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Cover Letter

Dear Friend of Consumers for Affordable Health Care:

Off the Charts: Unsustainable Hospital Cost Growth in Maine examines the costs and profits of hospitals in Maine and how they compare to hospitals outside the state. The report was released in response to concerns raised by many small businesses that are struggling with the growing costs of providing health care coverage for their employees. The purpose of the report is to put this issue on everyone's radar screen by raising important questions that need to be answered. The intended outcome of the report is to engage the hospitals in a meaningful dialogue about ways to reduce costs and preserve essential community services.

Already, we believe the report has had this impact. We are including an editorial published in the Lewiston Sun Journal on Friday, March 12. This editorial, written by David Farmer, discusses the challenges that health care consumers and government officials face when trying to analyze hospital financial information. It concludes by stating that the more financial information that is made available by hospitals, the easier it will be to determine the true costs of providing hospital services.

While the report has received much attention, it has been met with sharp criticism from the Maine Hospital Association (MHA). However, it is important to note that the Maine Hospital Association did not take issue with the vast majority of the data presented in this report, including the following facts:

  • Inpatient unit costs (median hospital inpatient cost per discharge) are higher in Maine than in the U.S. and the Northeast and have been higher since 1995. In 2002, the median cost incurred by hospitals to provide one unit of inpatient care was $6,917 in Maine, while it was $5,819 in the U.S., and $4,759 in the Northeast.
  • Comparing hospitals in Maine to a comparable group of hospitals from outside the state, Maine hospitals had inpatient costs that were almost $1,000 per discharge higher (equivalent to almost 24% higher) while the quality of care was statistically the same.
  • Between 1997 and 2001, Maine hospitals had a higher profit margin than hospitals in the U.S. and the Northeast.

However, the MHA criticized the data used to compare hospital cost growth. In this report, CAHC used the most recent data available to a non-hospital organization. Moreover, since actual costs of hospital services are not available to the public, it is necessary to use measures that estimate actual costs.

The measure CAHC chose to use for national cost growth is the Hospital Input Price Index, developed by the Centers for Medicare and Medicaid Services (CMS). This measure estimates hospital cost growth by calculating the change in prices for the goods and services hospitals use to provide care to patients. The measure was chosen because it is the measure used by the federal government to update payments and cost limits in CMS's various payment systems. In addition, the measure and the methodology used to calculate it are both publicly available, unlike many other hospital cost or price indices.

The Hospital Input Price Index does not have a corresponding price index for Maine. Thus, for hospital cost growth in Maine, CAHC used estimates from the MHA. The MHA uses expenditures as an estimate for costs. It is unclear why the MHA would use an estimate when they have actual data. The only rationale for using expenditures is if there were complete efficiency in the system and all expenditures were essential to providing hospital care. For example, a hospital's annual expenditures may include spending for a new piece of equipment, a new chandelier in the lobby, a new façade for the building, repairs for an ambulance, and wages and benefits of new staff. Are all of these expenditures necessary to deliver quality hospital care? It is clear that some are, but there may be debate over other expenditures and their direct correlation with the provision of quality care.

The MHA argues that the Maine hospital cost estimates account for the number of patients receiving services, but the national estimates do not. They further argue that growing hospital costs in Maine can be explained, at least in part, by an explosion of new patients entering the health care system. According to the MHA, about 200,000 more patients sought treatment in 2002 than 2001. Given an estimated total population of almost 1.3 million in 2002, that increase in patients is equivalent to almost one-sixth of the state's entire population. Can the MHA provide documentation for these increases? Why was there such a dramatic increase in patients and what hospital services did these patients receive?

Moreover, in almost every other industry, when volume increases, costs decrease as fixed costs are distributed across a larger number of goods and services sold and economies of scale are achieved. Additionally, increased volume leads to increases in revenues and profits. Why does the hospital industry not have similar cost decreases associated with increased volume?

In the past, the MHA has pointed to a PriceWaterhouseCoopers study when discussing the impact of volume on hospital costs. It is important to note that this report, prepared for the American Hospital Association and the Federation of American Hospitals, studies the key drivers in the growth of spending on hospital care in the nation. In the study, volume is identified as one of the "key drivers" and includes population growth and increased utilization per capita. One may question whether this study is relevant to Maine. For instance, this study attributed 21 percent of the increase in hospital spending to population growth. In recent years, the population in Maine has been growing at less than 1 percent each year. Attributing such a large percent of the increase in hospital spending to a factor that is not very significant in Maine seems inappropriate. Moreover, strong arguments can be made that hospitals play a role in the demand for hospital services and thus control, to a degree, growth in utilization.

The MHA also points to an aging population to explain rising hospital costs. A study published by the Center for Studying Health System Change finds that in 2001, population aging contributed to an estimated 0.7 percent (i.e., 7/10ths of 1 percent) increase in per capita health care spending for people under 65. The study concludes that aging is not a major cost driver.

In conclusion, despite disagreements in the actual percent and level of hospital cost growth, there are two points that are clear. Hospital costs have been growing faster in Maine than in the nation. Even the MHA, in its criticism to this report, presents estimates of hospital cost growth that are 1.2 to 1.7 percent higher than the national average. When we are looking at a multi-billion dollar industry, even small percentages represent a large amount. The second point that we can not ignore is that small businesses are struggling to cover health care for their employees. Many are continuing to cut costs in other areas to continue providing health care coverage because they see it as an "ethical obligation." It is time for hospitals to join businesses in playing a role in finding ways to provide consumers with access to quality healthcare that is affordable. The first step is to engage in an honest dialogue that explores ways to control their rising costs.

We hope you find this report useful.
Sincerely,

Joseph Ditré, Esq.
Executive Director

Hilary Holbrook
Policy Coordinator

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