The Incidental Economist has some testimony from the chair of the Medicare Payment Advisory Commission concerning payment rates and hospital efficiency.
In 2013, the median hospital margin was –5.4 percent. Relatively efficient hospitals (i.e., hospitals with lower costs and better quality over three years) had a median margin of 2 percent in 2013.
Part of the reason Medicare margins are low is that hospitals have high costs per case driven in part by lack of fiscal pressure from private payers….The Commission has shown that higher payments from private insurers allow hospitals to have higher costs which, in turn, makes Medicare margins more likely to appear inadequate. There is evidence that higher private insurer payments result from hospital consolidation—that is, hospitals have gained greater market power relative to private insurers. When financial resources are abundant hospitals spend more
The TL:DR version of this is that hookers, blow and Vice Presidents for Strategic Hookers and Blow Acquisition Strategies are expensive. At inefficienct hospitals there are a lot of random VPs whose job is to collect the skim. Those costs are baked into the Medicare cake.
There was an interesting study conducted at John Hopkins as to whether some of these ruffles and flourishes actually improved care. This is from Kaiser Health News in February 2015:
The sleek hospital tower that Johns Hopkins Medicine built in 2012 has the frills of a luxury hotel, including a meditation garden, 500 works of art, free wi-fi and a library of books, games and audio….
Siddiqui’s study, published this month by the Journal of Hospital Medicine, contradicts the presumption that better facilities translate into better patient reviews…..
Siddiqui discovered that for the most part, patients’ assessments of the quality of the clinical care they received did not improve any more than they did for patients treated in the older Hopkins building, which…. were constructed as early as 1913 and as late as 1980….
A nationwide survey from 2012 conducted by the consultants J.D. Power and Associates reached similar conclusions to the Hopkins paper about the influence of the physical environment on satisfaction scores. That survey found that communication by doctors, nurses and other staff was most important, while the facility accounted for a fifth of patient satisfaction.
And now back to the testimony about the relative pricing :
For example, Aetna and Blue Shield of California pay hospitals rates that are often 200 percent of Medicare’s rate for inpatient care and 300 percent of Medicare’s rate for outpatient services in California (California Department of Insurance 2014a, California Department of Insurance 2014b). In 2013, hospital all-payer margins were a record-high 7.2 percent.
It is nice to have some solid, public numbers I can quote.
These are pre-Exchange figures, and I think the dynamic is changing. However, we know on average that Medicare pays roughly long run average costs of services, Medicaid pays marginal cost and hospitals make their money on employer sponsored group health insurance. The margin on private health insurance claims was probably 10% to 12% in California for 2013.
The Exchange subsidies are based on the second lowest Silver. This creates a distinctive market segment and strategy:
…There is a strong incentive for insurers to offer at least a Silver plan that is either the cheapest two Silvers or very close to the subsidy cut-off.
This segment in a competitive market should see a cluster of plans that are at the subsidy line plus or minus a couple percentage points….. The networks will tend to be very narrow as the pricing model is Medicare plus a small kicker (Where Mayhew Insurance sells, the pricing on this segment is Medicare plus 3% to Medicare plus 8% depending on the insurance company) and insurance companies are avoiding the high cost providers if they can…..
Most Exchange buyers are extremely price sensistive and they are buying Silver with Cost Sharing Assistance subsidies. Most Exchange buyers are buying plans where the pricing is Medicare plus a little bit instead of 200% Medicare or more. Off Exchange buyers are less price sensisitive as they are already paying full premiums without subsidies so the marginal percentage cost of a broader network at higher payment rates is less.
As low cost Exchange plans proliferate, employee groups are starting to ask questions as to how Mayhew Insurance can offer a comparable Gold plan on Exchange for 20% less than their current plan. Most of the difference will result from paying the providers significantly less. And then they ask if they can get into that narrow network. If it is Joe’s Autobody, we won’t file a new group network and plan design with the state, but when it is Evil MegaCorp with 10,000 covered lives, we’ll do the administrative work to get them a better rate and a narrower network. We might not be able to build a network that makes Evil MegaCorp happy at Medicare +7%, but we could build a narrow(ish) network at Medicare+17% instead of the current broad commercial network at Medicare +88%.
As that dynamic occurs, we should expect a gnashing of teeth as the junior VPs of SHBAS start to lose their jobs while the Senior VP of SHBAS lose their prestige as there is less cash to skim.
CarolDuhart2
As someone who was in the hospital 2 times in 4 years [2012 and 2014), some things are appreciated and others not. A physically attractive room, and free Wi-Fi for those boring times in the room is nice. But I grew up in the era of pale green and plain white, so I appreciate some attempt to make things pretty and comfortable.
However, if I had to choose, cleanliness and prompt attention beats expensive pictures. It’s no good if you see cobwebs in the corners, and a floor that gets a mopping every once in a while (like an emergency room I once went to)
Tommy
@CarolDuhart2: My mother was in the ICU for a month about two years ago. I can tell you little stuff. A DVD player where I could watch a movie. The nurse bringing me a pillow. That mattered. Made it easier for myself, my dad and brother.
But yes cleanliness and prompt attention. Each two people had a single nurse for them. Prompt was an understatement. I’d only been in hospitals a few times before and they always smelt of death to me, or cleaners.
That was the exact opposite of this place and it was very welcome. But when my mother was moved 80 miles to the hospital I went to Google and found the hospital was in the top 5% in the nation. So guessing they work hard to be stellar.
JCJ
I always wondered what all those VP’s and managers did. Thanks.
Lee
My daughter played soccer for years so we had our share of trips to the ER.
We had one trip for a medical (not injury) issue that resulted in a 3 day stay at Children’s of Dallas. It was by far the best of anything we have been in before or since for her or my father-in-law.
As others have pointed out, it is the little things that count. One of the things that just stunned us was if we pre-paid for our meal it was $5 (we purchases a meal voucher). Otherwise it was the listed price (maybe around $9). Either way we could have what we wanted delivered to the room.
The staff was incredibly nice.
Fred Fnord
I wish there were some way to know the contracted rates for hospitals/doctors/labs/etc. I would happily try the ones that cost my insurance less money. As it is, I have to guess. (Not Sutter Health. Maybe SF General. Certainly not UCSF Medical Center. Etc.)
pseudonymous in nc
It’s actually not that dissimilar from airports.
Patients want cleanliness, things to work properly, and timely information. Visitors want food that doesn’t suck and isn’t overpriced.
Administrators and executives want pianos in the lobby, leather chairs, and all the platinum-club fancy shit. And a Louis Vuitton concession for when they want to spend their bonus in a hurry.
jl
Thanks for a very informative column.
Raven on the Hill
“The sleek hospital tower that Johns Hopkins Medicine built in 2012 has the frills of a luxury hotel, including a meditation garden, 500 works of art, free wi-fi and a library of books, games and audio….”
These are for the patient’s families, mostly. Patients, after all, are largely lying down being miserably sick. I expect they are relatively inexpensive relative to the costs of a modern hospital’s extensive building systems, filtered and disinfected ventilation, piped oxygen, etc. etc. Hospitals are often built with short floors between the occupied floors (“interstitial layers”) just to contain all the equipment used.
Do we really want our hospitals to be grim and grey? They are supposed to be places of healing!