Colorado hospitals hiked prices by 76 percent over a seven-year stretch as they pushed their profits to among the largest in the nation and built more aggressively than hospitals in all but one other state, according to data the state plans to use to change spending priorities.
Along the way, hospitals doubled their administrative costs from 2009 through 2016 and contributed to residents in the state’s mountainous west region paying the highest insurance rates in the nation, according to the information collected for the Colorado Department of Health Care Policy and Financing.
The state sought the data to gain clarity into why health care costs are rising so much here. While the Colorado Hospital Association is disputing aspects of the findings, state officials say they expect to finalize the data this fall and eventually release hospital-by-hospital information.
The scrutiny is hitting an industry dominated by nonprofits, which operate about three-fourths of the hospitals in Colorado. That nonprofit status allows them to escape paying income, property and sales taxes and to benefit from other tax advantages that lower their borrowing costs.
“Those nonprofit decisions could have been made in collaboration with the public, the public that they are supposed to serve,” said Kim Bimestefer, executive director of the department of Health Care Policy and Financing, which oversees the state’s Medicaid program.
Tax records show that more than half the state’s nonprofit hospitals or their systems cut back on their charitable giving for items such as free medical care, subsidized services and community health programs from 2013 through 2015. Collectively, the percentage of their budget they devote to what they call community benefits declined from 12 percent of their budget to 10 percent during that time, the latest available tax data shows.
Meanwhile, they are contributing to an escalating “arms race” among hospitals in Colorado, Bimestefer and other state officials warn.
Capital expenditures for the hospital industry in Colorado were higher than all states but Alaska, data collected for the state shows. Amid the construction boom, the state’s hospitals erected new facilities they now struggle to fill. And as services get duplicated, the prices they charge their patients keep growing, according to the data.
Bimestefer, who is the former chairwoman of the health insurer Cigna HealthCare of Colorado, and other state officials plan to use the data to bolster their push to overhaul a state program that raises $1.2 billion annually from patient fees and matching federal funds to help pay hospitals for uncompensated care of indigent patients. That program currently pays hospitals strictly on their volume of Medicaid patients. If Bimestefer succeeds, that $1.2 billion will be used to initially encourage and eventually require hospitals to redirect their spending and priorities. Under the plan, still being formed, the patient fees instead would be used to pay hospitals to turn some freestanding emergency clinics and excess hospital beds into what state officials say are more pressing community needs, such as inpatient drug rehabilitation services or on reducing fatalities during births.
The state officials want to restrict the aggressive hospital growth in Colorado because they fear the growth comes at a cost. Colorado’s hospitals have become some of the most inefficient in the nation on key measures, they believe the HCPF data shows.
Hospitals in Colorado spend 33 percent more on capital and administrative costs per patient than the national average for such spending, according to the state data. Capital and administrative costs for Colorado hospitals from 2009 through 2016 increased nearly twice as fast as the rate of increase for such costs for hospitals nationally. At the same time, Colorado’s hospitals generate some of the nation’s largest profit margins while also amassing billions in reserves, the data shows.
The concern is that somebody has to pay for all the rising administrative costs, aggressive building and stockpiling of assets by the hospitals in the state as well as their surging revenue. And data shows those costs increasingly are borne by the privately insured. Colorado hospital revenues per patient, using a formula that accounts for outpatient volume, increased 76 percent from 2009 through 2016, from $36,551 to $64,225. Nationally, revenues per patient hit $50,668 in 2016, up 53 percent from 2009, the state data shows.
“That cost shift is occurring and putting pressure on hospitals to drive prices higher for private insurance, which then gets passed on to employees and their employers,” said Bimestefer, who hopes to use her state administrative powers to reverse the trend. “We are trying to align with our employers to understand their pain and drive the price down for the good of the entirety of the state.”
Kaiser Permanente, the largest insurer in the state, said its costs for hospital admissions went up by 9 percent last year and emergency department costs grew 12 percent. “Higher costs for health plans equals higher costs for patients,” said Amy Whited, Kaiser’s director of communications in Colorado.
“We also have seen a widening gap between the rates we pay hospitals in our network compared to those outside,” Whited added. “Unlike some states, Colorado has few regulations governing what hospitals can charge. This means that the same hospital can charge drastically different fees for the same procedure depending on the patient.”
The burden hospitals now place on the privately insured is a force felt throughout the state, Bimestefer and other critics say. Insurers say it’s the main reason those living in Vail and other resort towns in the state’s mountainous west region struggle to pay what a 2014 study found was the highest insurance costs in the nation.
