Less than a month after reporting record profits, the Blue Cross and Blue Shield Association released a study fingering hospitals as the key culprit behind the nation's rising healthcare costs.
The Blues' third annual compendium of secondary research and analysis, dubbed the Medical Cost Reference Guide, examined the financial impact of several industry factors, including pharmacy costs, physician services, and payment and lifestyle trends. But as in past years, the 76-page report found hospitals to be the primary driver of insurance premiums, which are expected to climb at double-digit rates for the fifth straight year in 2005.
"Hospitals are the largest component of healthcare expenditures, accounting for over half of private insurers' spending growth in 2003," said Maureen Sullivan, senior vice president of the Blues association, adding that "Private payers reimburse hospitals more than it costs to care for their members."
The report irked some hospital groups, which have been working to recraft their image amid mounting criticism of hospitals' aggressive pricing, billing and collection practices (Feb. 2, p. 6). "The study fails to tell the whole story when it comes to hospitals," said Richard Coorsh, spokesman for the Federation of American Hospitals, which represents investor-owned hospitals.
According to the report, the average cost per hospital admission climbed 11% to $7,353 from 2000 to 2002, even as the average length of stay dipped slightly to 5.7 days from 5.8 days over the same period. The increase in inpatient costs was attributed primarily to hospital consolidation, higher labor costs and the growing use-and potential overuse-of expensive new medical technology, particularly diagnostic imaging.
The number of MRI scans performed nationally, for example, is expected to balloon to nearly 500 million in 2008 from 300 million in 2001, the report found. And Barbara Rothenberg, a senior consultant with the Blues association, pointed out that while providers are adopting newer MRI, CT and PET scans, they aren't necessarily phasing out older technologies like X-rays. "There has actually been an additive effect," she said.
While proper use of these new imaging technologies can lead to greater efficiency and better care, Rothenberg said, "Long-term evidence suggests that some of the procedures being done aren't appropriate or necessary."
The Blues association began publishing the Cost Reference Guide in 2002 as part of a broader initiative to help keep healthcare affordable. But hospital groups have complained that the annual report is politically motivated and does a disservice by unfairly singling out certain trends while omitting others (Oct. 28, 2002, p. 6).
"They don't sufficiently take into account changing medical practices, pressure on hospital payments and total value to the patient," Coorsh said, referencing a study released by the federation and other industry groups in January, which found that each dollar spent on healthcare generates health improvements valued at $2.40 to $3. "A focus on costs merely as a problem overlooks the substantial return on investment from those dollars," he said.
Coorsh and others also questioned the timing of the report, released as the Blues are enjoying record growth. The Blues association announced last month that its 41 indepen-dent affiliates posted combined net income of $3.7 billion in the six months ended June 30, up 32% from $2.8 billion in the same period of 2003 (Nov. 15, p. 10). Profit margins expanded to 3.2% from 2.8%, and total cash reserves grew 48% to $41.3 billion. The results build on a 53% earnings gain in 2003 to $6.1 billion and a 43% gain in 2002 to $4 billion.
In addition, the nation's two largest for-profit Blues plans, Anthem and WellPoint Health Networks, last month completed their $16.4 billion mega-merger in a move that will trigger up to $600 million in severance and retention bonuses for 293 WellPoint executives, including a $42 million change-of-control payment earmarked for WellPoint Chairman and Chief Executive Officer Leonard Schaeffer (Dec. 6, p. 8).
Caroline Steinberg, vice president of trend analysis for the American Hospital Association, pointed out that WellPoint's operating margin grew to 8.1% in 2003 from 7.1% in 2002, while Anthem's grew to 7.8% from 6.6%. By comparison, the hospital industry's overall operating margin slipped to 3.3% in 2003 from 3.7% in 2002.
"When you see those trend lines, you know a fair amount of additional dollars are being tacked on to premium costs," Steinberg said. "Insurers' profits are part of the (cost) picture and need to be considered part of the picture."
The Blues' Sullivan, however, said insurers' burgeoning bottom lines simply reflect a temporary upswing in the underwriting cycle and "are not a major driver" behind ongoing rate hikes. "Rising healthcare costs directly drive premium increases, while administrative costs and (profits) remain small components of premiums," she said.
The Blues association said it plans in early 2005 to release additional cost studies on topics including specialty hospitals, the aging population and consumer-driven healthcare.