Health care doesn’t come cheap. Unless you’re a millionaire (and even then, it’s likely), paying for health care involves, at some point, getting help with that payment from insurance. 

So what happens when insurance becomes harder to get? And how does a patient’s difficulty in paying for care impact the bottom-line finances of the health care industry?

Additional reporting provided by Sonia Ahmed. 

Changes and challenges

The macro-economic picture doesn’t look to be getting much better for hospitals—not in the near future, anyways. 

“On a broad level across the country, I think the [health care] industry is strong,” said Jerry Dunlavey, CEO of Garnet Health Medical Center - Catskills. “But there are a number of challenges facing the health care industry, and really, a lot of it comes down to the economics of the industry.”

According to Dunlavey, those challenges are twofold. Reimbursement rates are, on the whole, either declining or staying flat. At the same time, the same inflationary pressures that are affecting the economy writ large have an effect in pushing cents up for the health care industry. 

“It’s not getting cheaper to run the business that we’re in,” said Dunlavey. “When you think about things like the rising cost of pharmaceuticals, and then there’s just general inflationary impact that health systems are experiencing—the same things that you and I experience every day: the rising cost of gas, of electric, of food; we need all of these things to run our business—when these continue to rise, and the rates of reimbursement are either falling or staying flat, that again makes for what we talked about initially as not a good equation in terms of strength and stability, he said. 

At least things aren’t about to all get worse. Right?

Dr. Lisa Davis is the director of the Pennsylvania Office of Rural Health and Outreach Associate Professor Health Policy and Administration at Penn State.

Photo from www.porh.psu.edu/contact-us/

Reimbursement rates

The type of care someone needs doesn’t depend on the type of insurance they have. (The type of care they get can, but that’s a story for another day.) A stent or a foot surgery costs a hospital the same whether it’s needed for a patient covered by private insurance or by Medicaid. 

The difference comes at the next step of the process. While a treatment may cost the hospital the same amount, different insurance providers will pay the hospital different amount of money for that service. That’s a difference in “reimbursement rates,” the rate at which an insurer reimburses a medical provider for its services. 

As a general rule, private insurance providers offer hospitals higher reimbursement rates compared to government-provided insurance plans like Medicaid. It’s not a small difference, either: a 2020 study from independent health researcher KFF found that private insurers paid nearly double what Medicaid paid for an average of all hospital services. 

Lisa Davis is the director of the Pennsylvania Office of Rural Health. She said that when Medicare and Medicaid don’t fully reimburse hospitals, it’s hospitals that have to make up the shortfall out of pocket. 

“The hospital or the health system needs to cover the cost between what it actually costs them—because they have fixed costs they need to focus on and support—and what they are actually reimbursed for these services,” she said. 

If a hospital has a healthy balance of patients using Medicaid and using private insurance the reimbursement rates can balance out. The higher-reimbursement-rate private insurance patients can, in essence, subsidize those on government insurance. 

That math gets tricky for hospitals in a rural area. According to Davis, rural hospitals tend to serve more vulnerable populations than urban hospitals—and, consequentially, have a higher percentage of patients on Medicaid or Medicare. 

Rural hospitals “do not have the economies of scale to offset losses that they might be experiencing—especially through the Medicaid program, which reimburses about 71 to 73 cents on the dollar for every service that’s provided—to make up for that shortfall, and that can really be extremely challenging,” she said.