Minnesota Hospital Association

MN Hospitals

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.   

Hospital charges

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.

Hospital revenue

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.  

Cost-shift phenomenon

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.

Payer mix

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:

Payments from Medicare

For most hospitals, Medicare is the largest single source of revenue. Medicare is the federal program that was established in 1965 for older Americans over the age of 65 and for some who have lifetime disabilities.

Medicare pays hospitals based on a prospective payment system (PPS). The system uses medical service diagnostic related groups (MS-DRGs) to identify the primary diagnosis and procedures involved with a hospitalization. These diagnosis and procedure codes are assigned an MS-DRG that most closely represents a bundling of the types of care and services delivered. This prospective fee schedule makes some adjustment for geographic wage differences.  

Minnesota has 78 critical access hospitals (CAH). This federal program allows small, rural hospitals to be paid by the Medicare program at “cost plus 1 percent.” One qualification for this program is that a small, rural hospital must have 25 beds or less. This program has allowed small hospitals to be more financially viable.  

Medicare Advantage is an option for seniors to enroll in a health plan that provides their Medicare coverage. These plans typically cover some of the co-pays and deductibles that patients would otherwise be expected to pay. Health plans negotiate payment rates with hospitals.

Medical Assistance or Medicaid

Medical Assistance or Medicaid is a federal and state program whereby the state funds 50 percent of the program with state funds and 50 percent of the program is matched with federal funds. This program primarily serves lower income families with children, people with disabilities and Medicare co-pays and deductibles for low-income elderly. Approximately two-thirds of this population is enrolled in a managed care organization with monthly premiums paid by the state. The other one-third are covered directly by the state and pay hospitals on a fee-for-service basis. The current hospital inpatient rates are based on 2012 costs and have an estimated payment-to-cost coverage of 71.5 percent for Prospective Payment System (PPS) hospitals and tiers of 85/95/100 percent for rural Critical Access Hospitals.

MinnesotaCare

This is a program that was established in 1992 to fill the gap of coverage for families without access to employer-sponsored coverage and whose income qualifications are just above the standards for Medicaid coverage. There are premiums based on family income and size. There is a $10,000 cap on hospitalization coverage. Most of this coverage is provided through a managed care organization.

Prepaid Medical Assistance Plans (PMAP) and County-Based Purchasing Plans

Several of Minnesota’s managed care organizations participate as options for people enrolled under the Medicaid and MinnesotaCare programs. These programs provide some level of care management services. The rates paid to providers are generally negotiated rates.

Managed Care Organizations

In Minnesota, not-for-profit health plans have formed networks of providers and offer some level of care management to control access, costs and quality. Some examples of such organizations include Blue Cross and Blue Shield of Minnesota, HealthPartners and Medica. The plans typically negotiate rates with hospitals based on a prospective-fee-for-service basis. These larger organizations also may act as a third-party claims processing organization for large companies that may have self-insured ERISA plans.

Commercial Insurance

Commercial insurance plans offer more traditional health care coverage and negotiate with hospitals for payment rates.  These are sometimes based on charges minus a percentage or using a Medicare-like MS-DRG. Some examples of commercial plans include Aetna and Prudential as well as Medica, HealthPartners and Blue Cross Blue Shield of Minnesota.

Self-Pay Accounts

Some patients cared for in hospitals have limited health insurance coverage. Self pay accounts for patients who have insurance will most often owe a co-pay or deductible portion for their hospitalization. With the advent of high-deductible health plans, many self pay account balances have grown significantly for hospitals, creating a challenge to collect these amounts.

Charity Care

Not-for-profit and government-owned hospitals all have financial assistance programs or charity care as a part of their mission. Patients who have no health care coverage may qualify for a hospital’s charity care policy by completing some basic paperwork, though it is not always a requirement. People without health insurance often end up in the hospital emergency department because they have limited access to clinics and they often wait until an acute need arises before accessing the health care system.

Bad Debt

Bad debts are typically payments that hospitals expected to collect from patients, but were not paid. Hospitals are often left with unpaid bills from patients who don’t respond to follow-up invoices and offers for financial assistance. When patients enter the emergency room for care, the EMTALA emergency treatment regulations require hospitals to ensure patients’ care needs are addressed before discussion of payment can occur.

Uncompensated Care

Chart - trends in uncompensated care