The data collected by the state shows that Colorado’s hospitals:
• Generate profit margins collectively that are nearly double the national median for hospitals, and those profits are increasing faster than they are nationally. The median profit margin nationally was 5.9 percent in 2016 while Colorado hospitals collectively had a 10 percent profit margin. Hospitals in only four other states have higher profit margins than Colorado’s hospitals do. For-profit HealthOne, which operates eight Denver-area hospitals, was the top earner in Colorado, with a combined 35.7 percent profit margin and income of $880.2 million at its facilities in 2016.
As the only tax-paying hospital system in the Denver area, HealthOne pays millions of dollars in taxes annually along with providing millions of dollars in charitable contributions while aggressively reinvesting in hospital operations, said HealthOne spokeswoman Stephanie Sullivan. “We continually focus on our clinical and operational performance, both of which are keys to a well run hospital, and we are proud of our record of providing high-quality patient care,” Sullivan said.
• Spend nearly 29 percent more per patient on administrative expenses than is typical for hospitals in the country. Just eight years ago, hospitals in Colorado spent less than the national average on administration.
The state’s consultants found that 28 Colorado nonprofit hospitals paid more than $105 million in salaries and compensation over three years ending in 2015 to their five top administrators: the chief executive and officers in charge of operations, medicine, finances and nursing. The compensation included $5.4 million paid in 2013 to Rulon Stacey, former CEO of Poudre Valley Hospital in Fort Collins, part of the nonprofit UCHealth chain. He was paid his regular $2.7 million salary that year plus a severance package of $2.7 million, approved by a compensation committee, when he resigned from the hospital. The review likely undercounts some of the administrative expenses since many hospital systems don’t file tax records for individual hospitals that would report those salaries.
• Gave their physicians healthy salary increases. From 2008 through 2011, salaries Colorado hospitals paid their physicians increased from $144 million to $231 million, a 62 percent hike. The number of physicians employed by the hospitals increased by about 30 percent during that time frame. Figures weren’t immediately available for more recent years.
• Increased administrative costs per patient, taking into account outpatient volume, from $1,318 to $2,604 from 2009 through 2016 and increased capital costs from $1,090 to $1,360 per patient during that time.
• Built, grew and expanded at a more rapid pace than hospitals throughout the country. In a seven-year period ending in 2016, hospitals in Colorado spent more than $12 billion on capital projects. They pushed construction of freestanding emergency clinics so much that Colorado now is one of the top four states for such clinics. Colorado hospitals devote nearly twice as much of their costs on capital expenditures as hospitals in the similarly sized state of Minnesota.
• Barely increased the number of patients they see despite their robust building. Patient volume for Colorado hospitals for inpatient and outpatient services increased by just 1 percent annually from 2009 to 2016. State officials believe all the construction is creating excess capacity. When new hospital beds go empty, prices end up rising for the patients the hospitals do provide care to, and that results in rising insurance premiums, the officials say.
“If you run a factory that is running at 50 percent of capacity, that factory can end up closing,” Bimestefer said. “In health care? Not so much. They just increase their prices.”
The Colorado Hospital Association, the trade group representing the hospitals in the state, has pushed back against the preliminary HCPF data. The association points to other studies that show health spending per privately insured beneficiary is close to or at the median national rate. But those studies tend to favor states, like Colorado, with healthier populations that have fewer health needs.
The association also contends that part of the reason Colorado hospitals raised prices for the privately insured is due to Colorado expanding its Medicaid program in 2013. That year the state expanded Medicaid eligibility to about 500,000 more people, with federal aid initially paying for 95 percent of the cost of that expansion.
Hospital executives say Medicaid doesn’t reimburse the full cost of hospital care, forcing them to charge the privately insured more to cover costs associated with seeing more Medicaid patients. But Colorado, through the provider fee program, raised Medicaid reimbursement rates to the same level as Medicare. And the federal Medicare Payment Advisory Commission, which advises Congress on the adequacy of that program, has found that “relatively efficient providers” still can avoid losing money on Medicare repayments. Further, amid Colorado’s Medicaid expansion, the profit margins of Colorado’s hospitals have continued to rise as those hospitals charge the privately insured increasingly more.
Hospitals in Colorado reported total profit margins of 10 percent in 2016. That number includes investment revenue, hospital association officials stress. Once those other investments, which include revenue from physician partnerships, are removed, profit margins for hospitals in Colorado related to just patient care dropped to about 4 percent.
“The state’s numbers are highly reflective of a good economy in Colorado and a good investment market, but all those things can change, and those percentages can drop down to even negative levels for a long period of time,” said Chris Tholen, executive vice president of the Colorado Hospital Association.
State officials agreed to have their consultants, which are being paid $250,000, refine the data further, but the officials and consultants remain convinced the final report will show Colorado’s hospitals remain inefficient compared to the nation’s hospitals.
