Study Examines Cost-Shifting and MedPAC Perspectives on Hospital Pricing, Profitability

A recent analysis of 7 common procedures found that hospitals’ contribution margins were 831% higher when treating patients covered by private health insurance compared with Medicare patients. The results also indicated that in 4 of the procedures, contribution margins for Medicare patients were significantly lower in concentrated markets than in competitive markets. The study defined contribution margin as the difference between the revenue hospitals collected from Medicare or the private insurer and the costs hospitals incurred to treat the patient. The findings were published online in Health Affairs [doi:10.1377/hlthaff.2011.0220] in an article titled Hospitals Respond to Medicare Payment Shortfalls by Both Shifting Costs and Cutting Them, Based on Market Concentration. James Robinson, PhD, MPH, a health economics professor at the University of California-Berkeley and the study’s author, concluded that hospitals in concentrated markets emphasize raising prices to private insurers, while hospitals in competitive markets cut costs. He noted that the outcomes support both the cost-shifting and Medicare Payment Advisory Commission (MedPAC) perspectives related to Medicare and private insurers. The report mentioned that hospitals have received decreasing payments from Medicare in recent years, lowering their profitability. Thus, some people believe hospitals are cost-shifting or charging higher rates to private insurers to offset the dwindling Medicare revenues. To reverse this trend, they argue Medicare payments to hospitals should increase, which would lower prices to private insurers and trickle down to lower costs for employers and individuals enrolled in the private insurance plans. MedPAC, an independent congressional agency, hypothesizes that hospitals in concentrated local markets have strong bargaining power, allowing them to charge private insurers high prices regardless of the Medicare reimbursement rates. Hospitals in more competitive markets are not able to charge hospitals as much. Dr. Robinson said that according to MedPAC, hospitals in concentrated markets use the revenue to expand operations, hire staff, and invest in new technologies. Hospitals cannot raise Medicare payment rates, so they offset that with increases from private insurers. According to Dr. Robinson, MedPAC’s theory is that Medicare profit margins should be lower in concentrated markets compared with competitive markets, where the hospitals do not have as much influence over private insurers. Conversely, the cost-shifting perspective says that costs and Medicare payments do not differ between concentrated and competitive markets and that hospitals can charge higher prices to private insurers even if the Medicare treatment costs are higher. “Both perspectives have validity, but MedPAC gets less play,” Dr. Robinson said in an interview with First Report Managed Care. “Costs follow prices. It’s not just pricing following costs. The hospitals and private insurers want to talk about increasing Medicare payments, but that’s not going to happen. The federal government has a huge budget deficit, so they have to do something with Medicare.” California HealthCare Foundation, a nonprofit organization that issues approximately $40 million in grants annually, supported the study. According to the foundation’s Web site, it does not have any lobbying or fundraising interests. The study included data from 30,514 patients at 61 hospitals in 8 states that participated in value-based purchasing with a consulting firm (Aspen Health Metrics) or the Integrated Healthcare Association, a nonprofit organization consisting of hospitals, medical groups, and health insurers in California. Patients were eligible if they underwent any of the following procedures: total knee replacement, total hip replacement, lumbar spine fusion, cervical spine fusion, coronary angioplasty with drug-eluting stent, insertion of a cardiac pacemaker, or insertion of an implantable cardioverter defibrillator. Dr. Robinson was mostly interested in the contribution margin earned by hospitals for treating each patient. He noted that he did not include overhead expenses for hospitals. For all 7 procedures, the cost to treat Medicare patients was higher than to treat patients covered by private insurance. However, hospitals received substantially more revenue when treating patients with private insurance. In addition, hospitals treating privately insured patients in concentrated markets had a significantly higher contribution margin than in competitive markets, ranging from a 48% difference for a defibrillator insertion to a 137% difference for a hip replacement. Meanwhile, hospitals had a negative contribution when treating Medicare patients in concentrated markets for knee replacements, hip replacements, lumbar fusion, and defibrillator insertion.