Healthcare Costs Will Inevitably Rise Again, Despite Temporary Dip

As patient demand for healthcare drops because of the recession, some healthcare providers are finding ways to make up for the shortfall. A Forbes article on America's most profitable hospitals estimates that some have margins of 25 percent or more -- equal to or greater than those of companies like General Electric (GE) and Pfizer (PFE). Meanwhile, a Massachusetts study concludes that the state Medicaid program is paying millions of dollars more than it should for advanced imaging tests. What this suggests is that when the economy recovers, health costs will soar again.

For the first half of 2010, however, growth in health costs was the lowest it has been in 50 years. Government data analyzed by USA Today indicate that the rise in spending on hospitals, doctors, and other medical services was only 2.7 percent at an annualized rate. After inflation is factored in, total health spending by consumers, employers, health plans and the government actually dropped slightly.

While that sounds good, experts say that it probably indicates people are avoiding healthcare that they need. That's impossible to confirm, but Americans spent 1.6 percent less on drugs, 1.1 percent less on hospitals, and nearly 1 percent less on dental care in the first half (annualized) than they did last year.

Of course, people are spending less on everything because of the economy, and the number of uninsured has grown significantly because of layoffs. More people are also on government programs, which pay providers less than commercial plans do. Since 2007, Medicaid and the Children's Health Insurance Program have enrolled 7 million additional people, and 3 million more folks have joined Medicare.
But that hasn't stopped some doctors and hospitals from raking in the dough. According to the Forbes article, 24 hospitals with 200 beds or more had operating margins of 25 percent or greater last year. Forbes based its calculations on financial information that hospitals must report to Medicare each year.

The most profitable hospital in the country is Flowers Medical Center in Dothan, Ala., which had an operating margin of 53 percent. (Flowers claims its profit was really only 12 percent, because it overstated its revenues to Medicare by $180 million. Say what?) Next in line were Del Sol Medical Center in El Paso, Tex. (45 percent), Rochester Methodist Hospital in Rochester, MN (37 percent), Saint Luke's Hospital in Cedar Rapids, Ia. (36 percent), and Seton Medical Center Austin in Austin, Tex. (34 percent).

What jumps out of this list is the fact that only two of the top five hospitals are for-profit: Flowers is part of Community Health Systems (CYH) and Del Sol is an HCA facility. The others are not-for-profit: Rochester Methodist is part of the Mayo Clinic (which has another hospital on the list), Saint Luke's is part of the Iowa Health System, and Seton Medical Center belongs to the huge Ascension Health chain of not-for-profits. So anyone who thought that not-for-profit hospitals operate differently from for-profit facilities should think again.

Meanwhile, a state auditor's report in Massachusetts suggests that the state Medicaid program is overpaying millions of dollars annually for advanced imaging tests. This is partly because Medicare has reduced its rates for MRI, CT and PET scans, while Medicaid rates have not dropped, inducing doctors to charge Medicaid for tests done on people who are eligible for both programs. Also, the auditor noted that some physicians may be referring tests to their own labs, and Massachusetts has no law against self-referral. From 2004 to 2009, the number of advanced imaging claims rose 75 percent, while all Medicaid claims grew 39 percent.

Will any of this change because people are spending less on healthcare overall? Unlikely. Only when the financial incentives are different will provider behavior change.

Image supplied courtesy of Flickr.
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