“It’s pretty clear and pretty well known that Colorado hospitals have pretty high profit margins,” said one of the state’s consultants, Thomas Nash, former vice president of financial policy for the Colorado Hospital Association. “What hasn’t been looked at until now is what their cost structures look like. The hospitals have operated in an environment that’s been handed to them, and I can’t blame them for that. But even hospitals know this isn’t sustainable and that we need to figure out what to do on a lot of fronts.”
The final release will set the stage for a legislative session in which hospital pricing will be a top issue, said State Rep. Bob Rankin, a Carbondale Republican who sits on the influential Joint Budget Committee that drafts the state budget.
“The consumers are bewildered by health care costs,” said Rankin, who in the last legislative session helped secure $1.2 million in new funding for HCPF to hire new employees and consultants to study hospital costs. “They’re talking about it all the time. They’ll tell you stories all the time, but they don’t know what to do about it because they have no visibility into how much things cost and why they cost what they do.”
During a recent meeting of a little known state board, a harbinger of the coming debate played out. The setting was before the Colorado Healthcare Affordability and Sustainability Enterprise board, which is made up of gubernatorial appointees from consumer groups, insurers and hospital officials.
Robert Smith, executive director of the Colorado Business Group on Health, a nonprofit pushing for lower hospital costs, gave a presentation to the board detailing huge pricing variations among hospitals in the Denver market. Higher price hospitals in Denver charge anywhere from 8 to 11 times more for common procedures such as chest scans, knee surgery and MRIs than what lower price hospitals charge in the same market, said Smith, who worked for decades as a hospital executive but has become one of their top critics since leaving the industry. The price variations for 10 common procedures in the Denver market amounted to an average difference of more than 800 percent, he said. That’s a price difference equivalent to paying $2.20 for a gallon of gas at one station and going across the street to pay $18.41 for the same gallon of gas at another station, Smith said.
Hospital executives on the state board groused that they hadn’t been given time to review Smith’s report. Bimestefer, who was attending, shot back, saying all the capital expenditures by the hospitals had “invited a corruption of the system.”
Her voice rising, she said: “If we’re focused on putting a cancer center or a sport orthopedic center across from somebody else’s cancer center or some competitor’s sports orthopedic center, that is not in the best interest of the community or the prices that are established that have to be paid by either consumers or employers or other payers.”
Colorado is one of 15 states without a certificate-of-need program that requires hospitals to prove they need to expand before they build. Without any restrictions on their growth, Colorado hospitals built repeatedly in the last decade and expanded as they bought more equipment, land, buildings and physician groups.
Cost report data shows Colorado hospitals are having trouble filling all the new hospital beds they created. The 63 percent occupancy rate for hospitals in Colorado already was worse than hospitals in 27 other states and below the median for occupancy nationally, 2016 data shows. That problem appears to be getting worse with some hospital expansions backfiring.
The nonprofit Southwest Memorial Hospital in Cortez borrowed for a $32 million expansion in 2014, backed with revenue from taxpayer-approved sales tax. But that hospital isn’t generating enough operational cash to meet a bonding agreement with its financiers. More than half of the hospital’s beds go unfilled, state data shows. Tony Sudduth, the interim CEO at Southwest Memorial, said a new management team has been brought in and staff cuts have been initiated to address operational issues. Despite the turmoil, he defended the expansion as necessary for the hospital to remain competitive.
New hospitals in Greeley, Castle Rock, Brighton and Fort Collins can’t fill all their new beds. Occupancy rates in those new hospitals ranged from half of capacity to less than a third, according to the latest data available from 2016. More patient beds likely will go empty now that UCHealth, one of the biggest nonprofit hospital chains in the state, is opening new hospitals in Highlands Ranch, Longmont, Broomfield and Colorado Springs not yet captured in the occupancy data.
Hospital executives point to the state’s growing population as the reason they are building. They also argue that the occupancy data can be misleading since it doesn’t account for all the patients under observation for less than 24 hours. They add that hospitals have to be prepared for the worst, such as if a flu epidemic strikes.
“It’s like a highway,” said Dan Weaver, a spokesman for UCHealth. “You can’t build a highway for the volume of traffic on a Sunday morning. You have to build a highway for the amount of the traffic you get on a busy rush hour.”
Insurers say that as the hospitals get bigger and consolidate operations and buy up more physicians, they gain leverage to negotiate higher payments.
The Colorado Commission on Affordable Health Care, created by the governor and the state legislature, reported two years ago that while spending in Colorado on nursing home care, prescription drugs and clinical practices dropped from 2015 to 2016, spending at hospitals was one of the health sector costs that continued to rise. The commission found that health care costs in Colorado are rising at a brisk annual 7 percent clip, faster than the rest of the nation. Health spending in the state grew by more than 300 percent over the past 20 years, and in the last eight years that pace picked up dramatically, rising at nearly four times the rate of inflation since 2000, according to the commission, which disbanded last year.
