Chargemaster Tomfoolery Part II: Are For-Profits Profiteering Off the Uninsured?

by Brian Clement and Karan Chhabra

A few weeks ago Karan used the recently released hospital charge data to ask how certain policies protect the uninsured–and where they might fail. (The short answer is: it’s complicated; they often backfire; an all-payer rate-setting system may help. But you should read his post.) He compared the average hospital charge “markup” in every state in the country, found that New Jersey’s were the most inflated, and then homed in on the most expensive hospital in New Jersey and the US (by charges to Medicare) [1].

The kicker? That hospital, Bayonne Medical Center, is a for-profit institution, and the only for-profit in NJ in the CMS dataset. Karan’s response: “I’m not suggesting this implies that all for-profit hospitals charge equally obnoxious rates, but someone with nice grants and research assistants should crunch the numbers for all 50 states and let us know.” Interestingly enough, a proposed federal regulation to protect the uninsured from excessive hospital charges applies only to not-for-profit hospitals [2].

So Brian Clement, a reader and friend of Karan’s, decided to explore the topic further. He also decided he didn’t need grants or research assistants, and ran the numbers himself. Here’s what he found.

  • For-profit hospitals have much higher markups than hospitals of any other ownership class (see below).

Charge Markup Percentage by Hospital Ownership

  • Why is that? Well, let’s break it down. The markup ratio has two components: the numerator is the amount charged to Medicare less the payment received from Medicare and the denominator is the payment received from Medicare [3]. As you might expect, we can see that for-profit hospitals are charging the highest amount to Medicare compared to hospitals in all other hospital ownership categories (see below).

Median Medicare Charges by Hospital Ownership Status

  • Despite charging more than any other type of hospital (as shown above), we can also see that for-profits actually end up getting the lowest payments from Medicare (see below)

Medicare Payment by Hospital Ownership

  • Important caveat, for the umpteenth time—the new data only reflect what Medicare pays out. They don’t show what private insurance companies, or Medicaid, pay hospitals. With that caveat in mind, isn’t this still weird? If for-profits know they’re getting lower reimbursement from Medicare than hospitals of other ownership statuses, why do they charge so much? Why do they bother charging Medicare so much if they’re not going to get nearly as much back? And why do we bloggers care if Medicare and insurers only actually pay a small fraction of those charges?

Well, we don’t know for sure, but we do know that they use their chargemasters to set charges for other payers, including uninsured patients. Unlike Medicare or insurance companies, the uninsured don’t have the bargaining power to bid down the charges in the chargemaster. So they’re more vulnerable to overcharging, and when they don’t have as much say in the hospitals they end up at (as in emergencies), they may really get exploited.

As Karan discussed in his last post, there are some policy approaches to protect the uninsured from these charges:

New Jersey has laws that protect the poor uninsured, requiring hospitals to bill them only 115% of Medicare rates [4]. The feds have actually proposed a similar regulation that would apply exclusively to not-for-profits—under this regulation, those hospitals could only bill patients qualified for financial assistance at the rate paid by Medicare or commercial insurance. The cutoffs for financial assistance vary at each hospital, but they tend to reflect some multiple of the federal poverty line. If this regulation is finalized, not-for-profit hospitals that violate it could lose their tax-exempt status—a threat hospital execs do not take lightly.

The federal reg won’t apply to for-profit hospitals, though. Since New Jersey’s doesn’t make the same distinction, I wonder why the federal law does… Yes, the federal policy uses tax exemption as a stick, whereas NJ is using hospital licensure, but the federal government has required other things of hospitals irrespective of tax exemption—why not use Medicare/Medicaid dollars instead, like EMTALA?)

With the new numbers in this post, an answer to this question is all the more urgent. In our admittedly amateurish legal analysis, it seems that the reason is that the federal regulation is written through the tax code and enforced by the IRS. Since for-profits don’t have any tax exemption to lose, there’s not much the IRS can do to penalize them.

But that’s under the authority allowed by the Affordable Care Act. Karan brought up EMTALA, the Emergency Medical Treatment and Active Labor Act, because it mandates all hospitals to stabilize any patient with an emergency regardless of their ability to pay—and regardless of that hospital’s for-profit/not-for-profit status. Instead of taxes, EMTALA’s enforced by participation in Medicare; if a hospital violates the law, it can’t receive Medicare dollars. EMTALA uses Medicare as a stick because it was written through the Social Security Act (which established Medicare); the federal proposal is written through section 501(r) of the tax code.

All that goes to say that more comprehensive federal protection for the uninsured doesn’t appear absolutely restricted to not-for-profits. If it were enough of a legislative priority, it could’ve been enacted through the Social Security Act and been enforced through Medicare participation rather than tax exemption. One could say that the ACA should make protecting the uninsured irrelevant, because it aims to make insurance affordable, but—thanks in part to the SCOTUS decision making Medicaid expansion optional—we still expect 30 million uninsured 8 years after the law’s full rollout. And the fact that the feds are issuing regs to protect the uninsured from not-for-profits shows that the uninsured are still on their radar. But if they’re going to try and protect the uninsured, they should make sure to protect them from the guys likely to fleece them the most.


1.  He defined “markup” as (average charge – average payment) / average payment. He calculated that for each DRG, for each hospital in NJ. So if a hospital billed $2000 and Medicare paid $1000, the markup was 100%. Then he averaged those markups in all the DRGs from each hospital to determine that Bayonne Medical Center overcharged more than any other state. For more on his methodology, see his original post.

2.  Under this regulation, those hospitals could only bill patients qualified for financial assistance at the rate paid by Medicare or commercial insurance. For the proposed federal regulation, see page 17 here. The cutoffs for financial assistance vary at each hospital, but they tend to reflect some multiple of the federal poverty line.

3. This dataset is for Medicare charges and payments only. We have no idea what they’re actually charging or receiving from uninsured patients based on that dataset, unfortunately. For Brian’s data and analysis, look here.

4.  Thanks to recent legislation, NJ limits the ability of hospitals to overcharge uninsured people under 500% of the federal poverty line—hospitals can only bill them 115% of what Medicare would’ve paid. But as Reinhardt notes, a family of four with gross income over $117,750 wouldn’t be protected. And more importantly, this isn’t true in every state.


Brian is a Duke graduate currently working in healthcare consulting.

Karan is a student at Robert Wood Johnson Medical School and Duke graduate who previously worked in strategic research for hospital executives. Follow him on Twitter @KRChhabra or subscribe to the blog.

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