We’re going to stick with the hospital story for just a bit longer. So far posts have discussed the significant profits generated by workers comp payments, the inability of comp networks to manage facility costs, and a cornucopia of other hospital-related issues.
The thesis statement for all could be summed up thusly – Hospitals are gaining power at the expense of commercial payers.
Here’s the proof.
The largest hospital/surgery center company in the nation, HCA reported a 21.6% jump in profits in the last quarter. Revenues “increased 3.7 percent to nearly $7 billion despite a decline in surgeries and flat admission numbers. ”
Lets parse that statement out.
Profits were up much more than revenues, indicating the company (also known as Hospital Corp of America) has been able to keep expenses under control while delivering higher margin services.
Revenues were up even though surgeries (which tend to be very profitable) were down (albeit slightly at 0.5% for inpatient and 0.7% for outpatient facilities) and admissions were flat. The only way that can happen is by changing the mix of services delivered and improving the payer mix (think private insurance instead of Medicaid).
HCA’s success wasn’t an anomaly. Unlike the other hospital companies, Universal Health Services (could we please get just a bit creative with the company names here?) enjoyed an increase in profits and revenue. UHS saw its profits increase 35%, driven by a big increase in inpatient admissions (up 8.5%) and smaller, yet significant increase in the length of hospital stays (up 3.1%). This wasn’t just a one-quarter event; looking at the first half of the year, revenues were up 8% and net income rose 34%. Note that UHS is one of the smaller for-profit hospital companies with fewer than 31 hospitals.
Revenues and profits were also up at HMA, with top line increasing 3.9% despite a decline in patient volumes. HMA, which operates 58 hospitals, also had a good first half of the year with profits almost doubling on a 4% increase in revenue. Interestingly, surgery counts also declined slightly at HMA over the same quarter in the prior year.
We’ll round out the review with a quick look at Tenet – the 58 hospital company saw admissions up almost 2%, driven mostly by ‘governmental managed care admissions’ which jumped 16%. (I wonder, does that mean the Medicaid and Medicare Advantage programs are seeing higher inpatient admission rates? or is it just a shift from unmanaged Medicare?) Tenet also enjoyed a 7.5% increase in ‘same hospital commercial managed care revenues’. (which brings up the rather uncomfortable question – is Tenet a preferred partner with the big managed care companies, or are the big managed care companies seeing a jump in hospital admits?)
Notably, Tenet’s revenues were up 6.3% on that 1.9% increase in admits, a rather surprising jump given that the Feds are not exactly a generous payer. And digging deeper into Tenet’s earnings report, one learns that commercial insurer admits actually declined 2.2% and patient days dropped 3.1%, while outpatient visits were also down 1.8%. So, revenues were up 7.5% on fewer admits and shorter stays…Cost-shifting, perhaps?
Here are a couple statements from Tenet’s earnings report that shed additional light on the situation.
- Outpatient pricing outpaced the growth in inpatient pricing due to an improving mix of procedures performed in our outpatient facilities.
- Pricing improvement was evident across all key metrics, primarily reflecting the improved terms of our commercial managed care contracts [emphasis added]
And this from Forbes “Price increases from better terms in its commercial managed-care contracts also helped boost Tenet’s profit and revenue.”
Looks like a trend to me – hospital revenues are up slightly, profits are up much more than revenues, and this despite (mostly) flat patient volumes and lower surgical volumes.
The source of all these profits? Commercial managed care companies.
Which brings us back to a question I asked a while ago; “what exactly are ‘managed care’ companies managing?”
Thanks to FierceHealthcare for the heads up
I just re-read your blog earlier this week, and found the reader comments interesting. One of the commenters made the point that the Hospitals have good managed care negotiators. Excellent point! 20 years ago, the managed care companies hired strong negotiators. However, over the years, they have lowered their standards (i.e. salaries). Many now negotiators have changed sidess and work for hospitals and large physician groups.
At least as far as California workers’ compensation is concerned, a provider cannot collect more than their “usual and customary” payment (note this is not fee charged, but rather the fee usually accepted)or the amount allowed by California’s official fee schedule, which ever is LESS. So if hospitals are accepting less for facility fees in group health than in workers comp, how do they get away with it? Of what benefit is a network negotiated fee which is greater than what the hospital accepts in 98% of its admissions (assuming comp is only 2% of revenues)even if it is less than California’s official medical fee schedule?
So called managed care companies are for the most part contracting plays that exploit cost shifting opportunities, or at least what’s left to cost shift to.
The promised medical management “secret sauce” has never delivered on its promise – other then perhaps fully integrated group practices with appropriate incentives.
Meanwhile, hospital systems whether proprietary or not, have a fairly basic and unimaginative playbook: limit governmental volume, while growing the commercial payor mix where unit pricing increases can at least partially offset any unit service declines.
Of course, they are only optimizing their results based on the financial incentives that exist today.
It’s only a matter of time before the flawed employer sponsored health insurance system implodes on its own weight. The “diminishing returns” phenomenon is alive and well in the cost/benefit health insurance/coverage value proposition.