While hospitals gripe about shrinking government reimbursements, they're raising prices in the only place they can: the private sector.
There's mounting evidence that hospitals are extracting higher rates from health plans and other nongovernmental payers these days. In fact, private payers may be the one bright spot on hospitals' balance sheets this year.
Faced with smaller payment increases from Medicare under the Balanced Budget Act of 1997, many hospitals have toughened their negotiating tactics with managed-care companies.
"When hospitals are feeling pressure in one direction, they'll try to push in a direction that seems to be more forgiving, if they can," says Gail Wilensky, chairwoman of the Medicare Payment Advisory Commission (MedPAC), which evaluates provider reimbursements for Congress.
As a result, the nation could see a resurgence of hospital cost-shifting to the private sector after a five-year hiatus (See chart, p. 61). With managed care hobbled, the private sector is again being asked to shoulder a greater burden of healthcare costs.
Health plans appear to be acquiescing. Both sides are secretive about their contracts, but what has been reported portrays a generally rosy picture for hospitals. Consider:
* For-profit hospital companies reported average rate increases of 3% to 8% this year, after increases of just 1% to 2% in the previous several years, according to industry analysts.
* Credit-rating agencies this year report a more-favorable pricing environment for not-for-profit hospitals and systems. Organizations as diverse as Detroit Medical Center, Methodist Hospitals of Dallas and Burlington, Vt.-based Fletcher Allen Health Care have won price increases, according to their credit reports.
* The consumer price index for hospital services, which measures inflation, is on the upswing. (See chart.)
"We've generally noticed the best pricing environment in at least three or four years, maybe longer," says Harry Anderson, spokesman for Santa Barbara, Calif.-based Tenet Healthcare Corp. He says Tenet's 113 hospitals in 17 states have typically seen price increases of 3% to 6% this year, compared with 2% or less in previous years.
However, higher prices don't mean hospitals are swimming in dough. Medicare revenue increases are not expected to keep pace with costs this year, according to Moody's Investors Service. Also, most of the price hikes appear to be confined to hospitals and systems with high market shares.
But a boost in revenue from private payers could be manna for some hospitals that are struggling to restore profitability and stabilize their credit ratings.
Behind the increases. Several factors appear to be propelling prices upward. For one, health plans have more money to spread around, thanks to double-digit premium increases. Managed-care industry profits are expected to exceed $3 billion this year, up 60% from 1999, according to a study released last month by Corporate Research Group, based in New Rochelle, N.Y.
There is a growing sense that the healthcare system is in crisis, which, along with a booming economy and tight labor market, has caused less alarm about increasing premiums among employers than in the past, some experts say.
Many hospitals believe they have already wrung excess costs out of their systems, says Michael Kaplan, director of corporate healthcare ratings at Standard & Poor's. "My sense is the higher premiums that managed care is able to get at this point is partly a recognition of the need to get more money to hospitals," Kaplan says.
Tight labor markets make employers skittish about disrupting healthcare coverage, and health plans don't want to anger their customers by removing hospitals and physicians from their networks.
Employers "are kind of shaking their heads as to what they'll be able to do" about higher premiums, says Don Hardin, a consultant in the Charlotte, N.C., office of the William M. Mercer benefits consulting firm. North Carolina employers saw premium increases jump 9.9% in 1999, the largest increase of any state.
Significantly, hospitals are toughening their stance on contract negotiations, threatening to walk away if a deal doesn't meet their specifications. Hospitals have abandoned contracts that don't cover their costs, retreated from capitation and demanded timely payments from payers.
In a recent report on investor-owned hospital companies, Moody's notes that hospitals have backed away from capitation nationally, with Cigna HealthCare, Humana and PacifiCare Health Systems reporting a decline in the percentage of capitated medical services nationally. Companies such as Tenet and King of Prussia, Pa.-based Universal Health Services have retreated from unprofitable capitation contracts on the West Coast.
Hospitals that accepted risky capitation agreements and low reimbursement rates a few years ago are terminating those deals as a first step to renegotiated agreements, says Steve Richter, healthcare practice leader in the Los Angeles office of Watson Wyatt Worldwide, a human resources consulting firm.
Market dominance. In many cases, hospitals are taking advantage of dominant market positions achieved by consolidations during the 1990s.
In 1998 West Coast not-for-profits San Francisco-based Catholic Healthcare West and Sacramento, Calif.-based Sutter Health threatened to terminate their contracts with Blue Cross of California in a successful bid to win more-favorable terms.
