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Hospitals on average charged more than 20 times their own costs in 2013 in their anesthesiology departments, as well as their CT scan departments, which suggests that hospitals strategically use chargemaster markups to maximize revenue, according to new research from Johns Hopkins University.
Appearing in the September issue of Health Affairs, the study notes that many hospital executives say the chargemaster prices determined by individual hospitals for billable items are irrelevant to patients. However, the relation between chargemaster markups and hospital revenue and the variation in markups across hospitals and departments show that hospitals still are using their chargemaster markups to enhance revenues, say the study’s authors, Ge Bai, PhD, assistant professor at the Baltimore, MD-based Johns Hopkins Carey Business School, and Gerard F. Anderson, PhD, professor at the Baltimore-based Johns Hopkins Bloomberg School of Public Health.
“Hospitals apparently mark up higher in the departments with more complex services because it is more difficult for patients to compare prices in these departments,” states lead author Bai, a Carey Business School assistant professor whose expertise is in accounting issues within the healthcare industry. Department-level payment information was unavailable from the database, so the authors could not examine payment variation across services. However, they found a positive correlation between markup and payment at the hospital level.
Average charge-to-cost ratios for hospital departments vary from a low of 1.8 for inpatient general routine care to a high of 28.5 for CT scan, with anesthesiology right behind at 23.5. In comparison, the average chart-to-cost ratio for the OR was 5.1. Charge-to-cost ratio is the dollar charge for every $1 of actual patient care cost incurred by the hospital. For example, a ratio of 7.2 means a hospital charge of $7.20 for every dollar of actual patient care cost. These numbers mean that a hospital whose costs in the CT department are $100 will charge a patient without health insurance and an out-of-network privately insured patient $2,850 for a CT scan.
According to Bai, Medicare pays close to $1, privately insured patients and their insurers pay higher than $1 but much less than the charge, and uninsured and out-of-network insured patients pay the charge unless offered a discount by the hospital.
Anderson, a professor in the Bloomberg School’s Department of Health Policy and Management, says the effect of hospital markups is vast. “They affect uninsured and out-of-network patients, auto insurers, and casualty and workers’ compensation insurers,” he says. “The high charges have led to personal bankruptcy, avoidance of needed medical services, and much higher insurance premiums.”
Hospitals with strong market power, through system affiliations or dominance of regional markets, were more likely to set high markups, as revealed by financial data in 2013 collected by the authors from all Medicare-certified hospitals with more than 50 beds. In their paper, the authors examine the average hospital’s overall charge-to-cost ratio, which expresses the ratio of what the hospital charged compared to the hospital’s actual medical expense. In 2013, the average hospital with more than 50 beds had a charge-to-cost ratio of 4.32 — that is, the hospital charged $4.32 when the cost was only $1. The cost includes all patient care-related costs, such as direct service cost and indirect overhead. The costs included items ranging from the actual cost of supplies to the overhead (gas, electric, sewer, water, personnel, etc.) Costs unrelated to patient care, such as gift shop, and non-operating gain or losses, such as investment and charitable contributions, were excluded.
In government-run hospitals, the ratio was 3.47; in nonprofit hospitals, 3.79; and in for-profit hospitals, 6.31. System-affiliated hospitals had an average ratio of 4.76, versus 3.54 for independent hospitals, and hospitals with regional market power had an average ratio of 4.56, versus 4.16 for hospitals that lacked such clout. These numbers support the researchers’ finding that hospitals which can mark up prices will do so. The markups help their bottom lines. A one-unit increase in markup, such as from 3.0 to 4.0, is linked with $64 higher revenue per adjusted discharge.
Besides the setting of a cap on the maximum markup hospitals can charge, Bai and Anderson recommend two other solutions to high markups. First, improve the transparency of markups by requiring hospitals to provide a benchmark rate, such as what Medicare would pay for the same services, on all medical bills so that patients can compare the amounts, while also requiring hospitals to disclose the total charges as a separate line item on their annual income statements.
Second, improve the consistency of the charge-to-cost ratios across all departments and services within each hospital.
Bai says, “Mandatory disclosure on medical bills and financial statements will be an important step toward markup transparency.”
Anderson says, “We realize that any policy proposal to limit hospital markups would face a very strong challenge from the hospital lobby, but we believe the markup should be held to a point that’s fair to all concerned: hospitals, insurers, and patients alike.” To access the abstract, readers can go to http://bit.ly/2beNytc.
Executive Editor Joy Dickinson, Nurse Planner Kay Ball, Physician Reviewer Steven A. Gunderson, DO, and Consulting Editor Mark Mayo report no consultant, stockholder, speaker’s bureau, research, or other financial relationships with companies having ties to this field of study. Stephen W. Earnhart discloses that he is a stockholder and on the board for One Medical Passport.