Relative profit margins and the allocation of inpatient and outpatient services

Background: Many surgical procedures can be performed during either an outpatient visit or an inpatient stay. In general, outpatient visits are less costly than inpatient stays. So a likely cost-containment strategy of a third-party payor would be to pay healthcare providers a larger profit margin for an outpatient visit than for an inpatient stay. Objectives: To determine which payor types promote cost containment by paying a larger profit margin for outpatient services than for inpatient services. Methods: The Florida Agency for Health Care Administration (AHCA) collected payments and charges data for inpatient and outpatient services separately and by payor type for fiscal years 2003-2005. Hospitals reported separate figures for eight different payor types: three government payors (Conventional Medicare, Conventional Medicaid and Other Government Fixed-Price Payors), two quasi-government payors (Medicare HMO and Medicaid HMO) and three commercial payors (HMO, PPO and Other Commercial Discounted Payors). If charges are proportional to the costs of providing healthcare, then payments divided by charges are proportional to the profit margin. Therefore for each payor type, if the outpatient profit margin is greater than the inpatient profit margin, then the outpatient payments-to-charges ratio is greater than the inpatient payments-to-charges ratio. Results: From 2003 to 2005, the numbers of acute care hospitals that provided data to AHCA were 224, 186 and 184, respectively. Of those reporting hospitals, we tested the difference between the mean outpatient and inpatient payments-to-charges ratios where reported payments were positive and charges were greater than payments. The number of hospitals that met these requirements ranged from 130-192 in 2003, 121-166 in 2004 and 123-183 in 2005 depending on the payor type. For the three years studied, both conventional Medicare and Medicaid consistently paid lower mean profit margins for outpatient services than for inpatient services. Conversely, all three commercial payors and Other Government Fixed-Price Payors consistently paid higher mean profit margins for outpatient services than for inpatient services. In almost every instance, these differences were statistically significant (P < 0.05). The quasi-government payors usually paid higher mean profit margins for outpatient services than for inpatient services, but these differences were seldom statistically significant. Policy Implications: Conventional Medicare and Medicaid in Florida differ from commercial third-party payors by not paying a higher profit margin for outpatient services than for inpatient services and thus may not be incentivizing providers to minimize the cost of care.