By MAGGIE MAHAR

MYTH #1: In negotiations over reform, hospitals were forced to accept sharp cuts in Medicare funding.

FACT: In those negotiations, hospitals come out winners. They “were inside the tent very early on, negotiated a decrease in their Medicare updates that they figured out was acceptable” the Urban Institute’s Bob Berenson explained in a recent Health Affairs roundtable. (Berenson is in good position to analyze the changes: he was in charge of Medicare payment policy and managed care contracting at the Health Care Financing Administration – now called the Centers for Medicare and Medicaid– from 1998 to 2000 )

“And now [hospitals] are off limits until 2020 from the new board that is supposed to [make sure] Medicare hits spending targets,” Berenson added referring to the Independent Payment Advisory Board (IPAB) that will recommend ways to trim Medicare spending if it continues to grow faster than the Consumer Price Index. IPAB begins its work in 2014, but hospitals and hospices are exempt from IPAB”s proposals until 2020.

Moreover, while annual increases in Medicare payments to hospitals will be trimmed slightly, these cuts will be offset by the fact that hospitals will be seeing an influx of paying patients. Beginning in 2014, millions of formerly uninsured patients will no longer need charity care. Granted, the “Disproportionate Share Funding” (DSH) that many hospitals now receive to help defray the expense of caring for a disproportionate share of poor patients will be sliced by 75%, but a portion of the 75% cut will then be distributed back to hospitals, based on how much uncompensated care a particular hospital is still providing.

MYTH #2: Medicare already underpays hospitals; any reduction in Medicare reimbursements will threaten the financial health of the nation’s hospitals.

FACT: In its March 2009 report to Congress the Medicare Payment Advisory Commission (MedPac) pointed out that not all hospitals lose money on Medicare patients. In fact, “some hospitals are able to generate profits [while] treating Medicare patients.”

How do they do it ?

Hospitals that break even or generate profits from Medicare patients tend to fall into one of two categories, MedPac reports. First, teaching hospitals often generate profits on Medicare patients due to indirect medical education (IME) payments that exceed the indirect costs associated with teaching residents. Secondly, relatively efficient hospitals are able to cover the costs of caring for Medicare patients by keeping their costs lower than their peers’ costs.”

When MedPac examined financial outcomes for a set of hospitals that consistently perform well on cost, mortality, and readmission measures” it “found that Medicare payments, on average, roughly equaled their Medicare costs.” In other words, higher-quality, relatively efficient institutions, where doctors and nurses take more care with discharges and fewer patients “bounce back,” are far less likely to lose money on Medicare patients.

Perhaps the supposedly “inefficient” hospitals are treating poorer, sicker patients? Medicare takes this into account. As noted, when it sets payment rates for hospital services, it increase reimbursements for hospitals that see a disproportionate share of low-income patients.

Moreover, MePac observes, when a hospital needs to tighten its belt and become more efficient, it can: “MedPac research shows that hospitals under financial pressure are able to constrain their costs. By contrast, hospitals that receive rich payments from private insurers face less pressure. As a result their costs rise and their Medicare margins tend to be low.”

In other words, hospitals are like many families. The more income they have, the more they spend—and the more lax they become about sticking to a budget.

MedPac suggests that the problem is not that Medicare pays too little, but that private insurers pay certain hospitals too much. A MedPac study of private hospitals from 2001 to 2007 found that in some cases private insurers were paying 13.5% more than it cost hospitals to care for patients. As a result, these hospitals were feeling flush, and didn’t focus on efficiency. No surprise, their Medicare margin was negative, falling 11.75% short of the cost of care. By contrast, hospitals that weren’t paid as well by insurers lost 2.4% on those private patients. Under financial pressure they worked hard to avoid waste when caring for Medicare patients, and came out with a 4.2% margin.

