Report: Best, Worst U.S. Cities for Hospital value

In some areas, hospitals charge more to private insurance to subsidize Medicare patients

By Stephen Miller Mar 26, 2010

Some U.S. hospitals can be profitable and deliver high value for Medicare and private insurers (including employer-provided group policies) for inpatient care, while others might provide high value for Medicare but are profitable by charging private insurers considerably more. That's the conclusion of a new study by Milliman Inc., a global actuarial consulting firm, and the National Business Group on Health, a nonprofit association of large U.S. employers.

The study report, High value for Hospital Care: High value for All?, identifies cities in which hospitals deliver high value for Medicare but meet their business objectives by charging private insurers a "hidden tax." In these cities, private insurers are, in effect, subsidizing Medicare to compensate for hospitals’ inpatient revenue shortfalls. These costs are ultimately passed on to consumers and employers as increased premiums.

These findings are particularly significant as lawmakers examine rising health care costs. Health care reform discussions have focused on identifying communities in which Medicare costs are relatively low and quality high. Private payers have questioned whether this high-value care for Medicare is shared with private payers, or if private payers, in effect, subsidize low cost for Medicare through higher payments.

The study examined hospital inpatient costs and utilization for Medicare and private insurers in 65 cities, identifying those where hospitals are profitable while providing high value to Medicare and private insurers for inpatient care. "High-value" cities were defined as those whose hospitals deliver low cost per capita to Medicare and private insurers while producing positive profit margins. While the study found a number of cities that fall into this category, several others deliver high value to Medicare but charge significantly higher amounts to private insurers.

Even among the high-value cities, the study found considerable variation in what are believed to be important cost drivers, including wage levels, payer and hospital competition, location and the ratio of primary care to specialist physicians.

One significant finding: High- and low-value cities have little in common when it comes to factors that typically affect costs, which suggests that hospital management rather than external factors might drive value.

The study's goal was not to identify all high-, low- and mixed-value cities, but rather to demonstrate that they exist. A comprehensive study would reveal many more cities in each category, according to the authors.

High value for Medicare and Private Payers

Cities where hospitals provide high value to Medicare and commercial payers for inpatient care and are profitable, the study found, include:

Tucson, Ariz.
Albuquerque, N.M.
Sarasota, Fla.
Akron, Ohio
Honolulu, Hawaii
Medford, Ore.
Boise, Idaho
Portland, Ore.
Portland, Maine
Pittsburgh, Pa.
Grand Rapids, Mich.
Knoxville, Tenn.
Asheville, N.C.
Newport News, Va.
Fargo, N.D.
Moorhead, Minn.
Spokane, Wash.

"It's important to note that we also identified specific cities that demonstrate low Medicare inpatient costs but, relatively, very high commercial reimbursement," said Bruce Pyenson, a principal and consulting actuary at Milliman's New York office and one of the study's co-authors. "These cities' data highlight the danger of using only Medicare data to identify high-value locales. In these cities, hospitals appear to meet their business objectives by charging private payers much more than Medicare."

High value for Medicare but Not for Private Payers

Cities where hospitals provide high value to Medicare but charge much higher amounts to commercial payers include:

Fresno, Calif.
Denver, Colo.
Modesto, Calif.
Fort Wayne, Ind.
Sacramento, Calif.
Reno, Nev.
San Francisco. Calif.
Seattle, Wash.
San Jose, Calif.

"Research on the Medicare population has underscored the importance of reducing unnecessary hospital stays," commented Elliott S. Fisher, M.D., director of population health and policy at The Dartmouth Institute for Health Policy and Clinical Practice, Dartmouth College. The study, he added, confirms that "communities that are able to care for Medicare patients with fewer hospitalizations are able to do the same for their under-65 population. But to slow the growth of spending, we also need to address the problem of prices."

"Before we initiate a national effort to replicate exemplary local health systems, let's be sure replication is warranted," added Arnold Milstein, M.D., the medical director of the Pacific Business Group on Health, the largest employer health care purchasing coalition in the U.S., and U.S. health care thought leader at Mercer Health & Benefits, a consultancy.

High Hospital Cost Structures Linked to Losses on Medicare Patients,

Higher Rates for Private Payers

In an article published March 18, 2010, in the journal Health Affairs, "Private-Payer Profits Can Induce Negative Medicare Margins," researchers at the Medicare Payment Advisory Commission (MedPAC), an independent congressional agency, challenge a common assumption about Medicare patients and hospital profit margins. The study finds that hospitals with strong market power lose money on Medicare patients because these hospitals tend to have high cost structures. In contrast, hospitals less able to charge higher private rates are under pressure to constrain their costs and thereby can generate profits on Medicare patients, say MedPAC principal policy analyst Jeffrey Stensland, MedPAC senior analyst Zachary R. Gaumer, and MedPAC executive director Mark E. Miller.

The authors examined all 2,950 U.S. hospitals that had complete Medicare Cost Report data from the years 2002 through 2007, excluding critical-access hospitals. The two questions they tested were: whether Medicare costs varied depending on a hospital's financial resources; and whether hospitals with the largest Medicare losses were those under the most financial strain. Their findings: hospitals under financial pressure to restrain costs had inpatient costs per discharge that were 93 percent of the national average; and hospitals with large Medicare losses—margins of negative 10 percent or lower—tended to have the highest overall profitability due to strong profits on their non-Medicare patients.

"There is general agreement that high private-payer margins are correlated with low Medicare margins. The debate is about which direction the causation flows," concluded the authors. "Given the difficulty that employers have in paying rising health care costs—and the difficulty the Medicare Trust funds will have in remaining solvent, given current spending trends—payers will need to set rates so that hospitals feel financial pressure to constrain costs. To maintain quality while constraining costs, there should be financial rewards and financial penalties tied to the quality of care."

Stephen Milleris an online editor/manager for SHRM.

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