“We will make electricity so cheap that only the rich will burn candles.”― Thomas A. Edison
Recently the RAND Corp. released its latest hospital pricing study that uses Medicare as a benchmark for hospital pricing. For many years, pricing and affordability has been top of mind for our patients, and our hospitals and health systems go to great lengths to ensure anyone who walks through our doors at any date or time will receive high-quality care regardless of their level of coverage. Efforts have been made to increase healthcare transparency, including the development of the MHA’s verifymicare.org website, recent federal legislation to establish a dispute resolution process for balanced billing that removes patients from payer and provider disputes, and federal requirements that hospitals post price information online.
Unfortunately, the recent study from RAND does not provide an accurate picture on the relationship between fixed government reimbursement rates, negotiated private insurer rates and financial sustainability for hospitals. We know Medicare does not cover the true cost of care. Hospitals do everything they can to break even, and most operate on razor-thin margins. Just consider that 52 hospitals in the US closed between 2018 and 2020. Nearly all hospitals still lose money on Medicare. In addition, unlike public goods that respond quickly to inflationary pressures, the ability of a hospital to pass cost on to consumers is extremely limited. The drivers of increased cost in the economy are felt by all hospitals, such as through the increased cost of labor and supply chain increases.
The RAND study makes a very broad claim from a cherry-picked data set that looks at claims for just 2.2% of overall hospital spending and inappropriately uses Medicare reimbursement rates as a benchmark. It fails to acknowledge that hospitals are the only healthcare entities in our communities and modern society that are open 24/7/365 to everyone, regardless of their ability to pay. This remains a commitment of ours well into the future.
Hospitals not only have to consider the actual and projected cost of care but plan capital improvements that will be necessary in terms of new technologies or facility renovations. For example, the cost of the workforce is built into negotiations with insurers. The reason we see price increases is that underlying costs for hospitals are on the rise. When contrasting the price of hospital care with the price of many goods and services in this inflationary economy, we do not look out of line. Looking at 2020, the unbudgeted expenses for hospitals exploded due to personal protective equipment and staffing expenses that totally changed the cost of hospital operations. Remember, hospitals are extraordinarily labor dependent, and hospitals must meet workforce sustainability challenges to maintain appropriate staff throughout their facilities and ensure the quality of care is never impacted.
Recent analysis from Kaufman Hall clearly indicates profiteering is not occurring by hospitals. Hospitals have been losing money during the pandemic and, while federal relief funds have made a significant impact, many have still lost money because of the exorbitant staffing and supply expenses they have been forced to absorb. Median operating margins for hospitals fell from 5.6% to -1.4% between December 2021 and March 2022, which includes funding from the Coronavirus Aid, Relief, and Economic Security Act. Hospital labor expenses have increased by more than one-third from pre-pandemic levels while contract labor as a percentage of total labor expenses increased more than five times the rate from pre-pandemic levels. In addition, drug costs have seen the largest increase in expenses for hospitals, up 24% compared to before the pandemic.
We empathize with our patients: no one wants to pay more money for healthcare than is necessary. This is true whether it’s healthcare or gas or milk. Hospitals’ shared goal is providing access to high-quality care in this challenging environment in a cost-effective way. It is a costly enterprise to ensure everyone in the community has high-quality healthcare every minute of every day, but hospitals do their best to keep costs as low as possible for every patient, every time.