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Consumer-driven Health Care and Hospital-specific Costs: Understanding the Data

Dr. David Guzick, M.D., Ph.D.

July 21, 2006

On June 27, 2006, the Democrat and Chronicle ran a story about local hospital charges, indicating that charges for such conditions as heart failure, hip replacement, hysterectomy and gall bladder surgery were highest at Strong Memorial and Highland Hospitals.  There have been few D&C stories about which I have been asked more questions, whether in the hallways of the Medical Center or in the community.

What's going on?  Are Strong and Highland really high-cost hospitals in an apples-to-apples comparison?  The answer is a resounding "No."   Indeed we are among the most cost-efficient academic teaching hospitals nationally, ranking virtually the lowest in cost among members of the Council of Teaching Hospitals.  In this newsletter, I will try to explain the apparent inconsistency, focusing on the difference between "charges" and true price, and on the nature of the cost structure in a major University-based teaching hospital.

First, some comments on the origin of interest in this topic may provide useful background.  As many of you know, there is a movement for "consumer-driven health care."  Indeed, this was a centerpiece of President Bush's last State of the Union message.  Some features of consumer-driven health care that, in my opinion, have real promise include the establishment of individual health savings accounts (HSAs) using pre-tax dollars, tax credits for low-income purchasers of health insurance and for small businesses that contribute to the HSAs of employees, and access to transparent information about providers, including cost and price.  On the downside is the potential for adverse selection: employees who choose to enroll in lower-premium, high-deductible plans, saving some pre-tax money in HSAs, will tend to be those who are well, leaving the sick to pay ever high premiums for traditional low-deductible policies. 

Len Shute
Len Shute, CFO of Strong Memorial and Highland Hospitals

But that is a subject for another newsletter.  The focus here is on the notion of cost transparency.  Sounds good, right?  As always, however, a good idea might turn sour if the data are misinterpreted.  And that is exactly what happened in the case of the report on hospital charges.

I am indebted to Len Shute, CFO of Strong Memorial and Highland Hospitals, for the data and analysis that follow.  This is a slightly edited text of a document that he prepared to explain the issue.

Data pertaining to "price transparency" in hospitals is usually gathered by comparing the cost of care received at different hospitals. This information, usually procedure-specific, is typically based on publicly accessible Medicare reimbursement rates or "charges." 

Large, urban, and teaching hospitals typically have higher prices (and costs) than smaller, rural, community hospitals, even when adjusted for case mix and wage indices.  At the University of Rochester Medical Center hospitals, Len and his team establish charges based on our costs and also on a consideration of benchmark data of local, regional and national peer institutions.  Since factors such as teaching commitments, Medicaid volume and charity care obligations drive up cost, the costs at academic health centers (such as Strong Memorial Hospital and Highland Hospital) are nearly always higher when compared with local community hospitals.  These higher costs are reflected in our relative charge levels.

It is important to understand that only a very small percentage of patients actually pay the full "charge," however.  This is done in different ways for different groups:  Third-party payers generally negotiate a discount on charges; government payers set their own payment rates independent of charges; and uncompensated care programs nearly always step in to offset the cost of care for those with no or inadequate insurance. 

The recent Democrat and Chronicle article highlighted charges associated with several procedures.  As expected, and as noted in the article, when compared to the local community hospitals, Strong's charges are generally higher.  The following tables are illuminating, however, in broadening the comparative group to other regions in New York State as well as several other academic health centers (AHCs) where we have data on those same procedures.  Finally, we also have a comparison of our overall per-case costs against other AHCs.

According to a recent report from Citizen Action, a state-wide advocacy group, the mark-up of charges relative to costs in Rochester hospitals is the lowest in the state.  This indicates that our charges are not excessive relative to our costs.

Strong Memorial Hospital

Charges are 1.7 times the actual cost of care

Rochester General Hospital

Charges are 1.6 times the actual cost of care

Park Ridge Hospital

Charges are 1.6 times the actual cost of care

Highland Hospital

Charges are 1.3 times the actual cost of care

Lakeside Memorial Hospital

Charges are 1.8 times the actual cost of care

Statewide average

Charges are 2.3 times the actual cost of care

Using the same procedures in the recent Democrat and Chronicle article, compared with hospitals in the other upstate communities, charges from Rochester's hospitals, including Strong, are considerably lower, according to data from the SPARCS database (Democrat & Chronicle source).

 

Heart Failure

Hip Replacement

Vaginal Delivery

Hysterectomy

Gall Bladder Removal

Albany Medical

$16,413

$21,426

$5,521

$11,156

$11,745

Buffalo General

$10,876

$31,178

N/A

$14,007

$18,154

Crouse Irving

$12,167

$17,342

$4,603

$8,036

$8,752

Millard Fillmore

$10,341

$26,726

$3,299*

$12,554

$15,778

SUNY Upstate

$9,521

$19,200

N/A

$11,540

$11,234

Upstate Average

$11,864

$23,174

$4,474

$11,459

$13,133

 

 

 

 

 

 

Highland Hospital

$6,359

$18,224

$2,651

$7,343

$8,347

Park Ridge

$7,484

$12,970

$2,495

$4,784

$6,539

Rochester General

$8,011

$15,618

$2,345

$5,963

$8,081

Strong Memorial

$8,349

$16,367

$3,692

$7,294

$9,156

Rochester Average

$7,551

$15,794

$2,796

$6,346

$8,031

* Millard Suburban

When Strong Memorial Hospital is benchmarked with peer academic medical centers, the charge comparison becomes even more striking.

