HCPF: Colorado hospitals’ highest-in-the-nation profit margins lead to higher prices for payers

According to a report released last week by the Colorado Department of Health Care Policy and Financing (HCPF), Colorado hospitals have the highest profit margins in the country.  The department says these high profits ultimately translate to increased prices for payers and patients.

The department evaluated the Medicare Cost Report Data for Colorado’s hospitals from 2009 to 2018 — the most recent year for which this data is available.

 

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Since the report only included hospitals with 25 or more beds, most rural hospitals were excluded. HCPF nonetheless emphasizes that these facilities — contrary to the urban hospitals included in the report — are “ripe for investment” and in-need of resources.

According to HCPF, some Colorado hospitals use high costs, or their hospital-only operating expenses, to justify raising prices for payers. State hospital costs have increased at a higher rate than the national average over the past decade. In 2018, HCPF estimates Colorado hospitals’ operating costs were $1.3 billion above the national median.

 

Image: Colorado Department of Health Care Policy and Financing

 

The report says around 28% of Colorado hospital costs in 2018 were for administrative and capital costs — “overhead costs” — rather than medical costs. This is almost 3% above the national average for overhead costs.

“If Colorado hospitals incurred overhead at the national rate, operating expense would be $474 million less than what it was based on 2018 discharges.” 

10 of the evaluated hospitals, however, had costs that aligned with the national average, but still had higher-than average prices. Known as “profit maximization,” this is when hospitals have nationally normative costs but make a strategic decision to raise prices disproportionately to their costs. These 10 hospitals had costs within the middle 50% of US hospitals, but their prices were in the top 25%.

 

Image: Colorado Department of Health Care Policy and Financing (HCPF)

 

Hospitals’ prices have increased in tandem with costs and have increased at a significantly higher rate than the national average. In 2009, Colorado hospitals’ price per patient was 9.2% higher than the national average. In 2018, it was 22.8% higher.

These high prices resulted in $1.5 billion in patient services profits for Colorado hospitals in 2018. For that year, Colorado had the second highest profit-per-patient in the country, which was three times the national median.

However, the report shows that Colorado hospitals earned almost the same amount of profits — $1.4 billion — from non-patient income in 2018. This includes investment income resulting from hospital systems using their profits to reinvest in the market and gain more market share.

The report explains this significantly increases hospitals’ market power by decreasing competition, allowing them to raise their prices more to make up for the cost of this continuous investment. This cycle — what the report called an “endless loop” — is illustrated in the image below.

 

Image: Colorado Department of Health Care Policy and Financing (HCPF)

 

“Colorado’s large system hospitals are in a cycle of using profits to invest in market share growth initiatives, further increasing their costs as well as the unfavorable impact of their higher prices and larger profits.”

Colorado hospitals’ combined patient services and non-patient related income of $2.9 billion in 2018 gives them a 15.6% total profit margin, which is the highest in the country by far. The national hospital profit median is 6.5%.

The report highlighted legislative actions the state has taken to reduce hospital costs, including HB 19-1001 (which mandates hospitals to provide HCPF with data on hospital finances) and HB 19-1174 (which requires health plans and providers to disclose the potential costs of receiving out-of-network care).

The department also listed cost-control initiatives it’s currently pursuing, such as the five-year Hospital Transformation Program (HTP). The HTP requires HCPF to transition hospitals away from pay-for-process and reporting to a pay-for-performance model, which is predicted to improve the quality of hospital care while controlling costs.