Report says US hospitals still marking up drug prices by 500%. This must stop, and China’s got the right answer.

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The News:

Hospitals markup medicine prices, on average, nearly 500%, according to a new analysis from the Moran Company that was commissioned by the Pharmaceutical Research and Manufacturers of America (PhRMA).

The analysis of 20 medicines also found the amount hospitals receive after negotiations with commercial payers is, on average, more than 250% what they paid to acquire the medicine. This means a hospital is paid two and a half times what the biopharmaceutical company, who brought the medicine to market, receives. This hidden threat to affordability is a driver of higher cost sharing and premiums for patients across the country.

Insurers pay for medicines administered in hospital outpatient settings differently than when they are purchased at a pharmacy. For example, many cancer treatments are provided in a hospital facility where the hospital purchases the medicine directly and is then reimbursed by the patient’s insurer–often with a steep markup.

How much a hospital can charge for a medicine and what they get paid varies widely based on local hospital and insurer market dynamics. When hospitals gain market power through consolidation, they can demand higher reimbursement from commercial payers.

Importantly, the Moran findings are a conservative estimate of hospital markups and margins for medicines reimbursed by commercial payers because the analysis did not consider the impact of the 340B program.

The 340B Drug Discount Program is a US federal government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible safety-net healthcare organizations and covered entities at significantly reduced prices

On average, 340B prices are significantly lower than the average sales price (ASP)–about 22.5% below ASP, according to the Medicare Payment Advisory Commission (MedPAC)–which is why medicines purchased by hospitals at 340B prices could have even larger margins.

While hospital markups lead to higher costs for patients, employers and payers, these markups are often overlooked in conversations about medicine costs. As the provider market continues to become more concentrated and the number of medicines being administered in hospital-owned facilities is growing, the amount hospitals markup medicine prices needs far greater scrutiny. (Ref: HealthEconomics.Com)

Steve’s Take:

I’ve spent decades consulting with every imaginable type and size of nonprofit and for-profit hospital. I’ve also been a patient, and despite having great insurance coverage (so I seldom had a reason to analyze a hospital’s bill), I had a suspicion any medicines I received were probably marked up along with the charge for professional services.

But I had no clue that this practice of marking up medicines by an average of 500% has continued unabated for years now.

Unfortunately, the latest findings in the Moran report show how hospitals continue to earn outrageous profits on drugs, especially on specialty drugs. Commercial payers, for example, still use reimbursement approaches that permit hospitals to inflate specialty drug costs by thousands of dollars per claim.

These hospital mark-ups translate directly into higher drug spending–regardless of how manufacturers set list prices.

If you think costs would come down if hospitals were all owned and operated by big for-profit corporations like Hospital Corporation of America (Nashville TN), consider a study published by the journal Health Affairs.

Of the 50 US hospitals that mark up prices the most, 49 of them are part of for-profit hospital chains, according to the study’s authors, Ge Bai of Washington and Lee University and Gerard Anderson of the Johns Hopkins Bloomberg School of Public Health.

Using data provided by 4,483 hospitals to the Centers for Medicare and Medicaid Services, Bai and Anderson found that those 50 had an average markup of 1,013% over what Medicare pays for the thousands of items on hospitals’ “chargemasters.”

Chargemasters are lists of all the items and services hospitals bill for. Hospitals set their own charges. Few states set any limits on what hospitals can charge.

That’s almost three times the average markup at the other 4,433 hospitals. The average markup for all those other hospitals–most of them nonprofits–was 340%.

Of those high-markup 50, more than a fourth of them are owned and operated by HCA. But with 14 hospitals on the list, HCA was just in second place. A full half of the top 50 were owned by HCA’s biggest rival, Community Health Systems, a Franklin, TN-based company that at the time of the study operated nearly 200 hospitals in 29 states.

At the very top of the markup list was North Okaloosa Medical Center in Crestview, FL. That hospital, in the state’s panhandle, had the distinction of marking up its costs an average of 1,260%. The Atlantic’s Olga Khazan examined North Okaloosa’s markups. She found, for example, that the hospital charged $79,350 to treat a hemorrhage, compared with Medicare’s reimbursement of $5,177.

China’s approach to curb drug profiteering by hospitals

In March, Beijing announced that public hospitals would end markups on drug prices to separate medical treatment and drug sales, and to lower costs to patients, according to China news source, Xinhua. Drug prices previously hiked by up to 15% were summarily disallowed in over 3,600 hospitals and medical institutions beginning April 8.

Instead, Beijing mandated transparent drug purchases, choosing suppliers by open bids and having drug and producer information fully disclosed. Registration and treatment fees were replaced by a medical service fee of between 50 yuan (7.3 US dollars) and 100 yuan. Medical insurance covers 40 yuan of the fee.

Fang Laiying, head of the Beijing municipal health bureau, said the reform aims to break the system of covering hospital expenses with drug sales.

“Separating treatment and drug sales will cut off the channel of making money through over-prescription, and help medical practitioners provide more and better treatment services,” he said.

Due to poor government funding, China’s public hospitals had relied heavily on markups of drugs, high fees for examinations and sales of materials such as bandages, creating an incentive for doctors to over-prescribe and advise unnecessary check-ups.

Li Bin, minister of the National Health and Family Planning Commission, said the move in Beijing will improve medical services, control rising medical costs and reduce the economic burdens of patients, a demonstrative role for medical reform.

Bottom Line:

As the authors noted in their Health Affairs article, “Collectively, this system [of giving hospitals free rein to mark up their costs] has the effect of charging the highest prices to the most vulnerable patients and those with the least market power.”

Those who are the most vulnerable, of course, are the uninsured and under-insured.

Steve's Take: We must stop #drugprice gouging in US hospitals, #China shows us how Click To Tweet

In the first three months of 2017, just 8.8% of Americans–or 28.1 million people–lacked health insurance, the CDC said. Bai and Anderson had predicted that even when the Affordable Care Act was fully implemented, around 30 million people would still be without insurance. They were not far off.

When the people without coverage get sick or injured and wind up in the hospital, they’ll be expected to pay whatever the hospitals decide to charge. This means that even if GOP efforts to scrap the ACA finally fail and are abandoned, thousands of families will still find themselves in bankruptcy court every year because of medical bills they can’t possibly pay.

Although Obamacare continues to reduce the number of Americans without health insurance, we still must stop the massive drug-price gouging that is so pervasive among US hospitals. It’s a national disgrace that countries such as China have to point us in the obvious direction we need to go.


(Note to the uninsured: Find out which hospitals near you are nonprofit and which ones are for-profit. And that’s not just because the for-profits’ markups are higher. The ACA requires nonprofit hospitals to provide discounts to eligible uninsured patients. There are no such requirements for for-profits.)

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