 

Heart Failure

Hip Replacement

Hysterectomy

Gall Bladder
Removal

Johns Hopkins

$12,385

$28,862

$18,113

$15,299

Strong Memorial

$8,349

$16,367

$7,294

$9,156

University Hospitals of Cleveland

$9,849

$24,831

$16,132

$30,491

University of Pittsburgh

$29,253

$64,724

N/A

$74,242

Yale-New Haven

$20,595

$40,049

$27,758

$22,425

*Comparative data on vaginal deliveries is not available.

Moreover, as noted earlier, when adjusted for severity and relative wages, Strong Memorial ranks 89th lowest in cost out of 92 academic medical centers ranked by the AAMC. 

 

Wage and case mix standardized expense-per-adjusted-discharge

Rank

Barnes-Jewish

$8,491

43rd lowest

Duke University Hospital

$6,909

78th lowest

Massachusetts General

$6,828

80th lowest

Ohio State

$7,443

68th lowest

Strong Memorial Hospital

$5,759

89th lowest

University Hospitals of Cleveland

$7,290

72nd lowest

University of Pittsburgh

$7,577

63rd lowest

Vanderbilt

$8,077

55th lowest

*Source: Council of Teaching Hospitals and Health Systems Survey of Hospital Operations & Financial Performance, 2004. 

The simple conclusion to be drawn here is that when compared to the local community hospitals, our charges are relatively high.  When benchmarked against virtually every other comparison group, however, we are invariably at the very low end.  Following is a discussion on the reasons for these inconsistencies.

Why are Strong's and Highland's costs-per-discharge so reasonable compared with national peers?
Strong Memorial, despite its role as a tertiary and quaternary regional referral center, runs at a high level of efficiency.  Highland Hospital, despite its status as a University-affiliated hospital with significant teaching, is also highly efficient.  Due to a historically adverse reimbursement environment in New York State, operating at a high level of efficiency is a necessity in order to maintain profitability.  However, when costs are broken down into direct patient care costs (variable), we are not dramatically different.  In terms of overall low case costs, what sets Strong apart, and for that matter, all Rochester hospitals, is the extremely high occupancy rates.  Rochester hospitals routinely run over 90% occupancy, as compared to an average of 60% in the rest of the country.  The obvious impact is very low fixed costs per case.  Combined with efficient operations, we compare very favorably in our overall unit costs.

Why are Strong's and Highland's costs higher than those of a community hospital?
A number of factors make it difficult to compare Strong's costs with those of community hospitals, including:

  • As the region's major referral center, Strong is the sole provider of many quaternary services – such as trauma and transplant.  The infrastructure, in terms of technologically advanced equipment, facilities, nursing staff and faculty leadership, needed to support these unique programs is not incurred in community hospitals.  It does allow the community to receive virtually all services locally, however.
  • As major teaching hospitals, Strong and Highland pay $42 million annually in faculty salaries and benefits.  Strong must compete nationally for the best faculty talent in order to ensure its ability to attract top medical students, residents, and fellows.  
  • Strong and Highland also pay over $31 million per year in resident and fellows salaries and benefits.  
  • In addition to the direct costs of a major teaching program, it is recognized that there are indirect costs of training residents.  Examples of indirect costs include:  additional ancillary testing ordered by residents; teaching programs require the most current technology in terms of equipment, facilities, and information systems; teaching hospitals tend to take care of the most severe and medically indigent patients.  These differences are recognized by Medicare through what is called the Indirect Medical Education (IME) add-on that is afforded to teaching hospitals.  The add-on rate to recognize these costs for Strong is 34% above what a non-teaching hospital would incur.
  • Because of its affiliation with a major research university, Strong Memorial's fringe benefits rate is higher than that of community hospitals, yet it is on par with other competing universities.
  • As a component of the University of Rochester, Strong Memorial Hospital helps to bear the cost of administrative overhead for the Medical Center and the University. 
  • Strong Memorial and Highland Hospitals have the community's highest proportion of Medicaid patients.  These patients often suffer from multiple conditions or delay treatment, which makes the cost of their care higher.

I hope you found this information to be informative.   Any feedback on this issue would be welcomed, as always.  There is a similar need for discussion regarding the public presentation of data on center-specific results of clinical treatment programs (e.g., cancer and cardiovascular disease), also under the moniker of consumer-driven health care,

Meliora,

David S. Guzick, MD, PhD
Dean, School of Medicine and Dentistry