It is important to keep in mind that profits can be high, either because prices are high or underlying production costs are low (relative to each other). The Bai and Anderson study does not decompose profits but rather measures overall accounting profits as reported to Medicare. So, higher profits do not always indicate excess prices. Higher profits could be the result of lower costs resulting from greater efficiency.
Most hospitals that make positive profits do so from their services to commercially insured patients in health plans such as Blue Cross, CIGNA, and others. Medicare and Medicaid, the largest payors, generally have regulated prices that are independent of local market competition and any other characteristic that hospitals can control.
In contrast, hospitals and health plans negotiate prices for commercially insured patients, usually for one- to three-year year periods. The outcome of these negotiations is highly dependent on competitive conditions for both parties. More hospital competition generally results in lower prices paid to hospitals, as does less health plan competition. Both sides understand these dynamics and their importance in determining prices and profitability.
– Health Affairs