Workers comp medical expenses account for less one-fiftieth of total US health care costs – $30 billion(see WC report pdf) out of $2 trillion.
Yet workers comp generates almost one-sixth of hospital profits.
Here’s how the numbers work. About one-third of comp medical payments are issued to healthcare facilities. The average US hospital cost-to-charge ratio (what it costs the hospital to provide a service compared to what they bill for that service) is approximately 31.2%; in comparison workers’ compensation payers reimburse about 55% of hospitals’ billed charges.
Thus workers comp payers pay hospitals 176% of their costs.
(There is another, very big argument over the methodology hospitals use to calculate their ‘costs’, my opinion is there is conclusive evidence that costs are exaggerated and overstated)
In dollar terms, in 2007 workers comp insurers and self-insured employers paid facilities roughly $9.1 billion. $3.9 billion of that $9.1 billion was profit for hospitals.
The entire US hospital industry generated profits of roughly $25 billion, workers’ compensation – which you will remember represents only about 1.5% of total hospital revenues – accounts for approximately 16 percent of all the profits for US hospitals.
Few dispute that workers comp insurers and SI employers should adequately reimburse hospitals. It is equally indisputable that under the current systems, comp payers are paying much more than their fair share.
How much should workers’ compensation payers pay? According to Vincent Drucker of FairPay Solutions, “something between what Medicare pays and the costs + twenty percent that group payers are reported to be paying.” (FPS is an HSA client)
Why are comp payers overpaying hospitals? That’s a subject for a later post.
Jun
26
The data speaks for itself. Many states have adopted fee schedule reimbursement rates to try and contain the medical costs in workers comp, including hospital facilites. Although it is a step in the right direction it would appear the hospitals are still gaining huge profits on such a small patient volume. If you consider the top three states in comp (CA, TX, and FL) all have developed reimbursement policies for hospital facilites. TX and CA have a Medicare based system with a mark-up ranging from 25% – 100%. However most hospital contracts with group health insurers and PPO networks are below Medicare rates. This would include contracts with per diem type rates or maximum cap alloawnces. I know you have not always been an advocate of using Medicare as a base for establishing work comp rates for hospitals. But even with this type of formula the margin for profit can be much higher through a comp case vs. a routine group health case. Let’s not forget FL, where the outpatient reimbursement is 60% – 75% of total charges. It is not common to see bills for outpatient surgical servics (epidurals, arthroscopies, carpal tunnel releases) being billed in the $10K – $25K range. You can imagine the payment rates on these claims and margins the FL hospitals are gaining in comp.
Joe – you note that hospital cost calculations are “exaggerated and overstated” and in a free-for-all world, you are correct. Medicare’s DRG cost accouting process addresses the cost shifting problem by including in the DRG those costs that are traditionally non-billable – nursing care, supplies, food, IT, backroom functions, housekeeping, security, etc. Medicare has the administrative resources to work closely with hospitals to review the cost accouting process and assure it is accurate. Workers copmpensation too often cedes the process of fee setting to state regulators who are resource-poor and ill-equipped to review hospital cost accouting processes and determine a fair and reasonable price. So the cost shift continues and work comp pays more than its fair share!
Joe,
I’m intrigued by your statement that WC accounts for about 1/6 of hospital profits. Might you be able to recommend a report/document which confirms this?