All of the financial information below is from data obtained from three primary sources: The Centers for Medicare and Medicaid Services (CMS) including Medicare cost report data, California’s Office of Statewide Health Planning and Development (OSHPD) and the American Hospital Association (AHA).

Total Expenditures to Hospitals in the U.S.

According to the Centers for Medicare and Medicaid Services (CMS) a total of $1.036 trillion in healthcare expenditures went to hospitals in 2015. That was about 32.3% of the $3.206 trillion total spent on healthcare in the U.S. that year and 38.1% of the $2.717 trillion personal healthcare expenditures (the money spent directly on patient care). Hospital expenditures as a percent of total healthcare expenditures have risen somewhat in recent years. Roughly 30% of the total annual national healthcare budget was spent on hospitals from 2000-2008 and that proportion has risen to just over 32% since 2008. However, that proportion is down significantly from 1980 when close to 40% of our healthcare budget (and 46% of personal healthcare expenditures) went toward hospitals.

Figures 1 & 2 show hospital expenditures as a percentage of both personal and total healthcare expenditures since 1960:

Figure 1: Hospital expenditures as a percent of personal and total healthcare expenditures each decade from 1960-2000.

Figure 2: Hospital expenditures as a percent of personal and total healthcare expenditures each year since 2000.

Hospital Billing

According to Medicare cost report data, Just over 5,800 U.S. hospitals issued about $3.14 trillion in billed charges (gross patient revenue or GPR) in 2015 and collected (net patient revenue or NPR) $897 billion or about 28.5% of what they billed. What’s more, billing charges have risen steadily since the lat e 70’s as the following two graphs show:

Figure 3: Medicare cost report data shows that hospital billing charges (GPR) in the U.S. exceeded payments on those bills (NPR) by about 1.76 times in 1996. That ratio (GPR/NPR) rose to about 3.51 by 2015.

Figure 4: Data from California’s Office of Statewide Health Planning and Development (OSHPD) shows that, in 1978, California hospitals billed an average of about 14% more than what they collected (GPR/NPR was about 1.14). By 2015 hospital bills exceeded payments by about 300% in California.

Payer Differential

Figure 5 is similar to figure 3 in that it shows the total GPR and NPR, but for California hospitals since 2000. Figures 6 show the GPRs and NPRs each year for Medicare and MediCal (California’s Medicaid) patients in California hospitals whereas figure 7 shows this for private insurance patients.

Figure 5: Data from California’s OSHPD shows that, in 2000, hospital billing charges (GPR) exceeded payments (NPR) for all patients and services by about 175% (2.75 to 1). By 2015, GPR exceeded NPR by 297% (3.97 to 1).

Figure 6: Data for Medicare and MediCal patients only shows that, in 2000, Medicare and MediCal payments were no different (as a percent of GPR) for all services by California hospitals as the totals for all patients that year. However, by 2015, Medicare and MediCal were only paying an average of about 20% of what they were billed compared to the 25% average for all payers that year.

Figure 7: Private insurance companies have been far more consistent in the payments to California hospitals. Since 2000, Private insurance companies have paid an average of between 36 to 38% of what they were billed by California hospitals each and every year.

Figures 8 and 9 show figure 7 data in a somewhat different way. Both figures are again from OSHPD data and show the average amounts Medicare, MediCal and the private health insurance companies paid for each inpatient admission (figure 8) and outpatient visit (figure 9) since 1995. As the figures show, all three payers paid about the same amounts to hospitals for these medical services between 1995 and 2000 but, after 2000 private insurance payments increased steadily compared to payments by Medicare or MediCal, by 2015, the private insurance companies were paying nearly twice as much for both hospital admissions and outpatient visits as either Medicare or MediCal were paying.

Figure 8

Figure 9

Figures 10 and 11 show a similar pattern in payments to hospitals. Figure 10 is from data from the American Hospital Association (AHA) and shows average payments divided by costs for inpatient care for all U.S. hospitals each year since 1981. Figure 11 is the same data only since 1995 to make an easier comparison to figure 8. According to AHA data, private insurance companies have consistently overpaid hospitals for inpatient care for more than three decades. These overpayments have varied significantly over the years, but have grown dramatically in the past few years.

