Hospital Costs and Payments

By December 19, 2019 Commentary

Hospitals are a major source of excessive health spending and spending growth, largely because of their commercial pricing practices, which in turn are due to extensive consolidation.  Supposedly consolidation should create economies of scale, meaning lower costs for the hospital to provide care.  Of course, that doesn’t happen, instead prior research suggests that hospitals with high prices usually have higher costs, including to pay their management excessive compensation.  And consolidation was supposed to result in better care coordination, which also would lower costs.  A new study in JAMA Network Open examines variations in what Medicare pays hospitals for the same patient for the same condition and factors that may be behind that variation.   (JAMA Article)   The study used a clever design to identify the Medicare patients who were treated for the same condition at two different hospitals and compared costs for the treatment based on a prior analysis to segregate hospitals by overall costs.  The two conditions used were health failure and pneumonia.  In the initial analysis there was a fairly significant gap in the treatment payments among hospitals.  Dividing the hospitals into quartiles based on total 30-day payments for the hospitalization and succeeding treatment for each condition revealed that hospitals in the highest quartile had median payments of $16651 for heart failure and $18382 for pneumonia, while those in the lowest quartile had a median payment of $13789 for heart failure and $13606 for pneumonia.  That is a pretty large spread.

There was little difference in the characteristics of the patients treated by hospitals in the higher or lower quartiles.  Low payment hospitals tended to be non-teaching, smaller, more likely to be safety net and rural hospitals or to be government facilities.  The high payment quartile were more likely to be trauma centers and have cardiac surgical procedure capability.  And so it shouldn’t be surprising that heart failure patients admitted to the high payment group were more likely to get percutaneous coronary interventions and implantable defibrillators.   It is very notable that there was no difference in mortality or other quality outcomes between the high and low payment groups.  So Medicare wasn’t paying more to get better quality.  So what happened in the analysis of the few thousand patients who happened to be admitted for the same condition to each of a low payment and a high payment hospital over the study period.  No surprise here either.  For the exact same heart failure patient total episode payments over 30 days were over $2100 lower at the low payment group of hospitals and for pneumonia the difference was over $2900.  For whatever reason, these high payment hospitals are using more resources, charging Medicare more and probably making more profit.  Since they tend to be larger more sophisticated hospitals what really is happening is that they are making sure all their high-cost resources are getting used as much as possible and I strongly suspect they are deploying much more upcoding resources to maximize revenue based on capturing marginal diagnoses and complications that can increase even supposedly flat DRG payments.  What is clear is that Medicare needs to clamp down on this, as if you extrapolate this, the program is paying tens of billions of dollars it doesn’t need to.

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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