Study: Hospitals charge more than 20 times cost on some procedures to maximize revenue

CT scans, anesthesiology departments have highest average charge-to-cost ratios, Johns Hopkins researchers say

Ge Bai (left) and Gerard Anderson

Image caption: Ge Bai (left) and Gerard F. Anderson

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

The study, which appears in the September issue of Health Affairs, notes that many hospital executives say the prices determined by an individual hospital for billable procedures and supplies—collectively called the hospital's "chargemaster" list— are irrelevant to patients.

However, the relation between chargemaster markups and hospital revenue, and the variation in markups across hospitals and departments, show that hospitals can still use 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," says lead author Bai, a Carey Business School assistant professor whose expertise is in accounting issues within the health care industry.

The average charge-to-cost ratios—which measure what the hospital charged compared to the actual medical expense—for different departments vary from a low of 1.8 for inpatient general routine care to a high of 28.5 for computed tomography, or 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."

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.

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 addition to examining charge-to-cost ratios by department, the authors also looked at the average hospital's charge-to-cost ratio overall. In 2013, the average hospital with more than 50 beds had a charge-to-cost ratio of 4.32—that is, the hospital charged $432 when the cost was only $100.

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.

Besides the setting of a cap on the maximum markup hospitals can charge, Bai and Anderson recommend two solutions to high markups:

  • 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.

  • 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," Bai says.

Adds Anderson: "We realize that any policy proposal to limit hospital markups would face a very strong challenge from the hospital lobby. But we believe the markup should be held to a point that's fair to all concerned—hospitals, insurers, and patients alike."