In a quest to counter the perception that New Jersey hospitals are among the nation's most inefficient, the New Jersey Hospital Association (NJHA) has taken indirect aim at what some argue is one of the most fictional financial measures: charges.
The association's concept, unveiled in a 10-month financial analysis completed last month, calls for calculating adjusted admissions-a key measure of cost efficiency-based on a hospital's actual costs rather than what it charges for services. Using the different methodology, New Jersey's national efficiency ranking soared from 43 (out of a possible 51) to 6 (See chart). The ranking, which measures cost efficiency provided to all payers, public and private alike, was based on data from Medicare cost reports from 1999.
Association officials said they only set out to improve the state's bottom-of-the-barrel standing in nationwide rankings so the state's 83 hospitals can make their case for higher reimbursement from government and commercial payers. Still, the analysis challenges the prevalent building block of most hospital financial comparisons at a time when hospital industry lobbyists are increasingly arguing that hospital charges generally have as much basis in reality as the sticker price on cars.
"Given the haywire nature of the payment system right now, (cost-based analyses are) the only honest way to look at the stuff," said Richard Wade, spokesman for the American Hospital Association. "Charges are the platform from which the pinball machine discounting systems take place. You put your charges up there-whatever they are-so when all (the payers) finish with you, you're left with something in the way of a margin."
Somewhat ironically, until recently inflated charges may have worked in favor of some individual New Jersey hospitals, even if those same inflated charges depressed the state's overall cost-efficiency ranking. A Modern Healthcare analysis of 2001 Medicare payment data revealed that a disproportionate number of not-for-profit providers in New Jersey relied on Medicare outlier payments to boost revenue (July 14, p. 4). Medicare determines outlier reimbursements by adjusting a hospital's gross charges based on its cost-to-charge ratio.
But state hospital association officials said the in-house study, which ultimately questions the same type of charge-based adjustments, was first launched in September 2002-two months before it was revealed that Tenet Healthcare Corp. and later, other hospitals were exploiting a loophole in the Medicare outlier program. The member-driven study was undertaken "with the sole purpose to accurately identify how our cost-per-service ranks per other states in the country," said Sean Hopkins, the association's senior vice president of health economics. The group has distributed copies of the study to hospital members, its congressional delegation and state lawmakers "so there is a clear understanding of the fact that New Jersey hospitals are efficient providers," Hopkins said.
Still, unusually high inpatient charges that possibly triggered high outlier payments could have had the adverse side effect of making New Jersey hospitals as a whole look inefficient, said Sean Nicholson, assistant professor in the Health Care Systems Department at the Wharton School at the University of Pennsylvania in Philadelphia. Once it completed the analysis, the association hired Nicholson and the Lewin Group, a Falls Church, Va.-based healthcare consulting firm, to validate the study's methodology and findings. The NJHA declined to say how much it paid Lewin and Nicholson.
"I don't know that New Jersey hospitals were doing anything (to boost outlier payments) consciously, though, and the final measure that the hospital association used should be the one least vulnerable to monkey business," Nicholson wrote in an e-mail to Modern Healthcare.
William Cleverley, president of Cleverley & Associates, a Columbus, Ohio-based healthcare financial data company, said he could not comment on the study without seeing it-and he was skeptical that the methodology was sound-but in general it "would make more sense" to calculate adjusted admissions on costs rather than charges. "The problem that occurs when it is charge-based is that I can change the measure of adjusted discharges by changing my price structure," Cleverley said. But that wouldn't necessarily wipe out all the potential problems, he added. "Someone still has to define how you are going to measure cost."
The association improved its cost efficiency ranking in a two-step process. In the first step, the ranking climbed from 43 to 26 by basing the cost per adjusted admission on costs rather than charges. In the second step, costs were further "neutralized" for expenses that the group said are beyond hospitals' control: sicker patients, an expensive labor market and the cost of training doctors. That was good enough to push New Jersey to the No. 6 spot. But not everyone may agree with those controls. Nicholson, for example, questioned controlling for direct medical education costs, noting residents consume resources but also provide patient care.
The new methodology made winners and losers out of other states besides New Jersey. Connecticut's ranking jumped to 3 from 37 and Nevada leaped to 1 from 20. On the flip side, Mississippi plummeted to 36 from 2.
The adjusted ranking did not faze Eddie Foster, chief operating officer of the Mississippi Hospital Association.
"We always rank well on cost per discharge but in terms of reimbursement, it is pretty well known that Mississippi is ranked last in Medicare reimbursement because our wage index is so low," Foster said. "You can always develop a methodology that fits your state-and well you should."
The AHA's Wade said that given the current system, New Jersey probably would have much higher charges than Mississippi because "the more payers you have in a state, the more likely you will see higher charges."
"The charge structure is the platform from which all discounting takes place with all insurers," Wade said.
But the AHA isn't interested at this point in leading any national movement to move from a charge-based to a cost-based system any more than the New Jersey association is, Wade said. "We would encourage every state to take a hard look at themselves. No matter how you look at it, you will see inconsistencies across the country," he said.