Operating Profitability of For-Profit and Not-for-Profit Florida Community Hospitals during Medicare Policy Changes, 2000 to 2010

By Langland-Orban, Barbara; Large, John T. et al. | Inquiry, Annual 2015 | Go to article overview

Operating Profitability of For-Profit and Not-for-Profit Florida Community Hospitals during Medicare Policy Changes, 2000 to 2010


Langland-Orban, Barbara, Large, John T., Sear, Alan M., Zhang, Hanze, Zhang, Nanhua, Inquiry


Abstract

Medicare Advantage was implemented in 2004 and the Recovery Audit Contractor (RAC) program was implemented in Florida during 2005. Both increase surveillance of medical necessity and deny payments for improper admissions. The purpose of the present study was to determine their potential impact on for-profit (FP) and not-for-profit (NFP) hospital operating margins in Florida. FP hospitals were expected to be more adversely affected as admissions growth has been one strategy to improve stock performance, which is not a consideration at NFPs. This study analyzed Florida community hospitals from 2000 through 2010, assessing changes in pre-tax operating margin (PTOM). Florida Agency for Health Care Administration data were analyzed for 104 community hospitals (62 FPs and 42 NFPs). Academic, public, and small hospitals were excluded. A mixed-effects model was used to assess the association of RAC implementation, organizational and payer type variables, and ownership interaction effects on PTOM. FP hospitals began the period with a higher average PTOM, but converged with NFPs during the study period. The average Medicare Advantage effect was not significant for either ownership type. The magnitude of the RAC variable was significantly negative for average PTOM at FPs (-4.68) and positive at NFPs (0.08), meaning RAC was associated with decreasing PTOM at FP hospitals only. RAC complements other Medicare surveillance systems that detect medically unnecessary admissions, coding errors, fraud, and abuse. Since its implementation in Florida, average FP and NFP operating margins have been similar, such that the higher margins reported for FP hospitals in the 1990s are no longer evident.

Keywords

hospital profitability, Medicare, Recovery Audit Contractor program, for-profit hospitals, not-for-profit hospitals

Introduction

During the 1990s, for-profit (FP) hospitals in Florida were found to achieve significantly higher margins than not-for-profit (NFP) hospitals, measured as either operating margin or basic earning power. (1,2) The purpose of the present study was to determine whether FP hospitals sustained their operating profit advantage following the heightened scrutiny of medical necessity from Medicare Advantage and Medicare's Recovery Audit Contractor (RAC) programs, and to assess the association of these two Medicare programs on operating profitability at FP and NFP hospitals. Both programs heighten surveillance of medical necessity and deny payments for unnecessary hospital admissions.

Medicare Advantage was enacted in December 2003, enhancing benefits and managed care options to beneficiaries. In Florida, Medicare Advantage enrollment increased from 18% in 2004 to 36% in 2013. (3,4) Medicare Advantage plans approve or deny payment for member services, typically prospectively. An incentive exists to deny funding for medical services deemed unnecessary as Medicare Advantage plans are private companies that must assure their own financial success,.

As Medicare Advantage plans typically deny medically unnecessary admissions prospectively, neither revenue nor expense is incurred for a disallowed admission because the admission does not occur. Nonetheless, a hospital's pre-tax operating margin (PTOM) can be affected. The PTOM measures a hospital's ability to generate revenue while controlling for expense. When an admission is denied, a hospital is precluded from generating earnings, where earnings are maximized from increasing revenue while controlling for expense. In general, admissions deemed unnecessary may have been more profitable as patients had acuity levels determined inappropriate for admission, meaning if reimbursed at inpatient rates, such patients should be profitable, on average. Furthermore, when fewer patients are admitted, fixed costs are spread among fewer patients, thus increasing the average cost per patient.

During 2005, a 3-year RAC pilot program was implemented in Florida, California, and New York, which affected Medicare fee-for-service (FFS) patients. …

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