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Myths and Facts About Health Reform Part III

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.

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H.R. 3590Pam TolllouisdousBarry CarolSarah Jolie Recent comment authors
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H.R. 3590
Guest

A year-long series of debates and negotiations, tweaks and overhauls, soon followed. The Senate voted in favor of ending the debate on December 23, and passed their bill the day after.
H.R. 3590: Health Care for Everyone

Pam Toll
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Pam Toll

Prepsoterous that health care should be amandatory.. it mandatory to balance the US budget and its never done and no ones putting the Senators in jail are they? I mean what are you going to do? you have a mortage two jobs, four kids, braces, school fees and childcare and you cant afford it on your $53,000 a year salary? whats the govt going to do ? Pull your teeth out? fine your grocery purchases? Deny you work? I mean if you dont carry auto insurance they suspend ur drivers license for failure to comply and if you dont they… Read more »

Nate
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Nate

76 out of 372 going to taxes and profit doesn’t sound right at all, thats 25%. If 296 is going to expenses that doesn’t leave much margin to pay taxes on. Unless the 76 includes payroll taxes and benefits?

Margalit Gur-Arie
Guest

Vikram, I would suspect that a large part of the $147 billion for operation and support goes to non-medical labor.

Vikram C
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Vikram C

Until this year Walmart has been working with third party suppliers rather than manufacturer. What skills does Walmart have in manufacturing to help manufacturers reduce their cost? Yes they can help with packaging and transportation and they provide large, continuous volume. The more important benefit of size is seller/buyer power rather than economy of scale. Someone does have to pay for their ‘instant economy of scale’. Either the workers in thirld world countries or their societies or competitors if possible. CMS is going to exercise the buyer power for sure. And it does provide continuous volume that hospitals so much… Read more »

louisdous
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louisdous

Per Ms. Mahar…”Notjust primary care docs but pediatricians, geriatricians, family docs.”
Perhaps trivial to some but the fact that Ms. Mahar is not aware of what constitutes a primary care physician pretty much sums up her lack of knowledge and credibility. LD

Karl
Guest

W.H.O. FACTS LIE http://www.washingtonpost.com/wp-dyn/content/article/2010/04/30/AR2010043001419_pf.html So much for all the claims that the USA health care is so “terrible.” If this is LYING CHICAGO THUGS’ ‘facts,’ they’ll get theirs. ///////////////// North Korea has plenty of doctors: WHO By Jonathan Lynn Reuters Friday, April 30, 2010; 2:52 PM GENEVA (Reuters) – North Korea’s health system would be the envy of many developing countries because of the abundance of medical staff that it has available, the head of the World Health Organization said on Friday. WHO Director-General Margaret Chan, speaking a day after returning from a 2-1/2 day visit to the reclusive country,… Read more »

Karl
Guest

STOP MAKING SENSE?
” .. Aside from access to capital, there are surprisingly few economies of scale to be had in these capital intensive businesses.”
So .. MESS-iah is a LIAR?
Of course. All politicians — INCLUDING the ones who post “facts” here — LIE.
Nov. 2, MESS-iah’s B.S. goes on trial. And it does not look pretty.
So all this B.S. is for naught.

Barry Carol
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Barry Carol

To follow up on Nate’s comment, Wal-Mart also orders goods in much larger quantities than most other retailers which allows for long, efficient, lower cost production runs. It also often sends its own trucks to pick up the goods at the supplier’s plant. When you reduce the supplier’s cost to serve you, the supplier can charge less and still earn a satisfactory return on investment. Small retail competitors, by contrast, cost more to serve. That’s why they are charged more. None of this, by the way, has anything to do with healthcare. Aside from supplies, which account for only a… Read more »

Nate
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Nate

“Effectively smaller chains subsidize Walmart as vendor’s cost bas remains the same.” This might be true in some very rare cases but so incredibly untrue in almost all. Even the slightest knmowlwdge of Wal Mart and their supply chain and you would know they invest tremendous amounts in improving their suppliers cost basis. When they push vendors to eliminate extra packaging it not only reduces the cost to package but also to ship. If yu look at laundry detrigent and how they pushed them to remove water and concentrate it saved millions shipping unneeded water. Their shipping logistics are unmatched,… Read more »

Sarah Jolie
Guest

“But the analysis also found that the law falls short of the president’s twin goal of controlling runaway costs, raising projected spending by about 1 percent over 10 years. That increase could get bigger, since Medicare cuts in the law may be unrealistic and unsustainable, the report warned.”
Is it convenient?

Vikram C
Guest
Vikram C

It all seems to be based upon MedPac’s analysis that hospitals can do same job with lesser money. Mark Spohr made interesting comment that efficiency improves quality and lowers cost. But how can this happen? Are hospitals and doctors practicing expensive form of medicine or are they poor at running business? Probably that’s where doctor’s input would have been so valuable in this forum. There are questions about one segment paying for others but that doesn’t merit too much conversation as by same yardstick we should be protesting Walmart using it’s buyer power to force it’s vendor to lower their… Read more »

Karl
Guest

IMF BAIL-OUT
AP just reported that Greece took a bail-out from IMF (a.k.a., USA) and Euros.
Whose going to bail-out the USA from OBAMA-BANKRUPTCY?
Will the Chinese Commies take a sexism-card? Or a race-card?
//////////
“.. Look at Greece and California — going BANKRUPT without an adult in sight.”

Peter
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Peter

“Maggie’s “analysis”, as far as it goes, blissfully ignores this variation, and the truly questionable public policy correlate- that it’s OK for one public program to pay, like two thirds of another, because it covers poor people.” It’s not “OK” and it’s also not OK to have Medicare pay less (or more) than what should be the proper amount. It’s disgraceful that we position patients into the healthcare system depending on what their ROI is. Hospitals should be paid ONE fee for everyone for the same work. From discussion here I think hospitals are being paid (or forcing payment) too… Read more »

tcoyote
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tcoyote

Kind of late in the process to weigh in on Maggie’s “Myth” vs. “Opinion” series, but her last point is the truly debatable one. Yes, hospitals have a long way to go to operate efficiently and Yes, 60% of Medicare is better than nothing. BUT, the fact that Medicaid is not randomly distributed and that PPACA will effectively end cost shifting places safety net institutions at risk (not just hospitals, but FQHC’s, local health departments) and they could end up being badly damaged. Medicaid accounts for “only” about 15% of the typical hospital’s revenues but the ones where it’s 20-40%… Read more »