4 Key Findings on Hospital Costs and Financial Pressure

The amount of financial pressure on a hospital to constrain costs can have a significant effect on its Medicare profit margins, according to the Medicare Payment Advisory Commission.

Hospitals with strong profits on non-Medicare services and investments face relatively little pressure to contain costs, while those with less profit on non-Medicare services face losses and potentially closure if they don't control costs and earn profits on Medicare patients, according to MedPAC.

In its annual report to Congress released last month, MedPAC included an analysis of how financial pressure affects Medicare costs. MedPAC grouped hospitals into three levels of financial pressure from private payers (high, medium and low) based on hospitals' median non-Medicare profit margins and other factors from 2007 to 2011. Here are four key findings from that analysis.

1. The hospitals under the most financial pressure had median standardized Medicare costs per case about 9 percent lower than the national median for all inpatient prospective payment system hospitals. Because of these lower Medicare costs, hospitals under the most pressure had a median overall Medicare profit margin of 2 percent, 7 percentage points higher than the national median.

2. Hospitals with low levels of pressure had median standardized Medicare costs per case approximately 3 percent higher than the national median. Additionally, they had a median Medicare profit margin of -10 percent, 4 percentage points less than the national median.

3. Although there's a significant cost gap between the two groups, both low-pressure and high-pressure hospitals limited cost growth to roughly 2 percent per year from 2011 to 2012. "The similar rate of cost growth for the two groups suggests that financial pressure may cause a one-time shift in cost structure rather than allowing perpetually lower cost growth," MedPAC states.

4. For-profit hospitals generally maintained their Medicare costs per case at the national median even if they didn't face much financial pressure. According to MedPAC, this suggests higher payment rates from private payers lead to higher costs for nonprofit hospitals, while for-profit hospitals retain a larger share of that revenue as operating profit.

More Articles on Hospital Finance:
10 Reasons Why Hospitals Are Shifting to Advanced Cost Accounting
Moody's: 3 Risks That Could Counteract PPACA Benefits for Nonprofit Hospitals
7 Hospital Bankruptcies and Closures in 2014 Thus Far 

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