Massachusetts Nurse | November/December 2004

Study shows hospital charges are increasing, fueling inflation

According to a new study released Sept. 8, high hospital markups across the nation can be blamed for fueling the national health care crisis and the rate of medical inflation. The study was conducted at 4,184 hospitals by The Institute for Health & Socio-Economic Policy (IHSP)—a non-profit policy and research group with a focus on health care. IHSP has a prestigious advisory board with scholars from Boston University, Harvard University and the University of California.

Key findings included the following:

• The national average hospital price markup, known as the "total charge to cost ratio," was 232.4 percent in fiscal year 2002-2003. This was a 13 percent inflationary increase over the previous year, at 205.84 percent.
• Massachusetts hospitals ranked in the middle of all states (at 25) with charges coming in at 203.49 percent of costs. Massachusetts hospitals cited in the study included:
• Partners HealthCare System at 227.45 percent
• UMass Health System, at 215.29 percent
• Caritas Christi Health care at 209.5 percent
• Baystate Health System at 205.52 percent
• The average share-to-cost ratio was highest for hospitals with 232-330 beds (and an average of 277 beds) at 295.91 percent. Hospitals in this category generated an average charge per patient discharge of $31,652.53, and the average net income for these hospitals was $7.56 million per year.

Interestingly, Maryland—the most regulated state—had the lowest average hospital charge ratio despite the frequent charge that public oversight, or regulation, reduces profit and harms the public interest. The number Maryland hospitals making profits is right at the national average.

Higher charges correlated to higher profits and were associated with large hospitals, hospital networks and for-profit hospitals. How high is a 232% markup?

In an article in a California newspaper1, it was noted that the typical markup recommended by auto manufacturers to their dealers is about a 10 percent margin for a dealer. Using that example, a new car costing a dealer $25,000 would be sold to a buyer for $27,500. Selling a $25,000 car at the average hospital profit margin of 232.4 percent would cost the buyer a shocking $83,100. What the hospitals say The hospital industry contends that charges don’t matter—that they do not equate with payment. However, charges are very important in determining reimbursement to a hospital. Charges are the starting point for negotiations with HMOs and other insurers and the higher the charge, the higher the eventual payment to the hospital.

Charges are also a financial tool to trigger what are referred to as "Medicare outliers" or HMO "Stop Loss" payments—payments to reimburse a hospital above the flat rate DRG compensation that are intended for unusually costly or complicated cases. The study found that some hospitals appear to be exploiting the outlier program to increase their reimbursement from Medicare or HMOs.

1 "Hospitals Got to Make a Profit, Sure, But Let’s Be Reasonable," Jeff Jardine, Sept. 16, 2004.