But officials at Gundersen and Sutter challenged the study's methodology, arguing that it's wrong to calculate what the authors refer to as profitability from the Medicare cost reports of a single hospital in a larger system.
“It's misleading and of limited value to look at the stand-alone portion of the hospital,” said Dara Bartels, chief financial officer at Gundersen, an integrated delivery system that also operates four critical-access facilities, a number of clinics, a health plan and other entities. “It's different from if you look across our entire system.”
“Analyzing Medicare cost reports of a single care center within an integrated … healthcare network isn't a constructive or relevant exercise,” said Bill Gleeson, a spokesman for Sutter Health, which has faced heavy criticism from payers for its prices. Gleeson said his system had a combined margin of 2.6% in 2015, and reinvested all those earnings into services for its communities.
The study comes out at a time of intense debate about the role of hospital consolidation and price-setting in U.S. healthcare cost growth. Commercial insurers are merging based heavily on the argument that they need greater scale to bargain effectively with larger health systems. The study also raises questions about the hospital industry's frequent claims that rate pressure from public and private payers is undermining hospital finances.
According to the Health Affairs study, 45% of hospitals had a positive margin for patient-care services. The median for-profit facility showed a positive margin, while the median not-for-profit and public facility showed a loss. The 10 most profitable hospitals each earned more than $163 million, with surplus per adjusted discharge ranging from $4,241 to $2,080.
But even many hospitals that showed losses on patient care had positive margins overall. The study found that median net income per adjusted discharge from all activities—including investments, charitable contributions and space rental—was $353 for all hospitals and $178 for hospitals with 50 or fewer beds.
The study found that the median hospital affiliated with a larger system and the median hospital with regional market power had positive margins, while independent hospitals and those without regional power lost money. The median not-for-profit and the median public hospital lost money, while the median for-profit hospital made money. Rural hospitals, hospitals with less than 50 beds and major teaching hospitals had larger losses than urban hospitals, larger hospitals and those with no teaching or minor teaching status.
The authors focused on the association between chargemaster price markups and margins. Hospitals with markups of at least the median 3.7 charge-to-cost ratio were more likely to have a positive margin than those with lower markups. Highly profitable hospitals had an average charge-to-cost ratio of 5.0, while extremely profitable hospitals had an average charge-to-cost ratio of 5.8. Of that latter group, 78% were for-profit, 88% were in a system and 47% had regional power.
Retail prices matter, the authors argued, because uninsured and out-of-network patients, along with casualty and workers' compensation insurers, pay hospitals' full prices. Also, hospitals use high chargemaster rates as leverage to increase their negotiated price from health insurers. They recommended that policymakers consider measures that target excessive markups.
Anderson wondered whether the hospitals that are doing well in the current, predominantly fee-for-service environment will still be doing well in a few years when value-based payment models are more common. “Hospitals are now rewarded for quantity,” he said. “I'm interested to see if it's the same hospitals rising to the top three or four years from now when the system changes and they are rewarded for outcomes.”