Memorial’s new lease might drive up prices

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Hospital systems vying to lease Memorial could end up passing along the millions of dollars of lease costs on to customers through higher costs for care.

It’s happened before and could happen here if cost controls aren’t spelled out in the new lease, said Dr. Steve Berkshire, a professor and director of health administration for Central Michigan University.

“When Humana took over the county-owned hospital from the University of Louisville in Kentucky, that was spelled out in the agreement — costs would not rise as a result,” Berkshire said. “But that’s the exception — it has to be spelled out.”

That’s because hospitals that are spending millions up front might have to borrow the money, and then have to recoup the expense of the lease through higher health care prices. Even in the case of a system with very deep pockets, like HealthOne/HCA, there has to be a return on the investment.

And, Berkshire said, Centura Health’s fears of a “medical arms race,” are accurate. Centura said prices would rise at both hospitals if an outside entity was brought in — in order to compete. The owner of Penrose-St. Francis Health System said that private insurers would bear the brunt of those higher charges.

Although some of the businessmen on the task force said they were “baffled” at the concept that competition could actually increase prices, Berkshire said that the health care industry doesn’t operate the way other companies do.

“Typically, hospitals compete by getting the latest technology, by building new wings, new hospitals,” he said. “They’ll duplicate services, just to hold on to their patient base. And that will drive up prices. It won’t drive up prices for people on Medicare or Medicaid.”

Hospitals in very competitive markets have to negotiate higher rates with private payers, because the federal government sets the prices for Medicare, Berkshire said.

“It can get expensive,” he said. “Look at the Denver market.”

According to the Colorado Hospital Association’s annual charge report, Denver-area hospitals charge more for services than do the ones in Colorado Springs. The association tracks hospital charges on a variety of illnesses — from mild to severe — and also tracks the average in a market. The Denver hospitals are grouped together. Both Colorado Springs hospitals are grouped in “other urban hospitals.”

For instance, a hip replacement at Denver-area hospitals averages $75,000, and in very extreme cases as much as $131,000.

In Colorado Springs, Memorial charges an average of $40,246 for hip replacements. It’s highest charge for a hip replacement in 2010 was $64,595 in the “major” category.

In the case of heart failure, Denver area hospitals charge an average of $34,543. Memorial charges an average of $24,760.

The difference, Berkshire said, is because of competition.

“The Denver market is seriously overbuilt,” he said. “That’s one reason the Springs market is attractive to them — there’s room to grow.”

But all three Denver systems vying to lease Memorial disagree, saying charges won’t rise under their leadership.

“This isn’t about the bottom line for us,” said Bruce Schroeffel, CEO of University of Colorado Hospital. “It’s about medical education; it’s about addressing clinical needs now and in the future. If it were just about the bottom line, I’m not sure we would be doing this.”

UCH will keep charges the same, said Anthony DeFurio, CFO. But, he said, charges are different than what insurers actually pay.

“And we have no way of knowing that,” he said. “No one really does.”

What UCH does know about Memorial is that they’ve been steadily losing market share, and that their cash before expenses is one of the lowest in the region.

“They’ve been operating at around 8 percent net profit,” he said. “That’s low. We think we can get that to 15 percent.”

And if they can, then the plans for Memorial — their $1.8 billion economic plan that includes a medical school in Colorado Springs — will pay for itself, he said.

“We’re going to improve the patient volume because Memorial’s been losing market share to Penrose and to Denver,” he said. “And we can adjust expenses, but not by much. We see it as a very viable plan.”

The medical school campus is a vital part of that plan to increase Memorial’s market share, he said. But that doesn’t mean that the hospital will charge more because of its academic setting.

“That’s a common fallacy,” he said. “Academic hospitals don’t charge more, but they do get higher payments from Medicare because of the dual mission. Since we won’t be doing research at Memorial –not in the short term — we won’t have those higher payments.”

HealthOne plans to rely on its economies of scale to keep costs down, said spokeswoman Linda Kanamine.

“HealthOne contracts with payers as a system, with a mix of hospital types, so we can balance the impacts of payer mix and seriousness of patient conditions to manage our costs and rates,” she said in an email. “The vast majority of our commercial managed care contracts are under fixed-rate arrangements that give us incentive to be cost effective and reduce unnecessary services.”

While charges in the Springs might be lower, Kanamine said health plan rates are higher here than in Denver.

“Health care utilization is higher and hospitals are paid more,” she said. “We believe if HealthOne comes in it will establish a more competitive environment.”

Sisters of Charity of Leavenworth Health System said that it always makes sure charges are competitive with the rest of the market.

“We typically work with a third party in each market to ensure that charges reflect market competitive rates,” said spokeswoman Christine Woolsey. “We stated our intention is to be a partner that helps Memorial continue to provide high-quality care at a reasonable cost. SCL Health System has a reputation of partnering with payers to provide high-value, cost effective and high quality health care services.”

Lease expenses will be paid out of the SCL’s operating budget.

“We are confident that Memorial will benefit from savings and best practices SCL Health System has achieved through standardized system services,” she said. “One example might be access to group purchasing contracts that enable us to buy certain items in bulk and pass on the savings to memorial.”

As an example, she pointed to the $15 million in savings in 2011, when SCL bought out Exempla. She said the hospital integrated some activities and adopted best practices at the Exempla institutions to reap the savings.

But if the system leading Memorial doesn’t raise prices, it will be unusual. The first study showing the correlation between competition and hospital prices was done in 1985 by economists James Robinson and Harold Luft.

“Hospitals with more competitors had higher costs of care, staffing levels and high-tech medical equipment,” the study found. “This is exactly the opposite of businesses that compete on results or outcomes.”

Hospitals don’t offer sales, said Shannon Brownlee author of “Overtreated.” That’s because their paying patients have insurance and are insulated from the price of their care.

“And who would undoubtedly view a cut-rate surgery with some suspicion,” she said. “Yet, even without lowering prices, catheterization labs rarely sit empty, because hospitals can employ a variety of methods for keeping them full … they may begin advertising the wonders of their cardiology departments, or they will go out and recruit a hot-shot cardiologist or two who can bring in more patients.”

The industry has a pattern of medical demand expanding to consume the supply of resources, she said in the book.

Hospitals don’t compete based on results — mortality rates by operation, 30-day readmission rates after surgery, all the metrics counted up and awarded to hospitals nationwide, analysts say.

According to Gary Fradin, president of Massachusetts-based HealthInsurance CE , they compete based on machinery, technology or staffing ratios.

“This type of competition differentiates health care from other parts of our economy,” he said in an article in Health Insurance Underwriter. “The auto industry, for example, competes on price and quality. We typically purchase a car knowing it miles per gallon and resale estimates…We typically care less about the type of metal used in the engine or the frame…But the health care industry operates differently… Hospitals compete on inputs, using them as a proxy for quality.”

And that, he said, can drive up the cost of care in a very competitive market.