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Health Care Costs and Financing

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Hospitals profit less from privately insured patients than from Medicare patients and profit least from Medicaid and self-pay patients

Payments for patient care at U.S. hospitals generally fall into four groups: Medicare, Medicaid, private insurance, and uninsured. The payment rates can be more or less "generous" in relation to the hospital's cost of caring for the patient.

Since 2001, budget pressures and growing hospital costs have forced government at all levels to consider cutting payment rates for the publicly insured (Federal Medicare and State Medicaid programs). In a recent study, researchers examined hospital financial reports—with detailed accounting by the four payer groups—and found that hospitals profit less from privately insured patients than from Medicare patients, and they profit least from Medicaid and self-pay patients.

Bernard Friedman, Ph.D., of the Agency for Healthcare Research and Quality, and his colleagues developed a model to estimate hospital profitability by hospital and payer in four States using data from hospital accounting reports in FY 2000 and detailed hospital discharge summaries from AHRQ's Healthcare Cost and Utilization Project. They found the profitability of inpatient care for privately insured patients to be about 4 percent less than for Medicare patients but 14 percent higher than for Medicaid and only 9 percent higher than for self-pay patients.

The overall inpatient revenue for the four States was 102.5 percent of costs. After controlling for State and hospital characteristics, the privately insured group was slightly less profitable than the Medicare groups but still significantly more profitable than Medicaid or self-pay and charity patients. Self-pay patients were more profitable than shown in previous reports due to the effects of State and local budget allocations, as well as programs that redistribute payments from insurers and obtain Federal subsidies under the Disproportionate Share provision of the Medicaid program.

Patients with more generous payers typically received more resource-intensive treatment for problems such as pneumonia and heart attack. There were no spillover effects from the generosity of one payer to the resources used for patients in other payer groups. Differences in hospital profitability appeared to be driven more by hospital payer mix than other hospital characteristics.

For more details, see "New evidence on hospital profitability by payer group and the effects of payer generosity," by Dr. Friedman, Neeraj Sood, Ph.D., Kelly Engstrom, M.B.A., and Diane McKenzie, M.S., in the International Journal of Health Care Finance and Economics 4, 231-246, 2004.

Reprints (AHRQ Publication No. 04-R069) are available from the AHRQ Publications Clearinghouse.

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