Do Chargemaster Prices Matter? An Examination of Acute Care Hospital Profitability

Background: It remains widely debated whether chargemaster price markups are tied to hospital profitability. Objective: To evaluate the effect of chargemaster markups on hospital profitability in the presence of unobserved hospital-specific (time-invariant) confounders, and cross-sectional dependence due to latent (common) policy shocks. Design: We use interactive fixed effects methods to address concerns of unobserved hospital-specific (time-invariant) confounders, and cross-sectional dependence. Setting: US acute care hospitals, 1996 through 2017 (ie, 22 y). Participants: Using primarily Medicare cost report data, we construct an unbalanced panel of 3499 acute care hospitals per year, or a total of 76,972 hospital-year observations. Measurements: Chargemaster markups (above cost), profits per hospital inpatient discharge. Results: Between 1996 and 2017, chargemaster markups increased (on average) by 155%, and the SD of the chargemaster markup distribution increased by 324% - indicating growing variability in the average markup strategies pursued by hospitals. Our preferred model specification implies that a unit increase of the hospital chargemaster markup is associated with a $261 (P<0.01; 95% confidence interval: $232-$291) increase in profits per hospital inpatient discharge. These results are robust to a wide set of model specifications, the use of alternative profitability measurements, and the use of an alternative instrumental variable identification strategy. Additional subsample analysis that controls for a rich set of hospital quality measures and system affiliation information also yields similar results. Conclusion: We show that higher chargemaster markups are associated with higher hospital profitability. Additional research is needed to understand how chargemaster pricing impact health outcomes and health care disparities.