Workers’ comp – for hospitals, it’s where the money is

Two recent articles in Health Affairs highlight a growing issue for employers and taxpayers; some hospitals are increasingly looking to work comp as a profit maker.

Depending on the state, facility costs can account for anywhere from around 32 – 40% of total work comp medical expenses (different states classify locations-of-service differently).

Ge Bai and Gerard Anderson examined the fifty US hospitals with the highest charge-to-cost ratios and found their markups over Medicare-allowable costs were three times higher than the average hospital.

This is critical in work comp because state work comp regulations often base facility reimbursement on charges – despite NO evidence or requirement that those charges have any basis in reality.

Fully 20 of the fifty hospitals are in one state – Florida – that uses a percent-of-charges reimbursement methodology for hospital outpatient services (manual is here).

Bai and Anderson’s latest work provides a deeper dive into hospital profitability.  A few key quotes:

  • Hospitals with for-profit status, higher markups, system affiliation, or regional power, as well as those located in states with price regulation, tended to be more profitable than other hospitals.
  • Hospitals that treated a higher proportion of Medicare patients, had higher expenditures per adjusted discharge, were located in counties with a high proportion of uninsured patients, or were located in states with a dominant insurer or greater health maintenance organization (HMO) penetration had lower profitability than hospitals that did not have these characteristics.

The methodology used by Bai and Anderson is somewhat different from that used by other researchers in that it excluded income from non-patient care services. I infer that they did this to focus specifically on the actual care delivery cost and not factor in other revenues from services such as parking, gift shops, investment income, etc.

So, what are the implications?

  • Work comp is a soft target for facilities in many states
  • The percentage-of-charges methodology is a license to…profit
  • More profitable facilities have likely already figured out how to make the most revenue possible from every source – including workers comp
  • Less profitable hospitals are going to learn from their more profitable competitors

4 thoughts on “Workers’ comp – for hospitals, it’s where the money is

  1. Joe, having had the privilege of being a hospital CEO for a number years, your Insights are right on. The reality is that workers compensation accounts for a rather small proportion of the hospital’s revenues and volume that it does not encourage or facilitate the hospital from allocating resources to collaborate or cooperate with Worker’s Compensation. Hence, it is just my humble opinion that many of the hospitals have not or had not deliberately intended to exploit the WC payers; but rather they just do not typically consider WC as a priority – ergo, WC is a victim of circumstances. One of the issues facing not-for-profit systems is their need to demonstrate their spend in “community service” to justify their tax status. As a result, many hospital systems use their “write-offs” (which is charges minus collected) or bad debt as an item on their calculation for this community service. It is my opinion that WC industry can help the hospital systems understand that they will truly do better by focusing on overall quality of care over the entire care continuum of patient’s condition … Rather than episodic care… And bad debt write offs. WC industry has always been in a very unique position to do exactly this.

  2. Do you have a list in particular of states that allow for reimbursements to be based on charges? Florida is seemingly one, but I am surprised that fee schedules don’t mandate the off the schedule, not the charge the hospitals come up with. Thanks

    • Blake – WCRI publishes a compendium of this information – I suggest you check on their website for this.

  3. Joe. This is very interesting. My vantage point is that of the surgeon. I have recently been trying to wrap my head around what drives the cost of elective, out patient surgery so high. The biggest factor is that the majority of out patient surgery occurs at an in patient facility. The master charge lists are highly inflated costs predicated on no real world economics. Work comp as you pointed out probably is the most abused in this situation. The first step in controlling costs is to move elective surgeries out of the in patient setting and into the ambulatory setting. The second step is partnering with the right center that is cost conscious. I have just started the process and I believe that for hernia surgery I can reduce costs by approximately 40-50%. All while maintaining the highest quality and patient satisfaction. It really doesn’t have to be this way.

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