More on Hospitals vs. Insurers: Carilion Edition

Last Updated Sep 9, 2008 5:46 PM EDT

A few days ago I noted Joe Paduda's argument that hospitals have regained some pricing clout against health insurers, enabling them to pad their bottom line at the expense of health plans. After some further scouting around, I still think the picture isn't entirely clear. So let's lay out the data points and take a look.

The first, and most extreme, case involves the nonprofit Carilion Health System in Roanoke, Va. Thanks to a 1989 merger that gave Carilion an effective local monopoly, the eight-hospital system is able to charge procedure rates vastly higher than those at small independent providers:

Carilion charges $4,727 for a colonoscopy, four to 10 times what a local endoscopy center charges for the procedure. Carilion bills $1,606 for a neck CT scan, compared with the $675 charged by a local imaging center.
The hospital justifies the lopsided costs as necessary to subsidize its emergency services and charity care -- a classic justification that has very little to do with how hospital pricing works in the real world. That pricing is almost wholly a function of the rates an outfit like Carilion can force insurers to accept, and here the nonprofit has enjoyed tremendous success. Although hard data is in short supply, the WSJ pulls together several threads that suggest Roanoke insurance premiums have skyrocketed, including the story of a construction-company owner who complains that his rates have jumped 50 percent in the past three years.

Meanwhile, several analysts have a grimmer take on hospital financials. Via FierceHealthcare, I came across Melissa Davis' recent hospital-earnings analysis at TheStreet.com, which argues that both Tenet Healthcare and Health Management Associates remain in the intensive-care ward. Tenet, for instance, projects an annual loss of between $20 million and $120 million, whereas some analysts had expected it to swing back to profitability this year.

Similarly, Anne Zieger of FierceHealthcare looks at the same trends and suggests that any improvements are highly unlikely to be sustainable:

OK, how about the improved hospital results that came out in the last several days? HCA, for example, saw a 21.6 percent growth in net income for the second quarter on revenue growth of 3.7 percent, despite falling surgical volumes and flat admissions. Sounds great. But it's hard for me to imagine that numbers that looked good despite flat admissions and falling numbers of surgeries will stay that way for long. Oh, and as for the other thing touted by Wall Street analysts -- that HCA managed to set aside almost enough money to pay its bad debts? Sounds nice, too, but what about the fact that HCA's debt rates continue to rise? That kind of drain isn't sustainable, either.
I remain squarely agnostic. Since I see hospitals and insurers as locked in a death struggle over a shrinking market, I'm naturally inclined to think that no one is likely to build a lasting advantage unless they somehow succeed in changing the rules of the game. And since the healthcare market is so Byzantine, the ability of any individual hospital or health insurer to do so is highly circumscribed.

Which is why I've long suspected that the only real impetus for fundamental change will come from government action -- likely spurred by some sort of catastrophic collapse in the commercial-insurance market. But more on that in a future post.

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    David Hamilton is the assistant managing editor of CNET News. He has been writing and editing business and tech coverage for about two decades -- the majority of that at the Wall Street Journal in both Tokyo and San Francisco. He is a two-time winner of the Overseas Press Club award and has written for numerous magazines and blogs, including Slate, Science, VentureBeat, CBS Interactive's BNET, California Lawyer and the New Republic.