MedPac describes how marquee hospitals squander health care dollars: “Hospitals with the greatest resources are less aggressive about containing costs and therefore have the highest Medicare ‘losses’ (the difference between Medicare rates and a hospital’s average costs). The most profitable and powerful hospitals spend more and increase their costs per unit of service. Hospitals with high profits, low financial pressure, large endowments or robust fundraising have the highest costs, and a higher cost base leads to lower Medicare margins. If Medicare were to increase payment rates, hospitals with market power would be unlikely to voluntarily cut prices charged to insurers and reduce revenue. Instead, hospitals might spend some or all of that revenue, pushing costs higher still.”

We know that, when it comes to health care, lower spending and higher quality go hand in hand. Indeed a separate MedPac study of 300 hospitals shows that more efficient hospitals have lower death rates. MedPac has concluded that “increasing Medicare payments is not a long-term solution to the problem of rising private insurance premiums and rising health care costs. In the end, affordable health care will require incentives for health care providers to reduce their rates of cost growth.” Under reform, Medicare will “encourage better care by covering the costs that reasonably efficient providers would incur in furnishing high quality care–rewarding providers whose costs fall below the payment rates and penalizing those with costs above the payment rates.”

MYTH #3: Most U.S. hospitals are efficient, and already have responded to pressure to cut waste.

FACT: MedPac reports enormous differences in the quality of care at profitable hospitals, and the latest 2009 hospital survey released by the Leapfrog Group, a nonprofit organization representing major private and public purchasers of healthcare benefits, confirms a wide disparity in hospital efficiency. For 2009, 1,244 hospitals in 45 states completed the voluntary Leapfrog Hospital Survey, and that self-reported information showed that “waste” remains a significant problem. For example, a 56% difference existed, between the highest and lowest performing hospitals in terms of resource use for heart bypass surgery.

For heart angioplasty, there was a 79% difference between the highest and lowest performers. To gauge waste, Leapfrog’s resource use measure is based on risk adjusted mean length of stay compared to readmission rates. Length of stay is a strong determinant of cost.

The variations in waste among hospitals performing the same type of surgery highlight the opportunities that exist for significantly cutting the costs of care, Leapfrog CEO Leah Binder said.

In 2009, less than half of hospitals in the survey met Leapfrog’s outcome, volume, and process standards for six other high risk procedures and conditions. Research has suggested that following nationally endorsed and evidence based guidelines for these procedures and conditions is known to save lives, Leapfrog suggested.

These procedures, with the percentage of reporting hospitals that fully meet Leapfrog’s standard in 2009, are:

Aortic valve replacement-11.8% Abdominal aortic aneurism repair-36.1% Pancreatic resection-33.5% Esophageal resection-31.5% Weight loss (bariatric) surgery-36.6% High risk deliveries-29.9%

Research indicates that a patient’s risk of dying can be reduced by approximately two to four times—depending on the high risk procedure—if care is obtained from a hospital that meets Leapfrog standards, Binder said. In particular, more than 3,000 deaths could be avoided each year if Leapfrog standards were implemented in hospitals that electively performed these procedures. Individual hospital results can be viewed and compared here.

MYTH #4: As Medicaid expands, more Medicaid patients will be showing up at hospital doors. Medicaid pays an average of 30% less than Medicare; hospitals cannot afford this drain on their resources.

FACT: Medicaid is reaching out to include patients who, in the past, were uninsured. If they became very sick, they wound up in hospitals where most could not pay their bills. Under reform, hospitals will receive some payment—which is much better than no payment.

In Part 4 of “Myths & Facts” I’ll continue to look at how reform will affect hospitals and hospital patients, focusing on concerns that because government payments are low, hospitals will continue to shift costs to private insurers, pushing premiums higher; fears that 32 million newly insured patients will crowd hospitals, leaving us all waiting on line; the belief that new regulations covering doctor-owned hospitals would leave us short of hospital beds, and the worry that reformers treated hospitals too generously, and that as a result, the cost of hospital care will continue to spiral.

Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.