What does the tool do?
The Hospital Cost Tool uses publicly available Medicare cost reports (MCRs), which hospitals submit annually to the federal government, to calculate the costs incurred for providing hospital services, as well as its payer mix and more. It answers key questions, including:
- What proportion of a hospital’s revenues comes from Medicare, Medicaid, and commercial payers?
- What percentage of the hospital’s patients are insured by Medicare, commercial payers, etc.?
Understanding the proportion of hospital revenue from different payers along with the percentage of patients covered by those payers provides a more complete picture of how the payer mix contributes to a hospital’s revenue. The tool also calculates how much the hospital needs to be reimbursed by commercial payers to break even. The tool can also answer additional questions, such as:
- How profitable is the hospital?
- How does the hospital charge compared to its costs?
- How much are in the hospital’s reserves?
What does “breakeven” mean and include?
“Breakeven” is an accounting term for the point at which revenues and expenses are equal. The breakeven point can help purchasers of health care services determine the appropriate baseline that covers a hospital’s costs for providing patient services. The Hospital Cost Tool accounts for the following in calculating the breakeven:
- The cost of providing hospital patient services to commercially insured patients, plus any costs not covered by public coverage programs, charity care, or uninsured patients.
- All Medicare-disallowed costs such as research, cafeteria expenses, and advertising. The tool excludes physician-direct patient costs because they are reimbursed separately from hospital reimbursements through other channels, such as fee schedules.
- Hospital non-operating income and expenses, such as parking lot receipts and loss on investments.
A hospital’s breakeven is calculated as a percentage of the hospital’s Medicare rates. By using the individual hospital’s Medicare rate, the tool’s breakeven measure considers the hospital’s acuity level, or the severity of its patients’ illnesses and level of attention needed from the professional staff.
The breakeven point can be compared to the RAND commercial price data point within the Hospital Cost Tool. NASHP worked with RAND to ensure its data within the tool is calculated using hospital service data only and does not include separate physician fee data, so the two measures are comparable.
Why is there a difference between the NASHP breakeven and the RAND commercial price paid data points?
The breakeven shows the amount at which a facility can cover its expenses for providing hospital services without a profit, while the RAND commercial price shows how much insurers pay for hospital services. So, the difference between these data points is the difference between what it costs to the provide the services and what insurers pay for them. For most hospitals, the RAND commercial price paid is higher, sometimes significantly, than the breakeven point, which is an opportunity for negotiating a different payment rate.
How can information from NASHP’s Hospital Cost Tool be used to reduce health care spending?
Purchasers can use the tool to better determine what their baseline reimbursement to a hospital could be so the hospital’s expenses for providing services are covered. Claims can then be run through a Medicare re-pricing tool to identify what is currently paid to each hospital as a percentage of Medicare. This information can aid purchaser negotiations with hospitals to achieve cost-based hospital reimbursement rates rather than rates that are discounted from a hospital chargemaster.
The Montana State Employee Health Plan pursued this reference-based pricing to Medicare strategy and reduced its hospital reimbursements, increasing the plan’s reserves by $112 million within three years, allowing the plan to increase its sustainability without increasing premiums. Additionally, this data can be used to investigate costly drivers of hospital claims across hospitals, when adjusted for utilization. Hospital cost data can also inform state pursuit of cost-containment strategies, such as cost growth benchmarks, global hospital budgets, or public options.
Won’t lowering hospital reimbursements risk decreased access to care?
Every hospital selected by Montana for its new cost-based rates eventually agreed to the policy. Plan members ultimately kept full access to their network of providers. Before the one holdout hospital agreed to join the network at the new rates, the plan paid for members to receive care at a nearby in-network hospital free of copays and coinsurance, covering gas mileage and a hotel stay if needed. Nurse care managers also re-routed care as needed. As a result, members maintained access to care during this brief time period. Importantly, there were zero hospital closures as a result of the change, which maintained the community’s access to care.
Don’t commercial prices need to be so high because government programs underpay hospitals?
The RAND Corporation’s study, Nationwide Evaluation of Health Care Prices Paid by Private Health Plans, found no correlation between a hospital’s prices and the share of its case-mix-adjusted Medicaid and Medicare discharges.
If the question’s assumption was true, hospitals with higher prices would likely have had higher shares of Medicaid and Medicare patients’ but that was not the case. NASHP’s Hospital Cost Tool allows purchasers to identify exactly what percentage of a hospital’s Medicare, Medicaid, and Children’s Health Insurance Program (CHIP) costs are reimbursed. The tool also shows what percentage of a hospital’s total charges are attributable to each program, and a hospital’s profit margin for all government programs collectively. The tool’s breakeven levels calculate what the commercial rates as a reference to Medicare would be if commercial payers covered any potential shortfalls from public payers or the uninsured. The RAND study can further inform purchasers as it shows commercial prices at hospitals across the country.
Further, several state leaders reported to NASHP that their state Medicaid program increased payments to hospitals and noted there was not a commiserate reduction to the commercial payment rate as a result.
Why address health care costs through hospital spending, particularly during a public health emergency?
Hospital spending is the largest health care expenditure in the United States. Combined with physician practices, which are increasingly being acquired by health care systems, hospital spending accounted for 53 percent of health care expenditures in 2018.
According to the Health Care Cost Institute, the main drivers of rising health care spending are price increases, not increased utilization. At a time of diminished state budgets and profitable health care entities, addressing hospital prices presents the most significant potential to reduce health care costs. Analyzing hospital cost data through the tool’s could free up much-needed state revenue while still appropriately covering a hospital’s costs.
For more information about health care costs, view the National Academy for State Health Policy’s Understanding the Health Care Cost Conundrum in 2020 slide deck.
For states seeking technical assistance: please contact hct@nashp.org.
