Hospital Financial Analysis

(A NineYear Study of the Annual Financial Reports of Nearly 400 California Hospitals) By David Belk MD and Paul Belk PhD


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As stated in the last section, hospitalizations are very expensive. Anyone who has ever had even a short stay in a hospital knows how enormous hospital bills can be. Next to the price of a house or a car, the cost of a hospitalization for any reason might appear to be one of the highest costs many people are ever likely to face. What’s interesting is that people usually have a good understanding of the costs of these other products (houses, cars, etc…). But people typically have very little understanding of the actual cost of a hospitalization or any idea of how much hospitals are really paid. This is because hospitals are normally reimbursed by insurance companies that have secret prearranged deals with most of these hospitals so insurance companies usually only pay a fraction of what they’re billed.

We may, however, have finally found a way to bring some transparency to the process of hospital finance. We recently discovered a very large data base that contains the complete financial records for all California hospitals going back to 2002. It’s called The Office of Statewide Health Planning and Development (OSHPD) and it posts annual financial reports that are provided by every hospital in California each year (example report).

(Glossary of Terms)

In an attempt to untangle the mysteries of hospital finance we decided to use these financial records to determine exactly how much money in health care actually went to all hospitals. To answer this question we analyzed the financial records of 387 California hospitals over a nine year period of time (2003-2011). We extracted the census and financial data from these reports and organized this data in order to show how each individual hospital performed over this period and then made a composite table to show how all hospitals performed each year as an aggregate. Our goal was to discover how many people are being hospitalized each year, how much money is actually going to hospitals in California, at what rate is that amount increasing and to shed some light on how the process of hospital finance actually works.

This study included financial reports from nearly every hospital in California from major university hospitals to small community hospitals, public hospitals, private for profit and non profit hospitals and even some rehabilitation facilities. The study also included 23 Kaiser hospitals that were used for census data only. Kaiser doesn’t charge its patients extra for hospitalizations so their hospitals have no financial data to provide. All financial data was taken from the 364 remaining non-Kaiser hospitals in the study. (The original extracted data is here but beware, it’s an enormous spread sheet.)

I think you’ll find much of what we uncovered is rather interesting and is contrary to what most people would expect. To begin with, we’ll talk about how many people are being hospitalized:

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Figure 1

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Figure 2

Figures 1 and 2 show the total census for all 387 hospitals combined for each of the nine years of the study (Figure 1) as well as the census for Medicare patients only (Figure 2). Hospital census is measured in patient days meaning the number of patients admitted to the hospital each year times the number of days each patient spent in the hospital. For example, if a hospital admits 10,000 patients in a year and each patient stays in that hospital an average of four days that’s 40,000 patient days for that hospital.

As you can see from Figure 1, the total census for all hospitals was about 18.7 million patient days in 2003. This number increased slightly to just over 19 million by 2008 then dropped rather sharply (about 5 % total) to just over 18 million by 2011. This corresponds with a drop in the average occupancy rate for these hospitals. In 2003 hospital had an average of 63% of their beds full each day but by 2011 it was just under 58% meaning that nearly one in two hospital beds were empty any given day in 2011.

These graphs are interesting because, even though the population in California had increased by about 2 million people (about 6%) during the time of the study and aged about two years (median) there were fewer people in California hospitals in 2011 than in 2003. This probably isn’t because so many people lost their insurance in the recession of 2008 either. The census for Medicare patients during this period dropped as well (Figure 2). Medicare only insures the disabled and people over 65 so no one loses their Medicare because of a recession.

The fact that were fewer people in all California hospitals in 2011 than in 2003 is also interesting because it seems to conflict with the story that healthcare costs are skyrocketing. If fewer people are in the hospital why are hospitals getting so much money? while you’re pondering that question, we’ll move to an analysis of hospital billing since this study is really about money and not hospital census.

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Figure 3

Figure 3 shows the total amount all hospitals in this study billed for all of the services they provided. That includes hospitalizations, surgeries, ER visits, X-rays, blood tests… everything. In 2003 the total amount all 364 non Kaiser hospitals billed (remember Kaiser doesn’t charge their patients extra for these services) was a little more than $146 billion. That amount rose steadily to about $289 billion by 2011 which is just about double what all hospitals in the study billed in 2003. OK, that’s a lot of money but, if you know anything about hospital finance, you would know hospitals never get anything close to what they bill. They usually receive only a small fraction. In order to understand this process better let’s take a close look at what hospitals don’t get. We’ll start by itemizing all the free care they give.

