Hospitals’ Medicare margins

Brad Flansbaum drew my attention to this testimony before the House Ways and Means Committee by Mark Miller, Executive Director of the Medicare Payment Advisory Commission (emphasis added):

However, hospitals’ overall Medicare margin—a measure of the relationship between Medicare payments for, and hospitals’ costs of, providing care to Medicare patients—is negative. In 2013, the median hospital margin was –5.4 percent. Relatively efficient hospitals (i.e., hospitals with lower costs and better quality over three years) had a median margin of 2 percent in 2013.

Part of the reason Medicare margins are low is that hospitals have high costs per case driven in part by lack of fiscal pressure from private payers. The Healthcare Cost Insitute reports that payment rates from private insurers have grown at an average of over 5 percent annually from 2011 through 2013. Commercial rates, on average, are about 50 percent higher than hospital costs and over 50 percent higher than Medicare rates. For example, Aetna and Blue Shield of California pay hospitals rates that are often 200 percent of Medicare’s rate for inpatient care and 300 percent of Medicare’s rate for outpatient services in California (California Department of Insurance 2014a, California Department of Insurance 2014b). In 2013, hospital all-payer margins were a record-high 7.2 percent.

The Commission has shown that higher payments from private insurers allow hospitals to have higher costs which, in turn, makes Medicare margins more likely to appear inadequate. There is evidence that higher private insurer payments result from hospital consolidation—that is, hospitals have gained greater market power relative to private insurers. When financial resources are abundant hospitals spend more—increasing their number of inputs and cost per input. All else equal, higher costs per case result in lower Medicare margins.

Of course, hospitals vary in their circumstances. Some hospitals have market power, a higher percentage of private payer patients, and stronger revenue from investments and donations. These hospitals tend to have higher costs. Hospitals without these characteristics have lower costs. Put differently: hospitals with the most revenue have the highest costs per admission. For example, we found that hospitals with low private payer profits from 2008 to 2012 had a median standardized Medicare cost per case in 2013 that was about 9 percent less than the national median, and generated a median overall Medicare profit margin of 4 percent. In contrast, hospitals with high private payer profits over the same period had higher costs per case (3 percent above the national median) and lower Medicare margins (–9 percent). This analysis suggests that hospitals can constrain their costs, but the lack of pressure from private payers is discouraging them from doing so.

This is main, modern “it’s not cost shifting” argument, and it has been offered by MedPAC before.


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