A recent Health Affairs study on hospital profitability has been garnering national press attention for finding that seven of the “Top 10” most profitable hospitals were non-profits. These findings will likely reverberate in states where policymakers are currently revisiting the standards used to award non-profit hospitals with tax-exempt status. However it would be a mistake to interpret the findings of this study as bolstering arguments in favor of revoking the tax-exempt status of non-profit hospitals.

We support better public oversight and community benefit standards for non-profit hospitals, particularly around issues facing low- and moderate-income consumers with regard to hospital billing and collections practices. But the focus on non-profits here buries the lead. For one thing, a deeper dive into the data shows the non-profits present in the Top 10 actually buck the trend: for-profit hospitals tend to dominate when it comes to making money off of patient care. Even more importantly, the study found that more profitable hospitals—again, disproportionately for-profits—appear to be more aggressive when it comes to charging patients higher prices.    

The Findings: Markups and Market Share Drive Profitability

The study looked at a variety of factors—market share, prestige, markups, ownership type, system affiliation, uninsured rates, Medicare rates, and more—to determine whether they impact a hospital’s ability to net a profit from patient care. (Interestingly, the authors found that even hospitals that don’t turn a profit from pure patient care can usually make themselves whole from other income streams, such as parking fees, investments, charitable contributions or public subsidies.)

Hospitals routinely establish a “list price,” also known as “gross charges,” from which they negotiate payment rates with payers, including insurers and self-pay patients. The authors mined Medicare Cost Report data for each hospital’s “cost-to-charge” ratio to understand how different hospitals set their prices for services and what impact a higher cost-to-charge ratio has on a hospital’s bottom line. The higher the cost-to-charge ratio is, the bigger the markup is from the hospital’s cost, as defined or “allowed” by Medicare, of providing the services in question. They found the following:  

  • The median cost-to-charge ratio for hospital care nationally is 3.7, or a markup of 370 percent from Medicare’s allowable costs. Highly profitable hospitals use an average cost-to-charge ratio of 5.2, or 520 percent of Medicare’s allowable costs.
  • “Extremely profitable” hospitals—those in the top 2.5 percent of profitability from patient care—use markups pushing 600 percent of cost. And, perhaps tellingly, almost 80 percent of these hospitals are for-profits.

The authors also found hospitals that turned a profit on patient care generally owned a bigger corner of the hospital market in their region and/or were part of a system, instead of a stand-alone facility. While the study itself doesn’t directly unpack the relationship between market share and prices that get passed on to patients, it would seem that hospitals that can command higher prices from patients and payers will do so, absent other restrictions in the marketplace.

Hospital Pricing: Profit or Profiteering?

While a bill for a hospital’s full charges may lead only to head-shaking for people whose insurers have negotiated a much better rate, high hospital prices can mean months of scrimping and saving or—worse yet—months of calls from collectors for patients who are un- or underinsured. The question the study leaves unexplored is what regard, if any, profitable hospitals pay to the surrounding community’s ability to absorb higher markups when calculating charges?

We’ve heard hospitals and policymakers—even other advocates—claim that high hospital charges don’t really get passed on to patients. The assumption’s been that uninsured and underinsured patients who would otherwise get socked for full charges will either qualify for the hospital’s financial assistance policy or negotiate some type of discount. The findings that higher markups do, in fact, have some bearing on hospital profitability put another nail in the coffin of that argument: someone’s making money off of higher patient charges, and it isn’t the patients.

Enforce and Expand Limitations on Charging

It’s also worth keeping in mind that in most states and under current federal law, for-profit hospitals have no standing obligation to limit what they charge patients for care, use reasonable collection tactics, or have a financial assistance policy for un- or underinsured patients. And their fiduciary obligations lie primarily with their investors and shareholders, not the communities they serve.

Under the Affordable Care Act and in some states, non-profit hospitals face stricter requirements for disclosing what they offer in financial assistance and limiting what they charge financially needy patients for care. Stripping hospitals of tax-exempt status would, ironically, leave patients in the affected communities less protected from overcharging and medical debt. Rather than rush to judgment on non-profit hospitals, let’s enforce the laws that exist to fairly limit charges to financially vulnerable patients and expand them, where necessary, to address the loopholes for-profit facilities are currently sailing through.