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OSPIRG wants state to clamp down on hospital profits from commercial patients

High rates for commercially insured patients drive up premiums, report says
March 14, 2023

Oregon hospital systems have made excessive profits from patients who are covered by commercial insurance, and the state should ensure hospitals levy more modest charges that are closer to break-even point, says a study released on Monday by the Oregon State Public Interest Research Group.

Steep hospital charges translate into high insurance premiums for many of the more than 2 million Oregonians on commercial insurance, according to the report. That population includes private and public sector employees on large-group employer health plans as well as employees covered by small group plans, plus individuals.

The study focused on the pre-pandemic 2016-19 period, when Oregon hospitals were exceptionally profitable. During the pandemic, especially last year, many Oregon hospitals ran operating deficits. Focusing on 2016-19 "does not paint an accurate picture of the very serious financial challenges hospitals face," Lisa Goodman, a spokesperson for the Oregon Association of Hospitals and Health Systems, told The Lund Report. "Using four-year-old data prior to the pandemic to make assertions and policy decisions is irresponsible."

But it’s not news that hospitals and other providers charge commercial insurers more for the same services than they are allowed to charge for Medicare or Medicaid patients. Medicare and Medicaid reimbursement rates are largely set by government agencies and the insurance companies that manage these programs.

Hospitals and other providers have long argued that the amounts they receive for treating Medicare and Medicaid patients don’t cover actual costs, so they need revenues from commercially-covered patients to make up the gap. The widespread practice is known as “cost-shifting.”

But that unfairly burdens residents and employers who rely on commercial insurance, OSPIRG contends.

“The high amounts paid to hospitals contribute to the high price of commercial insurance — the insurance that people obtain through their employer or purchase directly for themselves. The expense of commercial insurance is a major financial burden on these Oregonians,” according to the report.

But Goodman said commercial insurers "play a significant role in determining the extent to which rising health care costs are passed on to consumers. Insurers in Oregon have generally remained profitable throughout the pandemic."

Mandated by the Oregon Legislature, regulators in recent years have launched a string of initiatives to try to dampen rising health care costs and make health insurance more affordable. OSPIRG wants lawmakers to accelerate that effort by raising the income levels to qualify for the Oregon “bridge” program proposed by health officials to provide more people above the financial cutoff for Medicaid with a Medicaid-like insurance plan.

When OSPIRG conducted the study, its data set ran only through 2019, said OSPIRG spokesperson Maribeth Guarino. The 2016-19 period followed the 2014­ expansion of Medicaid in Oregon, which reduced hospital charity-care expenses, and preceded the onset of the COVID-19 pandemic in 2020, which pushed down hospital patient revenues and drove up expenses. For 2022, many Oregon hospitals have reported operating losses due to slack revenues, high labor expenses and the expiration of federal COVID financial aid.­ They have asked for the state's help with the high cost of boarding hundreds of patients that other facilities, such as nursing homes and the Oregon State Hospital, won't accept.

But the OSPIRG study's point still stands, Guarino said. “We know that the pandemic, historically high inflation, and the workforce shortage pose serious problems for the health care industry right now, but these are an extreme set of circumstances that don't negate the fact that hospitals have generally been profitable,” she told The Lund Report.

The OSPIRG report noted that some of the state’s biggest hospitals had some of the biggest profit rates in 2018 and 2019. Legacy Emanuel Medical Center in Portland had an operating profit margin of 27% in 2019 and 26% in 2018; Providence St. Vincent Medical Center in Portland had margins of 27% in 2019 and 24% in 2018; and PeaceHealth Medical Center at RiverBend in Springfield had margins of 27% in both years, according to the report. In 2019, of the 55 Oregon hospitals that accept commercial insurance and were studied by OSPIRG, only one - tiny Pioneer Memorial Hospital in Heppner in Eastern Oregon — reported an operating loss, according to the report.

OSPIRG and its consulting firm calculated the operational break-even point for each hospital for its commercially-insured patients and found that 51 of the 55 hospitals charged the insurers more than what was needed to cover expenses. The break-even point figure included funds to cover hospital losses on uninsured patients, charity care, bad debt and insufficient revenues from Medicaid and Medicare, said Guarino.

“At those hospitals, payments made for care delivered to commercially insured patients were a median of 60% higher than their break-even amount,” the study said.

“In 2019, the 51 hospitals with commercial payments above their break-even amounts had a collective operating profit of $2.2 billion, with a median operating profit margin of 17%,” the study said.

“If hospitals charged an amount closer to the cost of providing care, total health care spending could be lower. Lower spending could potentially enable a reduction in premiums for commercial insurance and decrease financial pressures on consumers, while still enabling hospitals to cover their costs,” the report said.

One fix proposed by OSPIRG is for more Oregon residents to have an alternative to existing commercial health insurance. The proposed Oregon “bridge” program, subject of a state waiver application to the federal government, would be offered through the state’s coordinated care organizations, the government-funded insurance companies that cover the state’s roughly 1.4 million residents who are on the Oregon Health Plan, the state’s version of Medicaid. Hospitals would be paid about the same as they are for Medicaid patients. Even if the rate were set substantially above the Medicaid and Medicare rates, that would still represent a big savings for consumers, according to OSPIRG, which wants the program to be offered to more people at higher income levels.

Guarino said hospitals must still be able to earn a profit – just not as much as they racked up before the pandemic.

“Hospitals are a business and should earn a profit,” she said. But policymakers, employers and insurers should take a closer look at what hospitals charge commercially insured patients, “especially at hospitals where the payments are much greater than the operational cost — in some cases more than double,” she said.

Only two of Oregon’s 60 general hospitals are owned by for-profit corporations. Almost all the rest are non-profits, and a few are government-run. For these systems, surplus revenues — that is, profits — typically go into reserves that are held in stocks, bonds and cash. The reserves can generate investment income or can be used in future years to cover expenses. They also serve as assets against which the hospital system can borrow in order to fund capital projects. Because they are nonprofits, the hospitals can borrow at relatively low interest rates while the money they keep in reserves can produce higher rates of return -- at least if investment markets are strong.

Oregon hospital system investment portfolios boomed in the past decade, as hospitals salted away their record profits into the stock and bond markets, which rose dramatically.

"Any money (non-profit hospitals) make above what it costs them to provide services isn't paid to shareholders, but instead reinvested to make sure they have the workforce, equipment, and facilities they need to take care of their communities," Goodman said.

You can reach Christian Wihtol at [email protected].