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Michigan slips in hospital-payment ranking as health systems also face rising costs

May 19, 2022

By MARK SANCHEZ, featured in MiBiz

Michigan slipped six spots in RAND Corp.’s latest analysis of what hospitals in the U.S. charge private health insurers compared to what they receive from Medicare.

The state ranked eighth in the RAND 4.0 Hospital Price Transparency Study commissioned by the Employers Forum of Indiana. The study analyzed prices between 2018 and 2020 and compares costs to the Medicare rate hospitals are paid.

In RAND’s previous report two years ago, Michigan ranked second nationally for what self-insured employers and health insurance carriers paid hospitals compared to the Medicare rate from 2016 to 2018.

The fourth iteration of the RAND report shows that private insurers and self-insured employers paid Michigan hospitals 203 percent of, or more than double, the Medicare rate for inpatient and outpatient care combined from 2018 to 2020. That compares to 156 percent of Medicare payments in the prior RAND’s analysis two years ago.

Payments to Michigan hospitals for inpatient care increased 219 percent from the prior 153 percent of the Medicare rate during the same period, and outpatient care increased to 182 percent from 161 percent.

While state and national trade associations for hospitals challenge the RAND data as offering an incomplete picture of costs and pricing, the business-labor coalition Economic Alliance for Michigan worries that the latest report indicates Michigan is losing a competitive advantage over other states when it comes to health care costs.

When weighed against neighboring states such as Indiana and Ohio, the comparatively lower costs in Michigan have been “a real difference maker” when seeking to lure business investments with a “good value proposition,” Economic Alliance for Michigan President Bret Jackson said.

“This is really alarming,” Jackson said. “We’re getting closer to the pack, and that’s not something that helps Michigan stand out.”

Hospitals dispute findings

Hospital trade groups have criticized prior RAND reports for allegedly basing conclusions on limited data. RAND’s latest analysis used information on payments to more than 4,100 hospitals in 49 states and the District of Columbia.

While some advocates say Medicare payment rates are a good benchmark for reimbursement payments to hospitals by private insurers, industry groups counter that they do not reflect what it actually costs hospitals to provide care.

Brian Peters, CEO of the Michigan Health & Hospital Association, said the RAND report makes “very broad claims about pricing based on a cherry-picked data set.” 

Basing an analysis on Medicare as a benchmark “falls short,” Peters added.

“So it’s not a comprehensive set. It’s looking very specifically at Medicare reimbursement rates, which we know in Michigan and other states as well does not cover the true cost of care,” he said. “Hospitals do everything they possibly can just to break even, at best, and still lose money on Medicare.”

Peters notes that rates Medicare and private insurers pay are subject to negotiations and that hospitals’ ability to pass on higher costs is “extraordinarily limited,” even at a time when costs are rising rapidly, particularly for labor.

Even with those concerns about the report’s methodology, Peters said Michigan “looks very good in contrast to the rest of the country when it comes to hospital costs and the underlying costs of the care we provide.”

“In other words, our hospitals are paid far less here in Michigan by commercial insurers than they are in Indiana, just across the border. That’s been the real point this group has made, which is: ‘Gee, why are our costs so much higher here in Indiana than they are in other states, including our neighbors in Michigan?’” Peters said.

Private health insurers and self-funded employers in Indiana paid hospitals 292 percent of the Medicare rate from 2018 to 2020, according to RAND.

Jackson worries that similar price and cost increases will continue, particularly with the financial pressures on hospitals from the COVID-19 pandemic and labor shortage that have driven up wages.

“There’s no reason to expect the trend would not continue to go up and up and up,” he said. “That’s really problematic for Michigan companies. It will definitely have an impact on their bottom lines.”

Rising costs

Jackson also asserts that some hospitals took advantage of Michigan’s comparatively favorable costs to other states in prior RAND analyses and raised prices. Peters rejected the claim, saying hospitals are “absolutely not” profiteering and face rising costs for labor, supplies and drugs.

Peters points to an April American Hospital Association report that showed labor costs at hospitals nationwide through 2021 increased 19.1 percent over 2019, and median drug expenditures were up more than 28 percent from pre-pandemic levels.

The cost for supplies increased 15.9 percent from 2019 through the end of 2021, according to the AHA.

Health care consulting firm Kauffman, Hall and Associates LLC reported two weeks ago that labor costs at U.S. hospitals increased 37 percent between 2019 and March 2022. Much of the increase came from higher contracted labor costs, which grew from 2 percent of all labor expenses in 2019 to 11 percent so far in 2022, according to the firm’s monthly report on hospital finances.

Hospitals’ higher costs will eventually transition to even higher premiums that employers and employees pay for health insurance coverage, said Scott Lyon, senior vice president for the Small Business Association of Michigan.

“That is a precursor to what’s going to show up in our members’ premium rates in the coming years,” Lyon said.

The rising costs could accelerate the steady migration for years in health care toward value-based contracting, where health insurers pay care providers and reward them based on quality and efficiency. Care providers in turn take on greater financial risk for the medical outcomes they generate.

A potential “couple rough years” of price and cost increases hopefully can lead to “some new initiatives that will help tame those price increases” in the next few years, Lyon said. The situation could factor into future negotiations over reimbursement contracts between hospitals and health insurers, he added.

“We have to put our faith in insurance carriers to negotiate on our behalf,” he said. “Here’s additional pressure coming at Blue Cross, HAP (Health Alliance Plan), Priority Health — name the carrier — that they’re going to have to deal with.”

Jackson said employers, especially those that self-fund their health benefits, need to do more to pressure hospitals to contain costs and avoid price increases.

“We have the leverage. We need to take control and use that leverage to demand affordability,” he said. “Michigan union and employer purchasers, health plans, and policy makers need to come together to address these prices and ensure safe and cost-effective health care to Michiganders.”

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