Association of Commercial-to-Medicare Relative Prices With Health System Financial Performance

Abstract

Importance: Various studies have documented the rise in commercial insurance prices during the past 2 decades; however, estimates on the association of rising costs with health systems' financial health are lacking. This study calculated 2 measures from standardized Audited Financial Statements (AFSs)-operating margins and days of unrestricted cash on hand-to explore the associations.

Objective: To estimate the association between health systems' financial condition and the ratio of commercial to Medicare relative prices.

Design, setting, and participants: This cross-sectional analysis combined standardized 2018 AFSs from a large sample of US health systems with publicly available relative price data to assess the association between their financial outcomes and commercial-to-Medicare relative inpatient prices. The 2018 AFSs were collected and standardized from a convenience sample of multihospital health systems and single hospitals that were included in round 4 of the RAND Hospital Price Transparency Study. Cross-sectional, multivariate regression models were estimated, controlling for payer mix and other system characteristics, and models were weighted by health systems' 2018 adjusted admissions. The analyses were conducted July 2021 through November 2022.

Exposures: The commercial-to-Medicare relative price for inpatient services (2018-2020 pooled average), which represents the average amount paid by commercial plans as a percentage of what Medicare would have paid to the same health system for the same services.

Main outcomes and measures: Operating margins and days cash on hand, which capture complementary aspects of financial performance (profitability and liquidity).

Results: The study sample included 156 health systems in the US, representing diverse geography, size, and ownership type. Mean (SD) days cash on hand were 180.1 (113.3) and operating margins were 3.3% (3.6%) in 2018. Overall, a 1-unit increase in the commercial-to-Medicare relative price ratio was associated with a 21.3% (95% CI, 21.3% to 21.4%; P < .001) increase in days cash on hand and a 2.7 (95% CI, 2.7 to 2.7; P < .001) percentage point increase in average operating margins. Higher Medicaid payer mix share was associated with fewer days cash on hand (-3.3%; 95% CI, -3.3% to -3.3%; P < .001) and lower operating margins (-0.081; 95% CI, -0.082 to -0.081; P < .001).

Conclusions and relevance: This cross-sectional study of health system financial data found that higher commercial-to-Medicare relative prices and a lower Medicaid payer share were associated with higher profits and more days cash on hand. These findings provide evidence against the claim that relatively higher commercial prices are primarily used to offset losses from public payers rather than to increase profits and liquidity.

Figure.. Univariate Relationship Between Commercial-to-Medicare Price Ratio for Inpatient Services and a Health System’s Financial Outcomes, Unweighted

The operating margins sample includes 153 independent hospitals (n = 15) and multihospital systems (n = 138) that were included in round 4 of the RAND Hospital Price Transparency Study, the source of the price ratio data. Days cash on hand exclude for-profit systems. The price ratio is defined as the actual private allowed amount divided by the Medicare allowed amount for the same services provided by the same hospital or system for inpatient services. Financial outcomes were collected and calculated from Audited Financial Statements.