Colorado hospitals’ profit margins are nation’s highest as state lawmakers move to cap health care costs

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Deb Hoffman, a UCHealth nurse, receives a sendoff from Poudre Valley Hospital after 47 days of hospitalization battling coronavirus, or COVID-19

Colorado hospitals charge more, have higher costs and still report higher profit margins than any other state, according to a financial analysis of federal data presented Wednesday to the Colorado Business Group on Health.

Both for-profit and nonprofit hospitals in Colorado have made “strategic decisions to maximize revenue and profit,” in large part by consolidating into a handful of powerful networks, said Thomas Nash, a health care financial consultant and former vice president of financial policy for the Colorado Hospital Association. The report employed analytical tools developed at the state Department of Health Care Policy and Financing.

When nonpatient revenues such as investment income are figured in, Nash said, Colorado hospitals as a group reported a 15.6% profit margin, edging out Utah and California for the highest margins in the nation.

A renewed emphasis on Colorado hospitals’ healthy profits will likely contribute to a looming debate in the state legislature over adding a “public option” insurance plan to the choices available on the Connect for Health Colorado insurance exchange, where federal subsidies are available.

Advocates say aggregating state negotiating power into a public option will help increase competition and stabilize health insurance premiums. Other interests have suggested putting off full implementation of a public option for two years and demanding that hospitals get prices under control in that time.

Nash and others said the concentration of Colorado hospitals into a few powerful groups — such as UCHealth, Centura’s Adventist and Catholic hospitals, and SCL Health, along with for-profit HealthOne — cuts into the negotiating power of the state’s relatively smaller insurance companies to hold down prices. Hospitals have also bought up physician groups and brought them in-house, with some states seeing more than half their doctors employed directly by hospital companies.

“Market power for a long time has resided with the hospitals, and that’s benefited them,” Nash said.

The Colorado Hospital Association said in a statement that, while its leadership did not see the presentation, “the data referenced is from 2018, which is an economic reality that no longer exists. Further, data from the most recent year available (2019) shows that the efforts hospitals have made are starting to have an impact in improving affordability.” (Nash said in his analysis that income from patient services since 2018 continues to be high.)

The hospital association said hospitals’ payments per patient decreased 4.4% from 2018 to 2019. They added that hospital costs of providing services to each patient decreased 2.7% at the same time.

“Hospitals are committed to doing their part and appreciate the recent productive conversations with legislators and the administration focused on achieving our shared goal of improving health care affordability for all Coloradans,” the CHA statement said.

The Business Group on Health, a forum for Colorado employers to discuss quality and pricing in a health care system that has accounted for an increasing share of their costs for decades, presented the analysis for companies to consider in their own negotiations. Health is a challenging combination of a product that dramatically improves life, but is priced in a way extremely obscure to the buyer, Executive Director Robert Smith said.

In almost any other industry, the buyer can “walk off the lot” if they don’t like the price, Smith said, but no one can “put off treating your kid’s leukemia because we’ll wait for next year’s model.”

The analysis of 2018 payment data by the federal Center for Medicare and Medicaid Services, which covers up to 60% of patients at many hospitals, shows Colorado hospitals as a group enjoying $2.8 billion in profit margins on $16.9 billion in revenue.

Though nonprofit hospitals do not call it “profit,” they are still taking in more revenue than their costs, and keep it within their system instead of paying it out to shareholders. Nash’s calculations put the profit margin at nonprofit UCHealth, for example, at more than 20%. The profit margin in Colorado for HCA Healthcare, which owns HealthOne’s hospitals such as Sky Ridge, Swedish and Medical Center of Aurora, was more than 40%, according to Nash.

The exception for Colorado is smaller hospitals, particularly rural hospitals on the Eastern Plains, Nash noted. Those hospitals have a higher portion of Medicare and Medicaid cases, where hospitals make low margins or lose money, and fewer large employers or high-priced specialty medical procedures to pad margins.

“Not all hospitals share in the prosperity,” he said.

Smith said employers are in desperate need of better information in order to control their health care costs. Experts know from public and private insurance data that the undiscounted “chargemaster” price for a procedure can be as much as 800% higher than what Medicare or Medicaid agree to pay for the same service.

Employers and their negotiators need to learn to use the data to pinpoint what is a reasonable cost for hospitals providing a common service and then agree to pay a multiple of 1.5 or so for that procedure, Smith said.

The U.S. health care system, Smith said, “was set up as a market but lacks many of the features of a good market, including good information for decision making.”

Michael Booth is a former board member of the Colorado Consumer Health Initiative, which advocates for broader public health coverage.