Skip to content

Markups On Care Can Fatten Hospital Budgets — Even If Few Patients Foot The Full Bill

Few patients pay a hospital’s full price for a procedure or test. But a new study shows why those charges still matter.

Economists at the Federal Reserve Board and the American Enterprise Institute found that list prices, often dismissed as meaningless by the hospital industry, are a critical gauge of which hospitals ultimately receive higher payments.

An additional dollar in list price was associated with an additional 15 cents in payment to a hospital for privately insured patients, according to the study, which relies heavily on data from California. It was published Monday in the journal Health Affairs.

The researchers, Michael Batty and Ben Ippolito, also found key differences in list prices across hospitals and how much they were marked up, compared to operating costs. A large, for-profit urban hospital that was part of a chain had list price markups that were 360 percent higher than those of a small, independent nonprofit hospital in a rural area. (The hospitals were not named in the study.)

Consumers might assume that higher prices indicate better care and improved outcomes for patients. However, the study looked at rates of hospital readmission — a potential indicator of poor outcomes — and couldn’t find any evidence that higher list prices corresponded with better quality.

Hospital care accounts for a third of the nation’s $3.4 trillion in annual health spending. Hospital prices and payments are key to any discussion about bringing the high cost of health care under control for U.S. employers, government programs and consumers.

“High list prices do matter for patients,” said Ippolito, one of the study’s co-authors and a health care economist at the American Enterprise Institute, a conservative think tank in Washington, D.C. “This directly contradicts the mantra you hear from providers that there’s no reason to pay attention to this.”

The latest Health Affairs study builds on previous work by two researchers at Johns Hopkins University. They examined costs and hospital list prices, also known as the “chargemaster,” and found that a one-unit increase in the price markup was associated with $64 in additional revenue per patient discharge.

“This confirms our observations that hospitals strategically use chargemaster prices to maximize revenues,” said Ge Bai, one of the researchers and an assistant professor at the Johns Hopkins Carey Business School. “Chargemaster is not an innocuous bookkeeping tool but rather a revenue-seeking device.”

Hospital industry officials defended the setting of prices as part of doing business. They say list prices can help them bargain with insurers and recoup losses they incur treating Medicare and Medicaid patients.

“Hospitals push up prices by a dollar, but you’re not getting that dollar. It becomes a negotiating tactic,” said Jan Emerson-Shea, a vice president at the California Hospital Association. “The cost of delivering care continues to go up, too.”

Batty and Ippolito said the confidentiality of negotiations between hospitals and insurers makes it difficult to prove that higher list prices directly cause higher payments for insured patients. Experts suggest that hospitals use high charges to stake out a better negotiating position for reimbursement and that some payments are pegged to a percentage of billed charges.

The latest study examined list prices from Medicare data on 3,230 U.S. hospitals as well as the charge-to-cost ratio for hospitals in another federal database. Data on actual payments can be harder to find.

For that information, the economists relied on payment figures collected by California’s Office of Statewide Health Planning and Development and other state data on quality of care. Some of the analysis relies strictly on California data — one limitation of the study.

Some experts and patient advocates have pushed for more pricing transparency to help consumers find the best deal in non-emergency situations and shield them from excessive charges.

List prices can pose a heavy burden for the uninsured, who can — despite hospital assistance programs — be hit with hefty bills. Increasingly, even insured patients have been exposed to these high charges when they unwittingly go to an out-of-network provider and receive a surprise medical bill. In most cases, the bills come from a doctor or medical group operating within a hospital.

Many states are trying to address that problem, and the researchers said California may offer a model. Last year, California passed a law that seeks to eliminate surprise bills by imposing new rules on what insurers will pay out-of-network providers.

Before that, in 2006, the state passed the Fair Pricing Act, which limited what hospitals could charge uninsured patients with household incomes under 350 percent of the federal poverty level (nearly $57,000 for a couple in 2017). For these patients, hospitals cannot collect more than what Medicare paid for the same service — removing hospital list prices from the equation.

This new study quantified the effect of California’s 2006 law, and the researchers concluded it was effective at protecting the neediest patients.

Before the Fair Pricing Act took effect in 2007, an extra dollar in list price was associated with a roughly 20-cent increase in payments from the uninsured, Ippolito said. The legislation eliminated that difference. Yet the higher payments remained for privately insured patients, further evidence that higher list prices were tied to increased revenue for hospitals.

Ippolito said the research underscores how lucrative privately insured patients have become for hospitals compared with patients covered by government health programs. He said the average hospital profit margin on privately insured patients increased from 15 percent in 2002 to 44 percent in 2013.

An uproar ensued last month when it was reported that the Mayo Clinic’s chief executive had prioritized the treatment of privately insured patients when they seek care for a similar condition to those with government coverage. The CEO, John Noseworthy, later said he regretted those remarks and reiterated the hospital’s commitment to patients on Medicare or Medicaid.

Yet Ippolito said those comments reflect hospitals’ financial trends.

“Overall, Medicare and Medicaid margins have been very flat for the last 10 years. But the margins hospitals are getting from private insurers have really exploded,” he said. “Privately insured patients have become more and more valuable over time.”

This story was produced by Kaiser Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation.

Related Topics

Cost and Quality Medicare Uninsured