Get the Basics on Minnesota Hospital Financing
All but two (Regency Hospital of Minneapolis and PrairieCare) of Minnesota’s 145 hospitals are not-for-profit or government-owned. As such, they are community-based organizations with tax-exempt status and a charitable mission to provide residents of Minnesota access to high quality care.
Hospital Financial Structure
Hospitals are reimbursed for services through a patchwork of public and private insurance products.
The established single price charged for each product or service. Hospitals maintain a charge master that often lists thousands of items. Some examples include the hospital room rate, which includes nursing care; line-item medications; supplies; operating room and emergency room incremental charges, etc.
The net payments actually received from government payers, insurers and patients. Government payers such as Medicare and Medicaid dictate payments based on regulatory and legislative updates. Private payers negotiate rates with hospitals usually based either as a discount from charges or on a bundled service price.
Hospital cost structure
Hospitals are very labor-intensive organizations. Approximately 50 percent of hospitals’ cost structure is devoted to salaries, wages and benefits costs in Minnesota. Since medical care is more and more reliant on high-tech equipment and services, another major component of hospitals’ cost structure are capital-related expenses, which account for nearly 7 percent of annual costs. Other operating costs include supplies, equipment, utilities, provision for bad debt and the like.
Hospital operating margin
The difference between revenues collected and operating costs. A hospital is doing well if they are able to produce a margin of five cents on the dollar or 5 percent above costs.
Due to ever-present budget concerns, government payers have tended to establish payment amounts to hospitals that are typically below the cost for providing services. MHA estimates Medicare reimburses hospitals, on average, 87 percent of costs. And Medicaid reimbursement is estimated at 85 percent of cost, on average. For hospitals to remain financially solvent or have positive margin, this means hospitals need to negotiate payments above cost from managed care and commercial payers. This “cost-shift” creates a sort of hidden tax on the private payer market.
Hospitals see patients that are covered by a variety of government-sponsored and privately-sponsored health coverage. The statewide breakdown of payments received by hospitals in Minnesota is as follows: