Newswise — Hospitals on average charged more than 20 times their own costs in 2013 in their CT scan and anesthesiology departments ― suggesting that hospitals strategically use “chargemaster” markups to maximize revenue, according to new research from Johns Hopkins University.

Appearing in the September issue of Health Affairs, the study notes that many hospital executives say the chargemaster prices determined by individual hospitals for billable items are irrelevant to patients.

However, the relation between chargemaster markups and hospital revenue and the variation in markups across hospitals and departments show that the hospitals are still using their chargemaster markups to enhance revenues, say the study’s authors, Ge Bai of the Johns Hopkins Carey Business School and Gerard F. Anderson of the Johns Hopkins Bloomberg School of Public Health.

“Hospitals apparently mark up higher in the departments with more complex services because it is more difficult for patients to compare prices in these departments,” states lead author Bai, a Carey Business School assistant professor whose expertise is in accounting issues within the health care industry.

As the chart below indicates, average charge-to-cost ratios for hospital departments vary from a low of 1.8 for inpatient general routine care to a high of 28.5 for computed tomography (CT) scan, with anesthesiology right behind at 23.5. This means that a hospital whose costs in the CT department are $100 will charge a patient without health insurance and an out-of-network privately insured patient $2,850 for a CT scan.

Anderson, a professor in the Bloomberg School’s Department of Health Policy and Management, says the impact of hospital markups is vast: “They affect uninsured and out-of-network patients, auto insurers and casualty and workers’ compensation insurers. The high charges have led to personal bankruptcy, avoidance of needed medical services, and much higher insurance premiums.”

Hospitals with strong market power, through either system affiliations or dominance of regional markets, were more likely to set high markups, as revealed by financial data in 2013 collected by the authors from all Medicare-certified hospitals with more than 50 beds.

In their paper, the authors examine the average hospital’s overall charge-to-cost ratio, which expresses the ratio of what the hospital charged compared to the hospital’s actual medical expense. In 2013, the average hospital with more than 50 beds had a charge-to-cost ratio of 4.32 ― that is, the hospital charged $4.32 when the cost was only $1.

However, certain types of hospitals had higher markups. In government-run hospitals, the ratio was 3.47; in nonprofit hospitals, 3.79; and in for-profit hospitals, 6.31. System-affiliated hospitals had an average ratio of 4.76, versus 3.54 for independent hospitals, and hospitals with regional market power had an average ratio of 4.56, versus 4.16 for hospitals that lacked such clout ― supporting the researchers’ finding that hospitals that can mark up prices will do so. The markups help their bottom lines; a one-unit increase in markup, such as from 3.0 to 4.0, is linked with a $64 higher revenue per adjusted discharge.

Besides the setting of a cap on the maximum markup hospitals can charge, Bai and Anderson recommend two solutions to high markups. First, improve the transparency of markups by requiring hospitals to provide a benchmark rate, such as what Medicare would pay for the same services, on all medical bills so that patients can compare the amounts, while also requiring hospitals to disclose the total charges as a separate line item on their annual income statements. Second, improve the consistency of the charge-to-cost ratios across all departments and services within each hospital.

“Mandatory disclosure on medical bills and financial statements will be an important step toward markup transparency,” says Bai.

“We realize that any policy proposal to limit hospital markups would face a very strong challenge from the hospital lobby,” says Anderson, “but we believe the markup should be held to a point that’s fair to all concerned ― hospitals, insurers, and patients alike.”

“US Hospitals Were Still Using Chargemaster Markups to Maximize Revenues In 2013” was written by Ge Bai and Gerard F. Anderson and appears in the September 2016 issue of Health Affairs.
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Average Charge-to-Cost Ratios for Selected Hospital Patient Care Departments, 2013

RANK DEPARTMENT CHARGE-TO-COST RATIO*
1 Computed tomography scan 28.5
2 Anesthesiology 23.5
3 Magnetic resonance imaging 13.6
4 Electrocardiology 12.4
5 Electroencephalography 9.3
6 Cardiac catheterization 8.7
7 Laboratory 8.5
8 Medical supplies charged to patients 8.3
9 Radioisotope 7.2
10 Renal dialysis 6.5
11 Radiology-diagnostic 6.4
12 Drugs charged to patients 5.9
13 Emergency 5.7
14 Respiratory therapy 5.5
15 Recovery room 5.3
16 Operating room 5.1
17 Occupational therapy 5.0
18 Speech pathology 4.8
19 Labor room and delivery room 4.4
20 Implantable device charged to patients 3.6
21 Clinic 3.0
22 Physical therapy 3.0
23 Nursery 2.7
24 Intensive care unit 2.1
25 Inpatient General routine care 1.8

* Charge-to-cost ratio is the dollar charge for every $1 of actual patient care cost incurred by the hospital. For example, a ratio of 7.2 means a hospital charge of $7.20 for every dollar of actual patient care cost.

SOURCE: Authors’ analysis of data from Medicare cost reports and Final Rule Data obtained from the Centers for Medicare and Medicaid Services for 2013.

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