Be careful about blaming Medicare

Editor's note: Guest blogger Joe Carlson is writing today's Of Interest post.

Hospitals with a higher proportion of Medicare revenue in 2009 tended to have lower overall profit margins, a new analysis of hundreds of hospital tax forms shows. But does that mean that Medicare's low rates are responsible for the lower profitability?

Not so fast. Remember the old saying: Correlation is not causation.

First, the correlation. Take a look at an exclusive chart (XLS) I produced in Microsoft Excel, based on data from 1,739 not-for-profit hospitals and health systems that reported Medicare expenses and revenue listed on their public tax forms in 2009.

Along the horizontal X-axis, I've plotted hospitals' profit margins, based on the tax data. The vertical Y-axis shows each hospital's proportion of patient revenue derived from Medicare.

That downward-sloping line slashing through all the data is a trendline, the result of a nifty linear regression analysis by Excel, taking into account $81 billion in Medicare revenue and $16 billion in collective hospital net profits for the year.

According to the trendline, as hospitals' bottom line profits increase, they tend to have lower proportions of Medicare revenue.

The American Hospital Association has reported that healthcare providers received about 90 cents on the dollar from Medicare, on average, for what it cost to provide beneficiaries' care.

But Martin Arrick, a managing director in Standard & Poor's Public Finance Ratings Group, said that explicitly connecting Medicare revenues and profits is a tricky proposition.

“I'd be careful there,” he said. “I don't think the driver (of profitability) is the size of the Medicare population.”

That doesn't mean that hospitals aren't watching their Medicare profit margins closely. The median not-for-profit hospital in our analysis derived 27% of its total patient revenue from Medicare, and given demographic trends at work in the U.S., the proportion of patients over age 65 seems very likely to grow.

“It's not whether you're making money on Medicare. The question people are asking is if your entire book of revenues was Medicare, would you be profitable?” Arrick said. “If everyone was paying you on Medicare (rates), could you be profitable?

“I would say at this point most hospitals can't do it. And so it's something of a stretch goal for everyone,” he said.

Follow Joe Carlson on Twitter @MHJCarlson and Melanie Evans @MHMEvans.