When the Affordable Care Act was signed into law in 2010, it was first and foremost designed to lower the number of uninsured people in this country. Secondarily, it also was enacted to remove the barriers insurers put up that could deny patient care to people with preexisting conditions. Finally, it was geared at keeping long-term medical cost inflation rates low.
The idea for this last point is that having easier access to medical care should result in more preventative doctor's visits and earlier detection of chronic or serious conditions. This should reduce some of the unexpectedly high costs patients incur later in life -- that insurers pay for.
It's certainly too early to tell if healthcare costs are under control as a direct result of the Affordable Care Act, also known as Obamacare. Its transparent marketplace and competitive atmosphere would be expected to help keep premium prices from skyrocketing, but ultimately, the online exchanges represent just one of many factors that push and pull on healthcare costs.
Hospital costs are rising -- here's why
One component within the chain of prices that's been putting upward pressure on healthcare costs are hospitals.
To begin with, prescription drugs, medical devices, and diagnostic tests are becoming more personalized and targeted. While this could mean better quality care for the patient, it also means a considerably higher cost for America's roughly 5,000 hospitals. For instance, new cancer immunotherapies that target PD-1 by enhancing a patient's immune system can run upwards of $143,000-$150,000, wholesale, per year.
In addition, hospitals have to contend with doubtful accounts. By this I mean services that have been rendered by patients who can't afford to pay for the service. Some of these services are written off as charity care, while others are simply eaten by the hospital as noncollectable. It should be noted that doubtful accounts arise from both insured and uninsured patients, so this isn't simply a case of people walking in and defrauding the hospital with the intent of not paying.
In some instances, smaller, rural hospitals are also struggling to survive under Obamacare. The amount being reimbursed to hospitals for uninsured claims is shrinking, and smaller hospitals are having to spend an arm and a leg to lure in top-notch doctors and surgeons from big cities.
With these forces pushing hospital expenses higher, the following question has been posed (perhaps in a different verbiage) more than once: "Can you really trust how much your hospital is charging you for care?"
While we'd like to think the answer is undoubtedly yes, a study published this past week from Health Affairs would suggest otherwise.
Your hospital could be price-gouging you
According to the Health Affairs report, after studying America's roughly 5,000 hospitals, researchers determined that the average hospital charged patients about 3.4 times the cost of patient care. In plainer terms, a $100 actual cost to the hospital would result in the patient receiving a bill for $340. Researchers compiled their data utilizing the costs Medicare would reimburse and dividing what they actually charged into the previously calculated Medicare figure.
This isn't even the terrifying finding.
The actual purpose of the report was to highlight the 50 hospitals across America with the highest charge-to-cost ratios. In total, 18 hospitals are marking up their prices at least 10 times higher than their costs, with the two worst offenders -- Carepoint Health-Bayonne Medical Center in Bayonne, N.J., and North Okaloosa Medical Center in Florida -- charging an average of 12.6 times the actual cost of patient care. This means $1,000 in actual costs to the hospital would lead to a patient being billed $12,600!
A few additional trends also emerged from the researchers' findings. First, 49 of the 50 worst offenders were for-profit hospitals, which probably shouldn't come as a huge shock. What was noteworthy was that 40% of listed hospitals were in the state of Florida, and in general, many would be classified as being in the South. In total, 13 states were represented among the top 50 list.
Furthermore, 46 of 50 hospitals are owned by for-profit hospital systems, many of which trade publicly. These include Community Health Systems (NYSE:CYH), which operates half (25) of the hospitals on the list, HCA Holdings (NYSE:HCA), which operates 14 hospitals listed, and Tenet Healthcare (NYSE:THC), which operates four hospitals on the list.
As researchers note, the primary target of these exorbitant costs tends to be uninsured patients, out-of-network insured patients, and workman's compensation cases. The uninsured are particularly vulnerable because they have little to no ability to bargain the price of their medical care lower. On the other hand, insured patients often have their medical costs reduced thanks to the bargaining power of their health-benefits provider.
How can this be happening?
You might be wondering how these wild charges are even possible. The simple truth is that there's little regulation when it comes to what hospitals can charge their patients. As an example, certain states may have regulations as to how much can be charged to uninsured patients, and two states (Maryland and West Virginia) set their hospital rates. However, for the most part, there is minimal regulation dictating how much a hospital can charge its patients.
This lack of oversight creates little incentive for hospitals to reduce what they charge consumers, especially if they have millions or billions of dollars in annual doubtful accounts and charitable care written off.
Another major reason hospitals can get away with high mark-ups is their lack of competition. Unless you live in a highly populated city, the chances that you have a wide selection of hospitals to choose from within 10 miles is probably slim. Between therapeutic specialization and the knowledge that there are few other nearby choices, hospitals understand that they can, within reason, charge some consumers higher prices.
Can patient price-gouging be stopped?
Clearly, this report isn't likely to incite confidence in our nation's hospitals from the perspective of the consumer, but, it is possible the system can be fixed.
One solution to consider is to create a transparent marketplace where consumers can compare hospital prices side by side, very similar to how consumers shop on the Obamacare exchanges now. While this would certainly help consumers looking for a good deal on an upcoming surgical procedure, it doesn't do much when you're having a medical emergency, and you need care immediately. In that instance, you're going to the hospital closest to your home and will wind up paying whatever it and your insurer charge you.
Another solution involves using antitrust regulation to prevent additional hospital consolidation and to increase competition. While this would help stem some increases, competition in rural areas is already nonexistent, meaning prices in outlying smaller cities could still be astronomically high.
Rate regulation is possibly the least-liked of the solutions, but it may, according to Harvard's Bill of Health, have the best chance of controlling egregious hospital pricing. Setting rate caps within a state, or negotiating prices each year, could remove the "surprise" element from patients' bills.
It's unclear at the moment what effect any of the above solutions would have on hospital operators, but I'd venture a guess that they wouldn't be viewed positively by investors. Community Health Systems, for instance, only generates a high-single-digit operating margin despite this recent study highlighting its apparent price-gouging. If I were a shareholder and states began implementing rate caps, I'd certainly be concerned -- especially with drug and device prices on the rise.
This is a story that's bound to garner even more attention in the coming years. Regulators will probably spend some time deciphering whether or not Obamacare is having a material effect on medical cost inflation before tackling hospital costs, but I don't see how this apparent hospital charge-to-cost gap between states can continue without regulators eventually stepping in.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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