Similarly, some companies have dropped national contracting strategies to leverage their strong positions in local markets, Moody's says. Nashville-based Columbia/HCA Healthcare Corp. promised to end its pact with Humana in Florida last year. The health plan caved in to the pressure, agreeing to a 15% price hike to secure Columbia's 56 hospitals in the state-about a fifth of the hospital market there.
Those examples emboldened other hospitals to terminate unprofitable managed-care contracts and start from scratch, sources say.
"From the mid '90s on there was a competitive environment where there were no price increases, and some competitors were actually cutting prices to get business," says Tenet's Anderson. "The providers in effect have stood up this year and said, `We can no longer do business like that.' "
In North Carolina, it is HMOs, not hospitals, that are complaining about an imbalance of power. Sizable markets such as Asheville and Greensboro have gone from two hospital systems to one, says Paul Mahoney, executive director of the North Carolina Association of Health Plans. Only 18 of the state's 100 counties have a multiple hospital presence, he says.
"The impression I'm getting from most of my members is that it's very tough negotiating in the monopoly counties. You just don't have the leverage to push back," Mahoney says.
Nationally, employer groups are less aware of the role of hospital inflation on healthcare costs than they are of highly publicized factors such as pharmaceutical spending and technology.
"A lot of times when you have the (hospital) merger debates, it's a local issue. I don't know that the impact on the community is understood by everybody involved," Mahoney says.
How far hospitals have been able to boost payments on the private sector side remains unclear. Data for 1999, the first year in which the full impact of the budget law was felt, won't be available until early 2001.
Some industry experts caution that private-sector price increases are too early to gauge and could be of limited benefit to hospitals, which are seeing increasing costs of their own.
"I think it's too soon to say how those double-digit (premium) increases are going to be passed onto providers, or how much," says Amy Peterson, a manager at RSM McGladrey, a Minneapolis-based consulting firm that assists hospitals in setting prices.
She argues that even a 10% increase in stated hospital charges might result in a 2.5% increase in a hospital's net revenue after discounts. Fixed payments from Medicare, Medicaid, Civilian Health and Medical Program of the Uniformed Services and, in some states, workers' compensation, typically account for 50% to 60% of a hospital's revenue.
"I would agree that a 5% to 9% increase in gross charges is what we're modeling this year. In response to the (balanced-budget act) impact, that's what providers are going for. What they are going to see of that increase in net revenue is a very small percentage of that," Peterson says.
Moreover, price increases are not evenly distributed. Those with market leverage are benefiting the most. For example, children's hospitals with a monopoly on their services can charge three times as much as other acute-care facilities in some markets, so there is less money available for other hospitals, says Will Fox, a principal at Seattle-based Milliman & Robertson, a consulting and actuarial firm.
Contrary view. For now, the American Hospital Association isn't willing to concede that the private sector is opening its wallet a little wider.
"Hospitals are not benefiting as health insurance premiums increase," asserts Carmela Coyle, the AHA's senior vice president of public policy. She says premium increases are going to the plans and their shareholders, not to hospitals.
"Anecdotally, the environment out there in terms of contract negotiations is as tough as it's ever been. In many markets, the health plans still have the clout," Coyle says.
Any good news on private-sector pricing might undermine hospitals' fight to beef up Medicare funding in Congress. During last year's negotiations to roll back balanced-budget act provisions, hospitals claimed that they can no longer cost-shift losses from government programs as they could in the 1980s because of managed care. Throughout the 1990s, hospitals have been able to argue that managed care was squeezing their bottom lines.
Meanwhile, hospitals aren't finding much sympathy in Congress. The General Accounting Office is looking into the issue at the request of hospital industry nemesis U.S. Rep. Fortney "Pete" Stark (D-Calif.), ranking minority member of the House Ways and Means health subcommittee. On April 28, the GAO is scheduled to release the results of a survey asking hospitals the extent to which Medicare and commercial payers cover the costs of certain procedures.
Sustained premium increases for the private sector could lead to yet another showdown in Washington over public funding. How much the private sector is willing to give will depend largely on the economy, according to many experts.
"We're in a period where we're seeing extreme financial pressure on the Medicare side and on the private-payer side at the same time. That's the first time that has ever happened," says Jack Ashby, hospital research director of MedPAC.
MedPAC's Wilensky believes there is still significant excess capacity in not-for-profit systems. Unlike for-profits, they have withstood reimbursement pressures longer than many people expected, she says. "We've heard a lot of cries of pain; we haven't seen a lot of exits from the field," she says.