4 Key Findings on Service Mix, Cost Structure and Hospital Outpatient Margins

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Differences in hospitals' basic cost structures have a bigger effect than differences in service mix on their Medicare outpatient margins, according to the Medicare Payment Advisory Commission's 2014 report to Congress.

MedPAC examined hospitals' 2009 Medicare outpatient cost and service mix data to find out which factor contributes more to differences in outpatient margins among hospital groups. MedPAC found for-profit hospitals had the highest average outpatient margins, and major teaching hospitals had the lowest. Here are four key findings on outpatient margins from the report.

1. Outpatient margins vary widely among different hospital groups. In 2009, the average outpatient margin was -2.5 percent among for-profit hospitals, -12.6 percent among nonprofit hospitals and -21 percent for major teaching hospitals.

2. Underlying cost structure differences increase the outpatient cost per unit of service by 10.4 percent for major teaching hospitals, relative to the national average. By contrast, cost structure decreases the cost per unit among for-profit hospitals by 5.2 percent.

3. Service mix differences increase cost per unit for major teaching hospitals by 1.2 percent and decrease cost per unit by 0.8 percent in for-profit hospitals.

4. MedPAC suspects teaching costs contribute to higher outpatient costs for major teaching hospitals (Medicare pays extra for teaching costs through the inpatient prospective payment system but not through the outpatient prospective payment system). However, even when teaching status is taken into account, for-profit hospitals still have, on average, a 6-percent lower cost structure, according to the report.

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