strategically use chargemaster prices to maximize revenues,” said Ge Bai, one of the Johns Hopkins investigators. “Chargemaster is not an innocuous bookkeeping tool but rather a revenue-seeking device.”

Batty and Ippolito said the confidentiality of negotiations between hospitals and insurers makes it difficult to prove that higher list prices directly cause higher payments for insured patients.

The latest study examined list prices from Medicare data on 3,230 U.S. hospitals as well as the charge-to-cost ratio for hospitals in another federal database. Data on actual payments were harder to find. For that information, the authors relied on payment figures collected by California’s Office of Statewide Health Planning and Development and on other state data on quality of care. Some of the authors’ analysis relied strictly on California data—one limitation of the study.

Ippolito said the research underscores how lucrative privately insured patients have become for hospitals compared with patients covered by government health programs. He said the average hospital profit margin on privately insured patients increased from 15% in 2002 to 44% in 2013.

An uproar ensued last month when it was reported that the Mayo Clinic’s chief executive had prioritized the treatment of privately insured patients over those with government coverage when they sought care for similar conditions. The CEO, John Noseworthy, later said he regretted his remarks and reiterated the hospital’s commitment to patients receiving Medicare or Medicaid.

Ippolito, however, said those comments accurately reflected hospitals’ financial trends.

“Overall, Medicare and Medicaid margins have been very flat for the last 10 years. But the margins hospitals are getting from private insurers have really exploded,” he said. “Privately insured patients have become more and more valuable over time.”

Sources: KHN; April 4, 2017; and Health Affairs; April 2017.