What would Medicare for All mean for hospitals? That depends on each hospital’s payor mix

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Richard Evans / Scott Hinds

203.901.1631 /.1632

revans@ / shinds@ssrllc.com


May 3, 2019


What would Medicare for All mean for hospitals? That depends on each hospital’s payor mix

  • We believe passage of Medicare for All is nearly impossible in the upcoming Congress (117th, 2021-2013), though we do see a US single payor as a realistic possibility in the longer term. Single payor concerns have weighed heavily on hospital valuations
  • The US has far fewer beds per-capita, and far fewer hospital days per-capita than the G7 average – meaning a US single payor can’t find new efficiencies by reducing basic infrastructure costs
  • However once in the hospital, Americans tend to use higher cost technologies more intensively than their G7 peers. We tend to pay more for these tech inputs simply because there’s no monopsonist buyer to drive down prices; thus, a key consequence of a US single payor is likely to be a reduction in the prices paid for high tech inputs (e.g. drugs, devices, higher tech capital equipment)
  • The US tends to make much less efficient use of higher tech capital equipment; even though we have more procedures using such equipment (e.g. MRI, PET, CT, radiation treatment) than G7 peers, the average utilization rate per piece of equipment in the US is well below the rate in other G7 nations. Limiting the availability and/or utilization of such equipment is a rational target for a single payor, though we note that Medicare in its current form has the heft to influence this pattern, but arguably has not
  • US hospitals are substantially less labor-efficient than the G7 on average, with much of the difference attributable to a relative excess of non-medical personnel. Arguably a single payor shift would simplify billing and reduce labor costs since there would be one payor to deal with rather than many. However, Medicare billing is also extremely complex, and hospitals employ considerable numbers of well-paid specialists who have no other role than to optimize coding in an effort to maximize reimbursement. Thus, it’s unclear whether a shift to single payor would bring substantial net gains in hospitals’ labor efficiency
  • The largest impact on hospitals from a shift to single payor likely relates to pricing. Commercial pricing currently stands at about 1.45x underlying costs; in contrast Medicare and Medicaid pricing is at about 0.87x and 0.88x underlying costs, respectively. A single payor cannot realistically just move everyone to Medicare pricing, since Medicare margins are on average demonstrably negative. More likely is that a single payor would have to set hospital prices at or near the current weighted average price-to-cost ratio of 1.17x
  • This would work against hospitals with higher than normal percentages of revenues from commercial payors, and vice versa. THC and HCA see approximately 66% and 52% of revenues from commercial payors, as compared to the national average of 47%; as such both THC and HCA presumably would be disadvantaged by a shift to the blended market rate for all patients. UHS takes just 31% of revenues from commercial payors, and presumably would see an improvement in average prices

Increasing concerns over Medicare for All have weighed heavily on hospital valuations (Exhibit 1). Despite the fact that we believe Medicare for All cannot pass in the upcoming Congress[1], these share price declines force consideration of how the US hospital business might change under a single payor. To begin with, we’re not oversupplied with basic capacity, nor do we spend a lot of time in the hospital relative to other developed countries. In fact, as compared to other G7 nations for whom we have data, we’re at the bottom of the pack in terms of both beds per-capita, and hospital days per-capita (Exhibits 2, 3). This means that the number of US hospital beds would be unlikely to fall under a single payor, either because of closing idle beds, or because of a reduction in the per-capita intensity of demand for beds

Even though we spend relatively little time in the hospital, when we’re there, we appear to consume technology more intensively than our G7 peers. Our sample of higher tech medical treatments is limited, and the evidence is a bit mixed. We’re less likely to receive stem cell transplants than our G7 peers, but (if we’re Medicare aged) more likely to receive a hip or knee replacement (Exhibits 4a-4c). When we shift the frame to higher tech capital equipment, the picture is much more clear – we’re relatively oversupplied with such equipment (Exhibits 5a-5d); and, with the exception of Germany and MRI scans we’re relatively more likely to have a procedure involving that higher tech equipment (Exhibits 6a-6c). Even though we have a lot of these procedures, it doesn’t make up for the fact that we have an awful lot of capital equipment, the result being relatively low levels of higher tech capital utilization than our G7 peers (Exhibits 7a-7c)

Even though a US single payor would be unlikely to take ownership of health care providers’ assets, such a payor might rationally choose to limit the amount of higher tech capital equipment in service, since evidence shows that more equipment tends to lead to more procedures using that equipment, and that not all of those marginal procedures are worthwhile. Whether this would in fact happen is an open question; Medicare in its current state arguably has the horsepower to influence the availability and use of higher tech capital equipment, yet here we are

Sticking with the theme of efficiency, US hospitals tend to be overstaffed relative to their G7 peers, with non-medical staff accounting for much of the difference (Exhibits 8a-8b). It’s tempting to argue that a US single payor would reduce non-medical staff numbers because the single payor would ease billing (one payor to deal with, rather than many), and this is probably true to some degree. However we would also note that billing Medicare (and Medicaid) is less than straightforward, and that hospitals and other providers have invested considerably in staff whose sole purpose is to optimize the codes under which claims are submitted. So moving to a single payor might narrow the US’ labor efficiency disadvantage, but by just how much is unclear

So, on balance, our use of basic infrastructure is efficient, but our use of non-medical labor and higher tech capital equipment is not, though it’s unclear whether a shift to single payor would reduce these labor and higher tech capital inefficiencies

Moving to pricing, Medicare (and Medicaid) prices have grown much more slowly than prices paid by commercial payors (Exhibit 9). And, because Medicare and Medicaid payment rates are below providers’ costs (Exhibit 10), providers’ overall margins on treating these patients are on average negative (Exhibit 11). This means that it’s practically impossible for a single payor to simply shift all patients to the Medicare (and/or Medicaid) payment rate; the far more likely scenario is that a single payor would have to set hospital prices at or near the current weighted average of Medicare, Medicaid, and commercial rates. It’s unlikely that a single payor could go lower, given that more than a fifth of US hospitals have negative total margins (Exhibit 12), and for obvious reasons it’s unlikely that a single payor would move hospital prices above the current (or then-current) weighted average

A shift in pricing to a single rate for all US persons would aid hospitals with relatively high proportions of Medicare / Medicaid patients, and hurt hospitals with relatively high proportions of commercial patients. To get a sense of how the publicly traded hospital chains stack up, we compared their payor mixes to the national average (Exhibit 13). THC and HCA both have relatively high proportions of commercial payment (66% and 52% of revenues, respectively, v. the national average of 47%), and would likely see significant pricing pressure from a US single payor. In contrast UHS has a relatively small proportion of commercial payment (31% of revenues), and would likely see pricing gains from a US single payor

  1. “Why Medicare for All can’t happen … yet”, SSR Health LLC, April 23, 2019



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