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Figure 4

Figures 4 shows the total amount of charity care all 364 hospitals provided each year when compared to total amount they billed. In 2003 all of the hospitals in the study forgave a total of about $1.9 billion of billed charges for charity care or about 1 1/3 percent of what they actually billed. That amount rose somewhat to a total of just over 2 percent by 2011 or just over 2 pennies for every dollar billed. From these figures it would be hard to argue that charity care was breaking most hospitals. To be fair, there were a few hospitals that forgave nearly eight percent of what they billed for charity in certain years (example) but, most hospitals didn’t, and many of the largest hospitals never forgave much more than one percent of what they billed as charity (examples).

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Figure 5

Figure 5 shows how much money all 364 hospitals lost to bad debt. We’ve all heard the stories of the uninsured showing up at the ER, getting medical treatment then disappearing without paying a thing, right? Well, how much of a problem is this for hospitals? According to the financial reports, and remember these reports are filled out by people the hospitals themselves employ, all 364 hospitals lost a combined total of about $2.6 billion in bad debt or about 1.8 percent of what they billed in 2003. That percentage dropped slightly by 2011 to 1.65 percent of what they billed. Again in fairness, there were hospitals that lost over ten percent of their revenue to bad debt some years but, these were very few which is why it’s important to do a composite study like this rather that relying on anecdotes.

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Figure 6

So, after subtracting the bills that went unreimbursed because of charity and bad debt, hospitals were still able to collect on slightly more than 96% of the bills they issued each year of this study (Figure 6). How much did they collect? Again, if you know anything about hospital finance you would know that hospital bills are almost never paid in full. Most of the time only a small fraction of what’s billed is paid by any payer. The rest of the bill is discounted (i.e. completely ignored) by the payer in a process called a contractual adjustment. For a clear explanation of exactly how the adjustment process works, please watch this three minute video.

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Figure 7

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Figure 8

Figures 7 and 8 show the total amount adjusted as well as the average percent adjusted from all billed charges that were paid each year of this study. In 2003 about 72 percent of the charges in the paid bills was adjusted out resulting in about $102 billion in discounts that Medicare, MediCal and private insurance companies gave themselves. That amount and percentage rose steadily each year so by 2011 about 75 percent of all paid charges were discounted for a total of more than $208 billion! Put another way, in 2011 hospitals in California billed an average of four times what they expected to be paid by all payers.

Does this seem a little strange? Well, it’s a little like this joke: A guy walks into an auto dealer and sees the car he wants to buy. But when he looks at sticker price, he says, “$80,000 for this car?! It’s a Honda Civic!” The dealer says, “Don’t sweat it, I’ll let you have it for $20,000.” The guy says, “Done. But why put four times the real price on the sticker?” The dealer says, “Hey, that way you get to tell people you’re driving an $80,000 car.” “Oh,” the guy says, “but what do you get out of it?” Here, the dealer gets close and whispers: “yesterday, another guy came in, and he needed the car so badly we got him to shell out the full 80K.”

OK… that doesn’t sound very funny. Let’s put it a different way: The dealer (asking $80,000 for a $20,000 car) is the hospital. They’ll claim they gave you $80,000 worth of care. The buyer is the insurance company. They’ll also claim you got $80,000 care (for your premiums) even though they knew it would only cost $20,000. And since it’s medical care, not a car, you’ll never know how much they inflated the price.

And here’s where it’s really not funny. The poor guy who really paid $80,000 because he needed the car so badly: that’s the guy who doesn’t have insurance, but ended up in the hospital because he was having a heart attack. He’ll pay, out of his own pocket, 4 dollars for every dollar of care he gets, all so the hospitals and the insurance companies can pretend medical care is way more expensive than it actually is. If you’re uninsured, you’ll be lucky if you can talk most hospitals into a 20-30 percent discount (if you even know enough to try).

It doesn’t end there either. Because reimbursement rates differ substantially for different insurance policies, even for the same procedure in the same hospital, many people who have insurance can be caught in this trap. For example, people often pay considerably more for medical services if they have high deductible policies or HSA accounts. Since most people aren’t told up front how much a medical service will cost them, they won’t know what kind of deal their insurance got for them (or if their insurance got them any deal at all) until they get their bill.

What’s more, the amount adjusted from each bill can vary widely for the same payer in different hospitals. Some hospitals had only 40-50 percent average adjustments meaning they billed an average of only about twice what they expected to be paid (example). Other hospitals had as much as 85 percent average adjustments or more some years, meaning they billed an average of six or seven times what they really expected in payments! Try to think of how many ways a system like this can be used to abuse you.

