Health Affairs: 5 factors that affect hospital profitability

A recent study published in Health Affairs examined Medicare cost report data to identify the factors directly associated with higher and lower hospital profitability. 

Below are five factors identified in the study.

1. Commercially insured patients. Most hospitals with positive profits serve a greater proportion of commercially insured patients. Unlike with government payers, which have regulated prices independent of local market competition, hospitals have the ability to influence reimbursement rates from commercial insurers.

2. Hospital consolidation and multi-hospital systems. Regional market power and system affiliation were associated with higher hospital profits in the HealthAffairs study. Hospitals that have regional power face less competition in their local markets, which can happen when competitors merge to capture greater market share. Hospitals affiliated with multi-hospital systems also see higher profits. When multi-hospital systems negotiate with health plans, they often demand higher prices for all system members if the plan wants to include any member hospital in its networks.

3. HMOs. The presence of health maintenance organizations in a market is often associated with decreased hospital profitability. For instance, HMOs may choose to contract with fewer hospitals in a local market to drive price competition between hospitals.

4. Health plan consolidation. As the number of competing health plans declines, average market share of remaining health plans increases. This is associated with lower prices paid to hospitals, particularly in markets where there are only one or two insurers offering products. The market is currently experiencing significant merger and acquisition activity between health plans as they attempt to gain the market power to more effectively negotiate with large, established hospital systems.

5. Provider-sponsored health plans. Many provider groups have launched health plans on markets created under the Affordable Care Act. If the trend continues, it could reduce market shares held by the largest insurers and challenge insurers' negotiating powers when setting reimbursement rates, according to the report.

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