MYTH #1: Because government payments to hospitals are so low, hospitals will continue to shift costs to private insurers, pushing premiums higher.
FACT: This is a canard that insurance lobbyists like to perpetuate because it helps justify climbing premiums. The non-partisan Medicare Payment Advisory Commission (MedPAC) has taken on exaggerated accounts of “cost-shifting” by showing that a hospital’s relative market strength determines what a hospital is paid by private payers.
MedPac points out that from 1994 through 2000, during the heyday of “managed care,” insurers had more power than hospitals in most markets: “managed care restrained private-payer payment rates.” But “by 2000, hospitals had regained the upper hand in price negotiations due to hospital consolidations and consumer backlash against managed care.”
Private insurers no longer tried to “manage care.” Huge hospitals had the clout to perform as many tests and treatments as they wished, without having to prove that the patient needed the procedure, and newly-consolidated hospitals could charge insurers as much as they pleased. They knew that the insurers’ customers wanted those large medical centers in their networks. Insurers “in turn passed along these costs through higher premiums to enrollees and employers,” MedPAC reports. “While insurers appear to be unable or unwilling to ‘push back’ and restrain payments to providers, they have been able to pass costs on to the purchasers of insurance and maintain their profit margins.”
Large hospitals with marquee names now have enormous power. Earlier this year, Massachusetts’ Attorney General reported that elite medical centers have been charging insurers twice as much as other hospitals charge for the same procedures. Insurers comply with their demands because they want “brand name” institutions in their networks. A 2008 Boston Globe investigation broke the story, revealing that hospitals such as Massachusetts General Hospital and Brigham and Women’s Hospital typically are paid 15 percent to 60 percent more for the same basic services that other hospitals provide, even though, when it comes to basic services, quality is not superior.
More recently, over at Managed Care Matters, Joe Paduda has highlighted a Health Affairs report which shows how “hospitals in California now occupy the high ground.” As the state’s hospitals consolidated they have forced insurers that need coverage in key areas to accept ever-higher rates: “In current health reform discussions and proposed legislation, providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room’ that is rarely mentioned,” the authors write. . . . “A recent study has shown that in California, after a downward trend in hospital prices for private-pay patients in the 1990s, a rapid upward trend began about 1999 that produced average annual increases of 10.6 percent over the period 1999-2005. The study’s authors concluded that the source of the near-doubling of California hospital prices remains “something of a mystery.” Analysis of Medicare Cost Report data by the Medicare Payment Advisory Commission (MedPAC) . . . shows that how much it cost hospitals to treat patients increased only 5.5 percent per year during that period.”
“The net is this,” Paduda observes: “hospitals’ market power enabled them to raise prices by 10.6% while their costs only went up about half that fast.” The authors of the Health Affairs report conclude: “California is leading a trend that will be felt in many other states, and soon.”
But under reform, perhaps the trend can be stopped. As I noted in Part 1 of this post, reform regulation will put private insurers under financial pressure. If hospitals over-charge, it will be harder for insurers to simply pass the cost along to customers. Under the new legislation, insurance companies will have to submit justification for requested premium increases. Already, some state regulators are getting tougher.
As a result, insurers will be more likely to stand up to hospitals. Meanwhile, states like Massachusetts and California will be taking a closer look at variations in hospital prices. And perhaps the media will continue to expose hospitals that are gouging insurers. It’s a good story. On the other hand, both newspapers and cable television reap revenues from hospital advertising. The Boston Globe deserves credit for digging into the facts. I hope that other members of the mainstream media follow suit.
MYTH #2: When 32 million formerly uninsured Americans begin flooding our hospitals and emergency rooms, we’ll all find ourselves standing on long lines.
FACT: The final legislation increases funding for community health centers to $11 billion over five years (2011 to 2015). Today, community clinics care for 20 million people—many of them among the 32 million uninsured. With the new funding, clinics will be able to absorb an additional 20 million of the 32 million newly-insured patients who will be seeking care in 2014.
This provision takes effect this year; it’s likely that Washington will begin to hand out funding in December. Of course some of the formerly uninsured will need hospital care; clinics won’t be able to accommodate all of their needs. But many patients who now receive most of their medical care at an ER will find “medical homes” in new and expanded clinics that are open evenings and week-ends. And if they receive ongoing care at a clinic, they will be far less likely to need hospitalization in the future.
