For-profit hospitals blamed for higher Medicare costs

David Strow

Thursday, Aug. 5, 1999 | 11:55 a.m.

For-profit hospitals drive up the cost of all health care for Medicare patients in their communities, a study found, contradicting arguments that they manage costs and services more efficiently than nonprofit hospitals.

Medicare spending in communities served only by for-profit hospitals grew faster from 1989 to 1995 than spending in areas served by nonprofits or a mix of both, Veterans Affairs and Dartmouth College researchers found.

The chair of the Nevada Senate's human resources and facilities committee told the Sun today that the state needs to start examining the profitability of for-profit hospitals in Nevada to see if such a situation exists in this state, and to find its causes.

"We do have a concern about the cost of hospital care," said state Sen. Ray Rawson, R-Las Vegas.

The study, published in Thursday's New England Journal of Medicine, looked at 3,436 hospital service areas -- some in rural areas with only one hospital, others in cities where residents could choose among half a dozen or more.

The authors of the study said Medicare spending grew nearly 50 percent faster in communities where hospitals converted from nonprofit to for-profit ownership.

The study found that average annual Medicare spending in communities served by nonprofits was $3,554 per elderly resident in 1989, compared to $4,006 in areas served by for-profits -- a gap of $452. Mixed areas fell in between.

By 1995, the gap had grown to $732, with average Medicare spending per person in nonprofit areas of $4,440 per year, compared to $5,172 in for-profit areas.

All hospitals have an incentive to maximize Medicare reimbursements, but administrators of for-profit hospitals face additional pressure "because they must respond to markets and shareholders," said Dr. Elliot Fisher, the study's senior author.

The gap doesn't surprise state Assemblywoman Ellen Koivisto, D-Las Vegas.

"I don't think there's any doubt that (for-profit) treatment methods are driven by the bottom line," Koivisto said. "But they see it (pricing reform) as a case of government telling businesses what to do. This is something that's going to have to come from a higher level than state government."

Rawson said the issues raised by the study would be something that he wanted the Division of Health Resources and Planning to examine further.

"I don't think profit is bad, as long at it's not excessive," Rawson said. "An issue we have to look at is to see if their profitability has changed. If they're (increasing their profits), we have an important interest in that."

Nevada's soaring hospital costs caused former Gov. Bob Miller to propose a law in 1991 that capped yearly charge increases at five of the state's largest hospitals, including Clark County's Sunrise Hospital and Medical Center, Desert Springs Hospital and Valley Hospital Medical Center. At the time, Nevada had the highest hospital costs in the nation. This year, Gov. Kenny Guinn proposed letting the caps expire, since they only dealt with billed charges. Only about 12 percent of Nevada patients pay billed charges; the remainder are covered by negotiated rates.

About 797 out of the 5,057 U.S. hospitals are investor-owned, and the rate of conversion from nonprofit to for-profit is increasing.

In Clark County, there are only two not-for-profit hospitals: University Medical Center in Las Vegas and St. Rose Dominican Hospital in Henderson. Koivisto said the two hospitals consistently charge the lowest rates in Clark County for most procedures.

One way that for-profit hospitals increase their Medicare reimbursements is by aggressively referring patients to nursing homes, rehabilitation centers and home health care agencies they own, said Dr. Steffie Woolhandler, a Harvard Medical School professor who co-wrote an accompanying editorial.

For example, an elderly woman who breaks her hip might spend seven days in a nonprofit hospital, then get outpatient physical therapy. But a for-profit hospital might keep her only two days, then transfer her to an affiliated rehab center for 12 days, Woolhandler said.

Both hospitals would collect the same amount of Medicare money for her hospital stay, regardless of its length. But the for-profit hospital would collect additional money for the time the patient spent in the rehab center, Woolhandler said.

One shortcoming of the VA-Dartmouth study is that the authors failed to adjust for the socioeconomic status of residents in the hospital service areas, said Jose Escarce, head of health care financing policy research at the RAND Corp. think tank.

"More affluent elderly people get more care" because they carry private Medigap insurance that allows them to take advantage of more supplemental services, Escarce said.

Rawson agreed, saying that patients in need of more critical medical services often have to go to for-profit hospitals, which are capable of more complicated medical procedures. "They're seeing the sicker patients, so that could be driving the costs up," Rawson said.

Carmela Coyle, senior vice president for policy for the American Hospital Association, which represents both for-profit and nonprofit hospitals, said the study also failed to account for other factors known to drive Medicare spending, such as regional variations in standards of practice.

However, the study's authors said they adjusted for the percentage of residents in urban areas, regional factors, and mortality rates.

The Associated Press contributed to this story.