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Report: Profits drive cost of health care; hospitals hit back

Posted: February 9, 2012 - 9:32pm

Hospital operators in the state are sharply critical of a state consultant’s report highlighting profit margins at large private hospitals as a factor in driving up costs of medical care in the state.

The report, by Seattle-based Milliman Inc., a respected health care actuarial firm, also said physician’s fees in Alaska are significantly higher than in other states, 60 percent above the average in a group of comparison states, mainly because of lack of competition. For commercial, meaning non-government, health care payers, the difference in physicians’ fees is 69 percent, Milliman said.

The comparison was for physicians in private practice, not salaried physicians employed by institutions.

Data from Washington, Oregon, Montana, Wyoming, Idaho and Hawaii were used in the study. Milliman also made comparisons to national averages.

The Seattle-based firm was retained last year by the Alaska Health Care Commission, a state advisory task force that includes health care providers, to do a study comparing Alaska medical care costs with those in other states.

Milliman found that hospital fees in Alaska in 2010, on average, were 38 percent higher than the comparison states, and that commercial hospital reimbursement, or payments by non-government employers, averaged 38 percent higher than the comparison states.

However, Karen Perdue, director of the Alaska Hospital and Nursing Home Association, a trade group, said these comparisons must be looked at in the context that Alaska costs are on average 30 percent higher than costs in other states.

Alaska Regional Hospital, a privately owned hospital in Anchorage, as well as the hospital and nursing home association were critical of Milliman’s methodology in parts of its study, particularly the comparison of hospital profits.

They acknowledged that Milliman is a respected firm in the field, however.

“Milliman is an excellent firm. We just have questions on their methodology,” said Perdue.

On a statewide basis, Milliman said hospital margins, or profits, were 13.4 percent on average in 2010 compared to 5.7 percent in a group of comparison states. Margins for hospitals in urban areas were 16.2 percent on average, while margins of hospital in rural areas were similar to the comparison state average of 5.7 percent, the report said.

The urban hospital average is mainly driven up by higher margins at two for-profit hospitals, Alaska Regional Hospital and Mat-Su Regional Medical Center, Milliman said in its report.

Alaska Regional’s 2010 margin averaged 29.5 percent and the 2010 margin for Mat-Su Regional averages 25.8 percent, Milliman said. The average margins of nonprofit hospitals in urban areas for 2010 was lower, in comparison.

Providence Alaska Medical Center’s margin was 13.7 percent; Fairbanks Memorial Hospital was 5 percent and Bartlett Regional Hospital in Juneau was 7.3 percent and Central Peninsula Hospital in Soldotna was 2.7 percent, according to the Milliman study.

Annie Holt, CEO of Alaska Regional, said Milliman’s comparison of margins of the two large private hospitals with nonprofit hospitals was incomplete because it did not account for the fact that the private hospitals pay taxes and that there are differences in the way private and nonprofit hospitals allocate costs and do other accounting.

“It’s not an accurate portrayal. Milliman presented this as an apples-to-apples comparison, but there are important differences,” Holt said in an interview.

When the accounting differences are adjusted for and local and state taxes are included, so that a more complete comparison can be made, Alaska Regional’s margin for 2010 would be 12.5 percent, Holt said. Alaska Regional paid $3 million in state and local taxes in 2011, she said.

In written comments made to the health care commission by the hospital and nursing home association said the consulting firm “did not take into account taxes paid by taxpaying entities. According to financial experts at HCA (Alaska Regional’s owner) the absence of this consideration overstates Alaska Regional’s reported margin by 58 percent.”

There are other problems in the comparisons, some resulting from Milliman’s reliance on data required to be reported to the federal Centers for Medicare and Medicaid by hospitals: “Alaska Regional is more fully depreciated, which makes a difference in the profit statement. Losses on certain items cannot be deducted as they can for nonprofits. Shares-service platforms such as information technology support, supply chain and accounts receivable are not necessarily in the Alaska (Medicare) cost report and therefore comparisons may not be fully vetted by the Milliman approach,” in relying on data reported to Medicare, the association said in its comments.

Although it is a nonprofit organization, Providence said it does pays taxes to the city of Anchorage.

“We do not pay property taxes for our hospital facility, however, we pay taxes on all of the property in which we rent space to tenants. In 2010, Providence paid the city of Anchorage approximately $2.7 million in property taxes,” Bruce Lamoureux, chief executive for Providence Health and Services Alaska, said in written comments. “Additionally, our margin – the amount of money left over after we pay our bills – is substantially less than the average attributed to Alaska’s metropolitan hospitals in the Alaska Health Care Pricing Analysis (Milliman) report.

“All of our excess revenue after expenses supports local facilities, technologies, community benefit and programs that aim to improve access and keep health care close to home,” he added. “We offer services available nowhere else in the state – often at a loss – to keep Alaskans close to home for care.”

An example is Providence’s new Senior Care Center that provides primary care to elders on Medicare, which operates at a loss, he said.

Deborah Erickson, executive director of the health care commission, said the Milliman study was not intended to be a financial analysis of the hospitals or of other providers, but only a broad look at many factors that affect medical costs in Alaska including health care utilitization rates, professional compensation and providers’ staffing ratios.

However, “if the hospitals are challenging Milliman’s data we ask them to bring their own information to us,” Erickson said. “So far they haven’t done that.”

Milliman’s study was focused on a range of factors that affect the cost of health care and health insurance. The hospital data did not include facilities operated by the military or the large tribal health associations, but some of the other data sets, such as for professional compensation, did include government health care workers. However, physicians in private practice were excluded in the professional compensation comparison and were compared separately.

Edward Jhu, health care actuarial at Milliman who co-authored the study for the health care commission said his team focused on data reported to Medicare as well as other sources of information Milliman has access to, some of which are proprietary.

Jhu said he wouldn’t comment on the criticisms of the hospitals or of using data filed with the Centers for Medicare and Medicaid, but said that hospitals are required to report data on operating margins for all patients including senior citizens on Medicare as well as care provided to other patients.

“Alaska is not really unique in suffering high health care costs,” Jhu said in an interview. “But Alaska has geographic factors and a small population, which means costs will be higher than in other states.”

Erickson said another key conclusion of the Milliman report was that hospital utilization rates in urban areas were about on par with hospitals in the comparison states. However, low volumes in rural hospitals contribute to high costs in those facilities, she said.

Perdue, of the hospital association, said her group has questions about other parts of the Milliman study, particularly a conclusion that compensation for health care professional workers is about on par with the comparison states.

“That doesn’t square with our members’ experience, or with data we see from other sources,” Perdue said.  For example, the Milliman study leaves out benefits for health care workers, which are higher in Alaska than the other states, she said.

There are also questions about the utilitization rates, which Milliman said were about on par with the comparison states. Perdue said relying on Medicare data for this category can be misleading since many senior citizens go out of state for more complex medical procedures.

“The subset of utilitization for Medicare-eligible may be on par, but that may not be the case for the population at large,” she said.

 

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