Hospital Pricing for Commercial Health Plans

By July 1, 2019 Commentary

I whine a lot about hospital pricing and cost structures; I know that.  But it is for a reason.  While inpatient hospital use has steadily declined, it still is the major cost category.  Prices continue to rise for private health plans especially, and patients bear a fair amount of that in the form of cost-sharing.  A new report details anew how much prices for commercial health plans have risen and how fast they are increasing.   (CAP Report)   According to the report’s authors, we will spend about $1.3 trillion on hospital inpatient care in 2019 and hospitals will incur a total profit margin of 8% on those revenues, which is higher than the margins for the health insurance industry, which is often accused of putting profits before patients.  Based on data from the American Hospital Association operating margins have risen over the last decade to around 7%.  Hospitals don’t make much if any profit on Medicare or Medicaid patients, so they are immensely profitable on privately-insured patients to achieve those margins.   Summarizing other research, this paper notes that higher prices are clearly associated with less competitive markets and that inpatient service prices in particular have risen at multiples of the general rate of inflation.  The geographic variation in pricing is staggering and while some variation may relate to geographic input cost differences, the level of competition in a market accounts for most of it.

Looking at data for 2016 filed by over 3000 hospitals with CMS, the report finds that even so-called non-profit and public hospitals have significant total margins.  Of these hospitals, 26% were for-profit, 61% non-profit and 13% public.  A quarter of hospitals, however, lost money in 2016, and public hospitals were most likely to be unprofitable.   If they aren’t making money, it isn’t because of what they charge private plans; research suggests that these health plans pay on average 241% of Medicare rates, with a variation of 150% to 400%.  The margins on private business are as high as 40%.  And hospitals with these kinds of margins have little reason to be cost-efficient, so costs of care, and prices, rise even more.  I strongly agree with the report’s conclusion that higher private plan prices are the result of hospital market power that is achieved through comprehensive horizontal and vertical consolidation.  Many health plans have to pay the prices demanded or they simply have nowhere else to go to provide members with hospital care.  And since health plan markets have consolidated as well, many of those health plans simply pass on the higher hospital prices in the form of higher premiums to customers.  The best solution is simply to reverse the consolidation that has occurred–break up the large health systems and ban hospitals from owning or controlling physician practices or other types of care providers.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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