HCPF: Colorado’s high profit margins drive higher prices for payers

According to a report released last week by the Colorado Department of Health Care Policy and Financing (HCPF), Colorado hospitals have the highest profit margins in the country. The department says these high profits ultimately translate into higher prices for payers and patients.

The department evaluated data from the Medicare Cost Report for Colorado Hospitals from 2009 to 2018 – the most recent year for which this data is available.

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Since the report only included hospitals with 25 or more beds, most rural hospitals were excluded. The HCPF nevertheless stresses that these establishments – unlike the urban hospitals included in the report – are “ripe for investment” and need resources.

According to HCPF, some Colorado hospitals are using high costs, or their hospital-only operating expenses, to justify the price increase for payers. The costs of public hospitals have increased at a faster rate than the national average over the past decade. In 2018, the HCPF estimated that Colorado’s hospital operating costs were $ 1.3 billion higher than the national median.

Image: Colorado Department of Health policy and funding

The report states that about 28% of Colorado’s hospital costs in 2018 were administrative and capital costs – “overhead” – rather than medical costs. This is almost 3% above the national average for overhead costs.

“If Colorado hospitals incurred overhead costs at the national rate, operating expenses would be $ 474 million lower than based on 2018 discharges.”

However, 10 of the hospitals assessed had costs aligned with the national average, but still above average prices. Known as ‘profit maximization’, this is when hospitals have normative costs nationwide but make the strategic decision to increase prices disproportionately to their costs. Those 10 hospitals had costs in half of the 50% of US hospitals, but their prices were in the top 25%.

Image: Colorado Department of Health Care Policy and Funding (HCPF)

Hospital prices have risen along with costs and have increased at a rate well above the national average. In 2009, the price per patient in Colorado hospitals was 9.2% higher than the national average. In 2018, it was 22.8% higher.

These high prices resulted in $ 1.5 billion in patient service profits for Colorado hospitals in 2018. For that year, Colorado had the second highest profit per patient in the country, three times the national median.

However, the report shows that Colorado hospitals made almost the same amount of profit – $ 1.4 billion – on non-patient income in 2018. This includes investment income resulting from hospital systems using their profits for reinvest in the market and gain more market share.

The report explains that this greatly increases the market power of hospitals by lessening competition, allowing them to further increase their prices to offset the cost of this continued investment. This cycle – what the report called an “endless loop” – is shown in the image below.

Image: Colorado Department of Health Care Policy and Funding (HCPF)

“Colorado’s large hospitals are in a cycle of using profits to invest in market share growth initiatives, further increasing their costs as well as the unfavorable impact of their higher prices and larger profits. “

Colorado hospitals’ combined patient services and non-patient revenues of $ 2.9 billion in 2018 give them a total profit margin of 15.6%, which is by far the highest in the country. The national median of hospital profits is 6.5%.

The report highlighted legislative measures taken by the state to reduce hospital costs, including HB 19-1001 (which requires hospitals to provide data on hospital finances to the HCPF) and HB 19-1174 (which requires health plans and providers to disclose the potential costs of receiving out-of-network care).

The ministry also listed the cost control initiatives it is currently pursuing, such as the five-year Hospital Transformation Program (HTP). The HTP forces the HCPF to shift hospitals from fee-for-service and reporting to a pay-for-performance model, which is expected to improve the quality of hospital care while containing costs.

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