Prior to 2000, private health insurance companies overpaid hospitals by an average of about 20% but, since 2000, that average has grown to 30% and been as high as 48% in 2012. Also, since 2000, Medicare and Medicaid have been paying an average of 8-10% less than what it costs to take care of inpatients.

Figure 10: (From AHA data) Private insurance companies have consistently overpaid for inpatient care since 1981 while Medicare and Medicaid have, at times paid enough for this care but often underpaid hospitals.

Figure 11: Figure 10 data only starting from 1997.

How does the AHA data reconcile with the OSHPD data above for California hospitals?

Medicare covers almost exclusively people over 65 and the disabled and Medicaid covers the impoverished and the disabled. Private health insurance usually covers people who are younger and healthier than Medicare or Medicaid recipients. Because of this, hospitalized patients covered by private insurance would likely be less expensive to treat than either Medicare or Medicaid patients.

According to the data from the OSHPD, private health insurance companies paid roughly the same amount (on average) for inpatient care as either Medicare or MediCal paid. If the care of a privately insured patient should be less expensive (on average) than the care of a medicare or mediCal patient yet the insurance companies are paying the same amount for their care, then the insurance companies would be overpaying. So the date from the AHA agrees with the data from the OSHPD.

Profits

Figure 12 shows the average annual profit margin (net income = (total revenues – total expenses)/total revenues) for all U.S. hospitals since 1981 and figure 13 shows the same data but only since 2001.

Figure 12 (from AHA data).

Figure 13 (from AHA data).

Figure 12 shows that hospital profit margins in the U.S. have ranged from four to six percent most years since 1981, though, in recent years, they’ve done much better. Figure 13 shows that, with the exception of 2008, profit for U.S. hospitals have risen consistently since 2001. The average profit margin for hospitals in the U.S. was 8.3% in 2014 even though 80% of hospitals admissions in the U.S. were to non-profit hospitals.

Figure 14 shows that, even though the average profit margin is quite high for U.S. hospitals, the good fortunes are not shared equally. Roughly 20-30% of U.S. hospitals have had a negative net margin each year since 1981 in spite of an overall average profit.

Figure 14

Uncompensated Care

There are two forms of uncompensated (free) care that hospitals claim in their financial statements: charity care, where the bill is forgiven in full by the hospital, and bad debt (or doubtful accounts) where the hospital is unable to collect payment on a bill. In both cases, hospitals will deduct their losses in the form of billed charges (as opposed to estimated payments on the bill).

Most hospitals lose very little money as a result of uncompensated care each year for two main reasons:

1) patients who require hospitalization, but have no means to pay for the hospitalization, usually qualify for emergency medicaid in most states. Emergency Medicaid can cover any patient who is uninsured and can prove that they can’t afford to pay a hospital bill even if they don’t normally qualify for Medicaid as an outpatient. Emergency Medicaid greatly reduces the the number of cases a hospital might have to forgive as charity.

2) Hospitals are very aggressive in going after patients who owe them money. Most hospitals have collection agencies working for them and, if their own collection agency can’t collect the debt, the hospital will usually sell it to an outside collection agency. When a hospital sells a debt to an outside collection agency, they often get nearly as much on that debt as they would from most regular payers for the same service. This is because most payers only pay about the same fraction of the total billed charges for a hospital service as a collection agency will pay. Once the debt is sold, the agency that purchases it is allowed to go after the patient for the full billing charge.

Also, hospitals that do provide a lot of uncompensated care because they have to treat large numbers of indigent patients (for example county hospitals) qualify for disproportionate share funds (DSH) from CMS. DSH payments can amount to tens of millions of dollars each year for hospitals that treat large numbers of both indigent and Medicaid patients. DSH payments ensure that the hospitals that treat these patients don’t lose money on these patients.

Those three factors limit the exposure hospitals have to uncompensated care. According to CMS, all hospitals in the U.S. forgave only about 2.25% of their bills for charity and lost only about 2% to bad debt between 2011 and 2015. Data from the OSHPD shows that California hospitals lost no more than 4% of what they billed to uncompensated care any year since 2000 as figure 15 shows:

Figure 15: Between 2000 and 2015 hospitals in California lost an average of 3.28% of what they billed to charity and bad debt combined.