Hospital Costs Lower in Michigan than in Indiana, Wisconsin; Michigan’s Certificate of Need Laws, Dominant Insurer Likely Contributed to Differences

April 20, 2015 | Publication

A report released today by the Center for Healthcare Research & Transformation (CHRT) shows substantial variation in hospital costs between Indiana, Michigan and Wisconsin, with Michigan as the lowest cost among the three states. Many complex factors contributed to these differences, and likely included state regulations such as Certificate of Need laws and health insurance market conditions that varied by state.

Major findings are that in fiscal year (FY) 2013, Wisconsin had per capita hospital costs of $3,107, higher than Indiana ($2,975) and Michigan ($2,624). This is consistent with earlier trends in total health care spending per capita. From 2001 to 2009, Wisconsin had the highest per capita health care costs among the three states, while Michigan had the lowest.

These three states were chosen for study as Midwestern states with diverse health care policies and market conditions. The report analyzed hospital costs at the state level and hospital profit margins in the largest city in each state—Detroit, Indianapolis and Milwaukee.

“Differences in the states’ health insurance markets, and Certificate of Need laws that regulate hospital construction and investment in technology are likely two factors contributing to the variation we see between hospital costs in these cities,” says Marianne Udow-Phillips, director of CHRT.

“Wisconsin has the most fragmented health insurance market in the nation, likely reducing the bargaining power of any one insurer. Wisconsin and Indiana have no Certificate of Need laws, while Michigan is one of 36 states that does,” says Udow-Phillips.

Other highlights of CHRT’s issue brief, A Tale of Three Cities: Hospital and Health System Costs in the Midwest, show that:

  • In FY2013, there was substantial variation in hospital and health system profit margins among the three cities. The Milwaukee health systems had the highest operating margins in the study, ranging from 4.1 to 12.2 percent, far above the national benchmark of 2.2 percent. Total margins ranged from 6.6 to 15.2 percent, compared to a benchmark of 4.2 percent.
  • The Indianapolis health systems generally had operating and total margins above the benchmarks as well. Operating margins ranged from -0.2 percent to 10.6 percent, and total margins ranged from 15.6 to 17.4 percent.
  • In contrast, most of the Detroit hospitals and health systems had margins below the national benchmarks. Operating margins ranged from -9.4 percent to 4.1 percent, and total margins ranged from -0.8 percent to 5.8 percent.

“This study illuminates the cost trend differences of communities in neighboring states with varying market and regulatory structures. Policy makers can further analyze these cost trend differences to inform future health care spending and regulatory policies,” says Udow-Phillips, who is a member of the U-M Institute for Healthcare Policy and Innovation and holds a faculty appointment in the U-M School of Public Health.

The CHRT analysis is based on financial data from FY2013 Medicare Cost Reports accessed through the American Hospital Directory to calculate operating and total profit margins, as well as per capita hospital spending by state. Medicare Cost Reports are the only national data source available for all types of hospitals, regardless of whether they are for-profit, not-for-profit, or government facilities.

For a comparison of health care costs in Indiana, Michigan and Wisconsin, please read “A Tale of Three Cities: Hospital and Health System Costs in the Midwest,” available at chrt.test.