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Hospital Cost-shifting in Colorado

By February 12, 2019Commentary

For some time it has been clear that hospitals charge much higher prices to privately insured patients that to those covered by government programs.  It could be that they are just using market power against the health plans covering the private patients, such market power being less effective in regard to price-setting government programs, or it could be that the government programs provide inadequate reimbursement to cover the actual cost of delivering care and hospitals make it up by charging private plans more.  A report from the Colorado Department of Health examines hospital pricing in that state.   (Colo. Report)  Like most states, Colorado has experienced dramatic consolidation among hospitals and has few, if any, truly competitive markets.  Due to the reform law and state initiatives which boosted the number of insureds, hospitals had $400 million less in bad debt and charity care losses.  Yet from 2009 to 2017, hospital costs increased 58.7%, from 3.2% higher than the national average in 2009 to 14% higher in 2017.  Payments to hospitals, however, rose even faster so that the ratio of total payments to actual (although poorly managed) costs rose from 1.05 to 1.08.  Hospital margins across all payers rose 250% in this period.  The authors seem more concerned about what was going on with costs, saying that if Colorado hospitals matched national benchmarks, they would have saved the state $7.9 billion over this period.  I don’t think so, I think they would have charged the higher prices anyway and just made even more profits.  The real story here is what occurs when you allow competition to cease.

Personally, I think the evidence suggests that while government programs may be low on the reimbursement side, what is really happening is that aggregation of market power has allowed hospitals to dramatically raise prices to private payers and to be inefficient and to run costs up–paying management extremely high compensation, building fancy units, etc.  In a competitive world, they would have to watch costs more carefully and probably would make money at Medicare rates for all patients.  And there is an idea to help get this under control, threaten hospitals that they get their costs down and start charging less or an all-payer rate will be mandated for their services.  So I don’t think the problem is cost-shifting, I think the problem is lack of competition that allows, even encourages, hospitals to be wildly inefficient but still make a lot of money by charging exorbitant prices.

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