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Figure 9

So, after all of the deductions from adjustments and free care provided, how much money did all of the hospitals in the study actually receive each year? Figure 9 shows the total revenue all 364 hospitals received for all of the medical services they provided each year as well as the total amount they billed (for comparison). In 2003 the total amount all hospitals in the study were actually paid was just over $47 billion or just under 1/3 of what they billed. By 2011 that amount rose to about $79 billion or just over 1/4 of what they billed. (In addition to what they receive from billing, some hospitals also get a fixed amount each year from insurance companies called a capitation. The Federal government will also pay a bonus to some hospitals for taking care of a disproportionate amount of poor or indigent patients. These were added to our figures for total revenue.)

That’s still a lot of money but it should be noted that the rise in actual hospital revenue was not quite as steep as the rise in billed charges. Though hospitals billed for about twice as much money in 2011 as they did in 2003 they only received 68 percent more money in 2011 as they did in 2003. That averages to about a 6.8 percent annual increase in hospital revenue each year which is far less than the double digit increase in health care costs insurance executives keep telling us about.

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Figure 10

Figure 10 shows the percent of their actual revenue all 364 hospitals paid in malpractice premiums each year. In 2003 all hospitals in the study paid a combined total of just under $488 million in malpractice premiums. That’s just over one percent of their actual revenue! By 2011 hospitals were only paying 0.63 percent of their revenue in malpractice premiums. That’s right; medical malpractice only costs California hospitals a fraction of a percent of what they make each year. If we really did shoot all lawyers it would barely affect health care costs in California at all!

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Figure 11

So, if hospitals only receive a fraction of what they bill, does that mean they barely get enough money to keep the lights on? Well, not exactly. Figure 11 shows the total amount all 364 hospitals made each year in net profit. In 2003 it was about $3.26 billion or an average of just under $9 million per hospital. By 2011 that amount rose to $5.8 billion or an average of nearly $16 million per hospital.

These profits are interesting for a number of reasons. First, the majority of the hospitals in this study are non profit. This means they don’t have to pay any taxes on the $16 million average profit they weren’t supposed to make. Second, it’s obvious from these profits that hospitals have little reason to ever expect to receive any more than a small fraction of what they bill. That they do sometimes receive a substantial fraction of what they bill, and it’s usually from the uninsured who are often the most vulnerable financially, makes this system all the more ludicrous.

Clearly, even though hospitals collect an average of only 27 cents for every dollar they bill, there’s more than enough money to go around. One problem is, the money is not going around. Though some hospitals are making profits of hundreds of millions of dollars a year, many are barely able to stay afloat. As figure 12 shows (below) an average of just over 100 hospitals had a net loss each year of the study and there were a total of 91 hospitals that recorded a net loss overall (i.e. total of profits plus losses for all years was negative). In fact, there were eleven hospitals in this study that lost money each and every year of the study (and yet are still open for some reason).

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Figure 12

Conclusions

Our goal for this study was to provide some transparency to the finances of California hospitals. We know of no other database for hospital financial records outside of California that is as extensive as the OSHPD which is why we focused entirely on that State. Even so, California is by far the most populated State in the United States. Fully one in eight people in the U.S. live in California and since the majority of hospitals in California were represented in this study, we feel that much of this data can be generalized to represent what’s happening in hospitals nationally.

There were a number of interesting findings presented here. First, the number of people being hospitalized each year appears to be declining. This is occurring in spite of the fact that the overall population in California is growing (it increased by about 2 million people between 2003 and 2011) and aging (the median age in California increased about 2 years during that period). As a doctor, these results didn’t surprise me so much since I wrote an essay about two years ago itemizing the reasons fewer people were being hospitalized each year. In short, medicine has become far more efficient and the criteria for hospitalizing someone has become far more strict in the last two decades. This has resulted in fewer reasons to hospitalize people as well as shorter stays for those who are hospitalized.

It’s difficult to say whether hospitals will continue to admit fewer patients each year given our aging and growing population. The fact that most hospitals are nearly half empty most days implies there are probably too many hospitals in California already but, for some reason, the hospitals in this study have actually increased their number of beds.

This study also helped to define the extent to which hospitals routinely over bill for their services. This over billing has been a problem for many years and, as we demonstrated, appears to be growing. It might not be such a problem if the discounts given were more evenly distributed but they’re not. Reimbursement rates very widely for different insurance plans for the same service, even in the same hospital. Since there appears to be no reason for hospitals to get more revenue than they already are getting, given their profit, why are hospitals billing so much?

