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Julie Creswell, Barry Meier And Jo Craven Mcginty for The New York Times
BAYONNE, N.J. — The most expensive hospital in America is not set amid the swaying palm trees of Beverly Hills or the luxury townhouses of New York’s Upper East Side.
It is in a faded blue-collar town 11 miles from Midtown Manhattan.
Based on the bills it submits to Medicare, the Bayonne Medical Center charged the highest amounts in the country for nearly one-quarter of the most common hospital treatments, according to a New York Times analysis of 2011 data, the most recent available. No other hospital was at the top of the price list more often.
Bayonne Medical typically charged $99,689 for treating each case of chronic lung disease, 5.5 times as much as other hospitals and 17.5 times as much as Medicare paid in reimbursement. The hospital also charged on average of $120,040 to treat transient ischemia, a type of small stroke that has no lasting effect. That was 5.6 times the national average and 23.6 times what Medicare paid.
For those prices, the quality of care at Bayonne Medical is no better — or worse — than that at most other New Jersey hospitals. In a 2011 state hospital quality report, Bayonne Medical scored only in the top 50 percent.
But profits at the hospital, which was bankrupt in 2007, have soared in recent years, in part because it has found a way to turn some of those high billings into payments.
The increasingly contentious issue of hospital charges drew renewed attention last week when the federal government released Medicare data showing that facilities nationwide submitted widely divergent bills for the same treatments.
And while the unassuming, six-story brick hospital here holds a notable place in those rankings, others stand out as well. The midsize Crozer-Chester Medical Center in Upland, Pa., was the top biller in the country for urinary tract infections. One prestigious Manhattan hospital, NYU Langone Medical Center, charged twice as much as the equally high-end NewYork-Presbyterian to implant a cardiac pacemaker. But Medicare considers the two New York hospitals so similar it pays them both about $20,000 for the procedure.
The hospital industry is quick to say that the charges are irrelevant because virtually no one — private insurers, Medicare or even the uninsured — pays anywhere near those amounts. Medicare sets standard rates for treatments and insurers negotiate with hospitals. But experts add that the charges reflect decades of maneuvering by hospitals to gain an edge over insurers and provide themselves with tax advantages.
Until a recent ruling by the Internal Revenue Service, for instance, a hospital could use the higher prices when calculating the amount of charity care it was providing, said Gerard Anderson, director of the Center for Hospital Finance and Management at Johns Hopkins. “There is a method to the madness, though it is still madness,” Mr. Anderson said.
A close look at the finances of Bayonne Medical Center sheds light on how hospital pricing at the extremes may financially benefit an institution. The practices at Bayonne Medical also highlight a new financial strategy used by a small number of hospitals to increase their profits by “going out of network” — severing ties, and hence contractual agreements that limit reimbursement rates, with large private insurers.
Neither officials nor owners of Bayonne Medical responded to multiple calls and e-mail requests for interviews. Because the company is privately held, it does not have to release financial data.
Bayonne Medical, which was founded in 1888, was losing nearly $1.5 million a month before it filed for bankruptcy in 2007. By 2011, under new ownership and a new financial model, its patient revenue had nearly tripled and its operating income had reached $9.3 million, according to the American Hospital Directory, a publication that compiles data from Medicare and other sources about health care facilities.
The hospital’s turnabout started in 2008 when it was acquired out of bankruptcy by a consortium of buyers in a deal valued at about $41 million.
Bayonne’s purchasers included Vivek Garipalli, who worked at the private equity giant Blackstone Group before co-founding the International Sleep Network, a company based in New Jersey that treats patients with sleep apnea and other disorders. Joining Mr. Garipalli was Jeffrey Mandler, the head of a health care imaging firm. To make money from Bayonne Medical, the new buyers made some big changes in the hospital’s business strategy.
First, they converted Bayonne Medical from a nonprofit to a for-profit hospital at a time when such hospitals were a rarity in New Jersey. Next, they moved to sever existing contracts with large private insurers, essentially making Bayonne Medical an out-of-network hospital for most insurance plans.
Under New Jersey law, patients treated in a hospital emergency room outside their provider’s network have to pay out of pocket only what they would have paid if the hospital was in the network. But an out-of-network hospital can bill the patient’s insurer at essentially whatever rate it cares to set. While the insurers can negotiate with the hospital, they generally end up paying more than they would have under a contractual agreement.
In recent years, Bayonne Medical put up digital billboards highlighting the short waits in its emergency rooms in an effort to attract more patients. Insurers complained that the hospital was seeking to take advantage of the higher rates it could charge.
While the law was aimed at giving patients more hospitals to choose from, it “has had the unintended consequence of rewarding folks for these inflated charges,” said Wardell Sanders, president of the New Jersey Association of Health Plans. “When people say these charges are just the sticker price and it’s meaningless, it’s not meaningless.”
Community leaders in Bayonne, fearing the hospital could close, said the buyers were always candid about the methods they intended to use to make the hospital a profitable enterprise.
“That raised a lot of concern, but what other choice did we have?” said Jeanne Otersen, who was a member of the Coalition to Save Bayonne Medical Center and is policy director for the Health Professionals and Allied Employees, a union that represents nurses at the facility.
Not surprisingly, the insurers fought back against the out-of-network model. In 2009, Horizon Blue Cross Blue Shield of New Jersey filed an injunction in New Jersey Superior Court saying Bayonne Medical’s owners had “flatly rejected” and refused to negotiate an in-network hospital contract with Horizon. When the existing agreement expired in early 2009, Horizon said Bayonne sharply increased its prices. Bayonne’s in-network charges to Horizon averaged $13,000 a day in 2008. A year later, when it was out of network, the charges soared to $29,000, the insurer said in a spring 2009 news release.
Bayonne Medical denied allegations in Horizon’s lawsuit that it was artificially inflating prices, and filed its own lawsuit against Horizon, claiming the insurer had intimidated patients and tried to get them to leave the facility before completing their treatments.
The two eventually settled in 2011, and Horizon became an in-network insurance provider. A spokesman for Horizon declined to comment on Bayonne Medical’s charges, citing terms of the settlement agreement.
Still, many other large insurance companies, including Cigna, United Healthcare and Aetna, remain out of network at Bayonne and are paying the higher bills.
“Their model is to charge exorbitant rates, particularly for emergency room services, and if the insurance companies don’t pay them, they threaten to go after the member for the balance of billing,” said Carl King, head of national networks for Aetna, whose in-network contract was also ended by Bayonne in 2008.
Like Horizon, Aetna said its bills from Bayonne Medical soared, and it also filed a lawsuit in 2011. The suit was dismissed.
Aetna’s internal data showed that Bayonne Medical’s emergency room charges jumped again in 2012 and are running 6 to 12 times as high as those of surrounding hospitals. Last fall, Mr. Garipalli bought the designer Tory Burch’s oceanside home in Southampton for $11 million, according to public records.
After purchasing Bayonne Medical, the investor group went on a buying spree, acquiring Hoboken University Medical Center in 2011 and the bankrupt Christ Hospital in Jersey City last year.
“This hospital is clearly pursuing an out-of-network strategy with a profit motive in mind and taking advantage of members who seek emergency services at their facility,” Mr. King said.