Workers Comp -- The Hospital Profit Engine

Friday, July 11, 2008 | 0

By Joe Paduda

Workers' comp medical expenses account for less one-fiftieth of total U.S health care costs - $30 billion out of $2 trillion.

Yet workers' comp generates almost one-sixth of hospital profits.

Here's how the numbers work. About one-third of comp medical payments are issued to healthcare facilities. The average U.S. hospital cost-to-charge ratio (what it costs the hospital to provide a service compared to what they bill for that service) is approximately 31.2%; in comparison workers’ compensation payers reimburse about 55% of hospitals' billed charges.

Thus workers comp payers pay hospitals 176% of their costs.

(There is another, very big argument over the methodology hospitals use to calculate their 'costs', my opinion is there is conclusive evidence that costs are exaggerated and overstated)

In dollar terms, in 2007 workers comp insurers and self-insured employers paid facilities roughly $9.1 billion. $3.9 billion of that $9.1 billion was profit for hospitals.

The entire U.S. hospital industry generated profits of roughly $25 billion, workers’ compensation – which you will remember represents only about 1.5% of total hospital revenues – accounts for approximately 16 percent of all the profits for US hospitals.

Few dispute that workers comp insurers and SI employers should adequately reimburse hospitals. It is equally indisputable that under the current systems, comp payers are paying much more than their fair share.

How much should workers’ compensation payers pay? According to Vincent Drucker of FairPay Solutions, "something between what Medicare pays and the costs + twenty percent that group payers are reported to be paying." (FPS is an HSA client)

Why are comp payers overpaying hospitals? That's a subject for a later post.

<i>Joe Paduda is a principal of Health Stategy Associates, a Connecticut-based employer's consulting firm. This column was reprinted with his permission on his blog on workers' comp and managed-care issues, http://www.managedcarematters.com</i>