Some of the most pronounced criticism comes from those living in the state’s mountain resort towns. Insurers there say hospitals have taken advantage of a lack of competition in areas like Vail to get high payments from insurers for surgeries and outpatient care.
The pricing of Colorado hospitals in the mountains has no “relativity to real costs,” said Janet Pogar, who contracts hospital reimbursement rates for hospitals across the state for Anthem Blue Cross and Blue Shield of Colorado.
“It’s like a black hole,” said Summit County Commissioner Dan Gibbs, who has made high health care costs a top concern. “The hospitals negotiate with insurance companies whatever they can maximize it at while the consumers are left high and dry.”
“What’s the real cost of an aspirin?” Gibbs asked. “Is it a penny or what someone can maximize profitability out of it?”
Consider Vail Health. That nonprofit hospital had a humble beginning. It opened in 1965 as a small clinic that employed one physician. For years the hospital had modest ambitions. Just 11 years ago it lost money. Now the hospital is a profit-making juggernaut with operations spread among eight locations in the Vail Valley. The 58-bed hospital made a profit of $100 million last year, with net revenues coming in 20 times higher than the loss reported in 2007. Vail Health last year generated a 36 percent profit margin, among the highest for a hospital in the state and the nation.
A $68 million three-story west wing opened last year that houses the Steadman Clinic, whose world renowned orthopedic surgeons have formed partnerships with Vail Health and where nearly 100 Olympic competitors have sought treatment. A $195 million two-story east and central wing still is under construction.
Last year Vail Health held investments, excluding real estate, building and equipment, of nearly $411 million. The hospital held less than $55 million in investments 17 years ago.
“They’ve expanded,” said Pogar, the Anthem executive, of Vail Health. “And I would argue that has happened at the expense of the community. Instead of lowering the cost as they bring in more profits, the dollars they take keep getting bigger and bigger and bigger and they keep expanding and expanding.”
Vail Health’s CEO, Doris Kirchner, said the hospital stashed assets so it can limit the borrowing for the overhaul to $100 million. The hospital had to rebuild to keep up with other mountain area hospitals in Summit County, Aspen, Steamboat Springs and Glenwood Springs, which built new facilities or completed extensive renovations, she said. Now Vail Health can boast that it’s a level three trauma provider with certified emergency physicians available 24 hours a day, seven days a week, she said.
“We have significant international visitors come to Vail,” said chief financial officer Harold Dupper. “And Vail Health is able to support the opportunities to ensure those folks who come here are safe in the community because of the strength of our health care services we provide.”
Kirchner and Dupper contend the hospital’s prices are competitive with hospitals in Denver and others in the mountain region. They add that employers also have had success by negotiating prices directly with the hospital instead of ceding that duty to insurers. But insurers say that as Vail Health has expanded, so have the costs for families that live nearby.
Hospitals in the state’s western region charge insurers 35 percent more for inpatient surgeries than the average charged by hospitals in the Denver area, according to Anthem executives. The price difference insurers pay is even bigger for MRIs, which can cost as much as seven times more in Vail than what hospitals charge in the Denver area, found the state commission that studied health care costs. And those MRIs are prescribed at nearly seven times the rate in the mountain west than they are prescribed in Denver. Hospital patients in the mountain west are tested in labs nearly four times as often as they are in Denver, turning simple blood work into a profit-making sector for some hospitals, the commission also reported..
Insurers say the higher prices of western Colorado hospitals and the higher intensity of services get passed on to their customers.
Heather Rawlings, a real estate broker, and her husband, Michael, a freelance photographer, hired an insurance broker to scour the market for some way to get medical coverage for them and their two children. The family, which lives in Eagle, had to get creative after they were quoted an insurance plan that would charge them $3,000 in monthly premiums with a $7,500 deductible per person.
“It’s obscene,” Rawlings said. “For the four of us, $36,000 a year in premiums. And then $7,500 on top of that for a deductible. You would be out of pocket for $43,500 before insurance would cover anything. I don’t know anyone who has that type of money. Most of my friends don’t. They’re in the same boat as we are.”
The family in the end got traditional insurance with about a $300 monthly premium for just their youngest 15-year-old boy, Jensen, because he plays the contact sports hockey and lacrosse. The rest of the family relies on a faith-based cost sharing plan that requires them to pay for any medical care they receive up front and then seek reimbursement. The faith-based plan, which costs $399 a month, won’t pay for any care in excess of $1 million. Rawlings worries about what will happen if she, her older 17-year-old boy or her husband suffer a catastrophic disease or injury that exceeds the limits of the faith-based plan.
“When you get down to brass tacks the system is broken,” Rawlings said. “People like me are tired of trying to figure out how to keep our heads above water. It is absolutely exhausting. And if one of the three of us gets something catastrophic or some sort of traumatic injury, we have to get treatment at one of the most expensive hospitals in the country not knowing what will get covered.”
