Do Chargemaster Prices Matter?: An Examination of Acute Care Hospital Profitability.

Abstract

It remains widely debated whether chargemaster price markups are tied to hospital profitability. To evaluate the effect of chargemaster markups on hospital profitability in the presence of unobserved hospital-specific (time-invariant) confounders, and cross-sectional dependence due to latent (common) policy shocks. We use interactive fixed effects methods to address concerns of unobserved hospital-specific (time-invariant) confounders, and cross-sectional dependence. US acute care hospitals, 1996 through 2017 (ie, 22 y). Using primarily Medicare cost report data, we construct an unbalanced panel of 3499 acute care hospitals per year, or a total of 76,972 hospital-year observations. Chargemaster markups (above cost), profits per hospital inpatient discharge. Between 1996 and 2017, chargemaster markups increased (on average) by 155%, and the SD of the chargemaster markup distribution increased by 324%-indicating growing variability in the average markup strategies pursued by hospitals. Our preferred model specification implies that a unit increase of the hospital chargemaster markup is associated with a $261 ( P <0.01; 95% confidence interval: $232-$291) increase in profits per hospital inpatient discharge. These results are robust to a wide set of model specifications, the use of alternative profitability measurements, and the use of an alternative instrumental variable identification strategy. Additional subsample analysis that controls for a rich set of hospital quality measures and system affiliation information also yields similar results. We show that higher chargemaster markups are associated with higher hospital profitability. Additional research is needed to understand how chargemaster pricing impact health outcomes and health care disparities.