The amount of free care hospitals provide is hardly an excuse for these excessive bills. Even the hospitals that provided the most charity or took the largest bad debt losses didn’t lose more than about 15% of what they billed for free care (and that was rare). How does that justify an average 400% mark up in billing? The cost of medical malpractice in California also doesn’t seem to be a factor. None of the hospitals in the study ever spent more than three percent of their revenue on medical malpractice and most spent less than one percent each year on this.

Hospital over billing leads to a lot of confusion about the cost of the services in health care and can often place an unfair financial burden on the people who need them. This doesn’t just harm the uninsured either. This system has led to some very unfair practices by both hospitals and insurance companies even for those who have insurance. And, as these recent news articles show, even doctors and financial executives have been caught off guard by the games insurance companies and hospitals play. This recent LA Times article shows how insurance companies have found ways to punish people with high deductible policies by getting them to pay hospitals more than even the uninsured pay.

Over billing isn’t just a problem because of the uneven and unfair reimbursement rates either. It also leads to a grossly inflated perception of health care costs. The billing charges by hospitals are what we’re usually shown when insurance companies are trying to justify their outrageous premiums even though they’re supposed to have no basis in reality.

When analyzing hospital profits there were a number of interesting findings as well. First, the total profit for all hospitals was quite substantial (nearly $34 billion over nine years) but about 90% of this net profit was brought in by roughly 1/4th of California’s hospitals. The Top 90 most profitable hospitals in California made nearly $30.5 billion in aggregate profit while the bottom 91 hospitals took a net total loss of about $3 billion. So even though the total profits for all hospitals was quite large the individual profits were often modest and sometimes non existent for the majority of California hospitals.

Finally, one of the most unexpected, and rather bizarre findings of our study was the fact that many of the most profitable hospitals in California were public (charity) hospitals. Of the 96 hospitals that brought in more than $100 million in profit over the nine years, ten were County Hospitals. Again, these results are from the hospitals’ own financial records and we can only comment on the information they’ve provided us. The hospitals include:

1) Los Angeles County Medical Center which earned $1.061 billion in profit. This was the fourth highest overall profit for the State of California!

2) Alameda County Medical Center (aka “Highland Hospital”) which earned $776 million in profit, which was the sixth highest in California.

3) Olive View/UCLA which earned $606 million ranking it fourteenth in the State.

4) Arrowhead Regional Medical Center earned $567 Million (ranked seventeenth)

5) Harbor/UCLA earned $444 million (ranked 24rd).

6) Riverside County Regional Medical Center earned $387 million (ranked 33rd).

7) Contra Costa Regional Medical Center earned $210 million (ranked 49th)

8) Rancho Los Amigos earned $192 million (ranked 56th)

9) Ventura County Medical Center earned $132 million and

10) Kern Medical Center earned $115 million in profits

These profits appear to be largely the result of money the State and Federal government give the public hospitals. This money was meant to cover the losses charity hospitals inevitably face but, in recent years, it has probably been too much. We might argue that no hospital should really be making much of a profit. After all, even if the financial balance for a hospital is zero at the end of the year everyone at the hospital still gets paid. As long as a hospital makes just enough money to adequately treat patients and pay all of its bills, why should it need to make a profit?

That said, I think everyone will agree that county hospitals above all should not be making huge profits. This is especially true when the profits are entirely at the expense of the taxpayer. Even though public hospitals will inevitably need at least some assistance from the State, the amount of assistance clearly needs to be re-examined.

It would be impossible to address in one analysis every potential issue that might be brought up by a study this vast in scope. The few issues we chose to focus on here were intended to make one point completely clear: Health care in the U.S. is broken. And nowhere is it more broken than in the ways in which we finance our hospitals. Hospital finance in the U.S. is a system which allows both insurance companies and hospitals to randomly and arbitrarily victimize unsuspecting people on a daily basis. It’s a system that puts millions of people one disease away from financial ruin even if they have insurance and it’s a system filled with so many complex and convoluted rules, as well as arbitrary traps, that even doctors can’t avoid falling victim to them at times.

As long as so many hospitals and insurance companies can continue to amass huge fortunes through obscuring real prices and confusing people there will be a tremendous resistance by them to any type of change. They’ll use fear, confusion and intimidation any chance they can to fight any kind of reform. Our best weapon against these abuses is knowledge which is why we conducted this study. If we know and understand exactly what their games are we can call them out for their deceptions. Then, when we demand real reform to the actual problems that plague our current health care industry we won’t be thrown off track by lies and obfuscations.