WSJ – Feb. 5, 2022
High-Priced Hospitals in Indiana Press Their Political Luck
If the state’s big nonprofit health systems can’t find a way to control prices, legislators will.
By Al Hubbard and Brian Blase | 808 words
When most people hear the word “nonprofit” they think of a benevolent organization driven by a desire to serve the community. This is certainly true of the public’s perception of nonprofit hospitals, which—like charities and churches—don’t pay federal, state and local taxes. Yet many large nonprofit hospitals charge unjustifiably high prices, which have led to irresponsible costs, exorbitant executive salaries and wasteful capital projects.
According to a Rand Corp. analysis, hospital prices in Indiana are an estimated 3.4 times as high as Medicare rates and the fifth highest in the country. A Harvard study estimated Indiana’s hospital prices are 3.6 times Medicare rates and the third highest in the country.
High hospital prices increase the cost of insurance. Every dollar an employer pays for employee health insurance is one less dollar for wages and to hire more people. If Indiana’s hospital prices were to drop to the national average, family income could rise by as much as $2,500 a year. For Indiana’s hospital prices to be at the national average, all else being equal, they would need to decline by more than 20%.
Indiana University Health, the state’s largest hospital system, has the highest prices—about 50% above the national average. Other large nonprofit hospital systems in the state, particularly Ascension Health, Community Health Network, Franciscan Health and Parkview, are also well above the national average. The small, independent and largely rural hospitals in Indiana charge prices below the national average.
High hospital prices have produced massive profit margins. Between 2015 and 2019, large nonprofit hospital systems in Indiana averaged double-digit margins—well above the 3% national average. IU Health averaged a 14% profit margin and at the end of 2020 had $7.8 billion in cash and investments and $7 billion in annual revenue.
While hospitals are posting record-breaking margins, so are health insurers. This may seem odd, since hospitals and insurers are often on opposite sides of the negotiating table. But insurers lack incentives to reduce spending, especially when the largest carrier faces little competition. Perversely, an ObamaCare provision intended to limit insurer profits creates an incentive for higher spending. Since the law caps profits and overhead as a percentage of premiums, insurers can make more money if they spend more.
Misguided government policy causes other significant problems in healthcare markets, principally the reliance on third parties—insurers and government—to pay most healthcare bills. By overly subsidizing third-party payment, government policy has reduced Americans’ ability and incentive to be price-conscious consumers of healthcare services.
Compounding the lack of consumer incentives to shop for healthcare, most consumers follow the advice of their doctors. This can be a problem if doctors’ incentives work to reduce competition and push up overall spending.
In Indiana, insurers pay doctors’ fees that are the fourth lowest in the country. This increases hospitals’ ability to buy physician practices; they can attract doctors with a portion of the payment from the high fees that insurers pay hospitals. In Indiana, insurers report that more than 70% of doctors are employed by hospitals, compared with the national average of about 50%. As doctors become hospital employees, competition declines. Doctors tend to refer patients within the hospital system employing them.
Rep. Todd Huston, speaker of the Indiana House, and Sen. Rod Bray, president pro tempore of the state Senate, have called for Indiana hospitals and insurers to present a plan within three months that will reduce hospital prices to the national average within three years. Absent a viable plan, they have promised to pursue legislation to reduce prices. While there is a role for government—increasing transparency to help consumers shop and getting rid of policies that restrict competition and discourage shopping—hospitals and insurers should also step up.
IU Health had already agreed to reduce its prices to the national average before the legislative leaders’ call. Other high-priced Hoosier hospitals should follow suit. The best community benefit those hospitals can provide is delivering quality care at affordable prices.
Indiana’s hospitals have a choice. They can reduce their margins, trim excessive reserves and lower prices. Or they can fight to protect a status quo that produces unjustified profits. If they choose the latter, it’s only a matter of time before government steps in and controls prices.
Joe Biden was the only Democratic presidential candidate not to support a single-payer health system. Single payer would damage healthcare quality and destroy the hospital industry over the long term. If hospitals are prudent, they will take sensible steps now to prevent that from happening.
Mr. Hubbard is chairman of Hoosiers for Affordable HealthCare and served as director of the National Economic Council under President George W. Bush. Mr. Blase, who served as a special assistant to President Trump at the National Economic Council, is president of Paragon Health Institute and policy director for Hoosiers for Affordable HealthCare.
The Wall Street Journal