The Trouble with Hospital Pricing
As employees’ health insurance has shifted to high deductible forms, they’ve become personally responsible for larger and larger percentages of hospitals’ billed charges. And, as the average self-pay (i.e. deductible, co-pay, or co-insurance) collectible from an insured person has risen, their willingness to pay that bill has fallen. Using THC as an example, the collection rate on insured patients’ share of hospital charges fell from 51.9 percent in 2006 to 37.1 percent in 2013
Conversely, as Medicaid expands and the previously uninsured gain new health coverage on the health insurance exchanges, hospitals’ collections from persons previously uninsured rises. The obvious question: Which effect ultimately will be larger?
We believe that all else held equal, feasible Affordable Care Act enrollment gains (Medicaid and health insurance exchanges) would reduce hospitals’ provisions for doubtful accounts by roughly 2 percent. Using HCA’s 2013 provision of 11.2 percent as an example; if nothing changed other than reduction of the uninsured due to ACA enrollment gains, we would expect the HCA doubtful accounts provision to fall to +/- 9.2 percent
If we then add back the assumption that employer sponsored insurance is becoming less generous, we find that if the average employer sponsored plan paid roughly $0.72 per dollar of allowed charges (equivalent to a generous Silver plan on the health insurance exchanges) as compared to the current $0.82 average (equivalent to a generous Gold plan), that the 2 percent improvement in the provision for doubtful accounts would be wiped out. As employers move employees to private health insurance exchanges, employees may self-select into plans paying as little as $0.65 per dollar of charges
Thus it’s feasible that falling numbers of uninsured improve hospitals’ collections at about the same pace that falling generosity of employer-sponsored coverage impairs hospitals’ collections – but the risks are plainly to the downside
But for these net pricing risks, we would recommend hospitals, as we anticipate significant growth in unit demand for hospital services, and this typically brings share price outperformance. However because of these risks, we believe hospital suppliers (e.g. BD, CFN, COV, OMI, etc.) are a substantially better investment, as these companies are likely to see both stable* pricing and volume gains
For our full research notes, please visit our published research site