Who will staff the community clinics? The legislation adds $1.5 billion to a medical school loan forgiveness program designed to encourage 15,000 primary care physicians to work in community clinics. Nurses and nurse practitioners also will play a vital role. To increase the nursing workforce, the law includes a loan repayment program that repays 60 percent of nursing student loans in return for at least two years of practice in a facility that has a critical shortage of nurses. The law also provides grants to nursing schools and academic health centers to enhance education and practice for nurses in master’s and post-master’s programs. These programs prepare nurse practitioners, clinical nurse specialists, nurse midwives, nurse anesthetists, nurse educators, nurse administrators, and public health nurses.
As I explained here, the nursing shortage has been caused, in part, by the fact that we don’t have enough nursing school teachers. As a result, nursing schools are forced to reject qualified applicants. The legislation establishes additional loan programs within schools of nursing to support students pursuing masters’ and doctoral degrees. Upon graduation, loan recipients are required to teach at a school of nursing in exchange for cancellation of up to 85 percent of their educational loans, plus interest, over four years.
This law also provides for “nurse-managed health clinics,” creating a new $50 million grant program to support innovative safety net providers. These clinics are designed to serve as crucial health care access points in rural areas such as Tyrell Count, North Carolina, where there are no doctors. As the Kentucky Herald Leader explains: “There’s only Irene Cavall, a licensed nurse practitioner and the sole source of primary care for 4,000 residents spread out over 600 square miles. It’s been that way since the county’s lone doctor moved away two and a half years ago.”
Nurse-Family Home Visit Partnerships also will help take up the slack. The new law’s “maternal, infant and early childhood home visitation provision” adds $1.5 billion over five years that can help programs that send specially trained registered nurses into homes to visit first-time, low-income mothers for a period of 2 1/2 years, coaching them on healthy pregnancies and helping them cope with the realities of caring for small children. It’s much less likely that these mothers will turn up in ERs, seeking medical help for their babies.
MYTH #3: New rules restricting doctor-owned hospitals will leave us short of hospital beds.
Fact: It is true that after December 31, 2010, physicians will no longer be able to invest in hospitals to which they refer patients, and existing doctor-owned hospitals will not be able to expand. (There is a limited exception to the restriction on growth: if the doctor-owned hospital treats a higher percentage of Medicaid patients than any other hospital in the county–and is not the only hospital in the county–it can add beds.)
Why interfere with a physician’s right to invest in a hospital? Lawyers can own hospitals, why not doctors? According to the American Hospital Association (AHA) when physicians refer patients to facilities they own, they are tempted to “cherry-pick” relatively healthy well-insured patients, while sending difficult cases and uninsured patients to the local community hospital. In effect, they skim the most lucrative business, focusing on money-making procedures such as heart surgery, while leaving it to the community hospital to provide money-losing services such as burn units, ERs and trauma centers.
Research suggests that the AHA has a point. In 2006, Business Week reported on a study of heart hospitals in Arizona which found that about 21% of patients admitted to physician-owned hospitals undergo routine surgeries such as a heart bypass, but are otherwise relatively healthy. At facilities that were not doctor-owned, only 10% of patients fit that profile; “the vast majority of cases at these hospitals were more complicated and expensive to treat because patients suffered from multiple problems, such as diabetes and other chronic conditions.” Another study by the Texas Hospital Assn. (THA) found that the year after a physician-owned heart-imaging facility opened in one town, the cardiac care center at the nearby community hospital slid from a $524,646 net profit to a $20,786 net loss. “We’re all for competition,” THA spokesman Gregg Knaupe told Business Week. “Problem is, this isn’t fair competition.”
That community hospital in Texas began losing money because it was treating many uninsured and Medicaid patients while the doctor-owned center welcomed well-insured patients. On average, Medicaid pays 70% less than Medicare, and Medicare often pays less than private insurers. Little wonder, then, that doctors don’t usually refer Medicaid patients to facilities they own. A study by MedPAC, confirming earlier work by the Government Accounting Office (GAO), reveals that physician–owned heart hospitals treat 75 percent fewer Medicaid patients and that orthopedic hospitals owned by doctors take in 94 percent fewer Medicaid patients.
Physician owners deny the charges, and claim that their focused surgical centers offer better care. But if facilities owned by doctors tend to treat easier cases it becomes hard to compare quality of care. As a study published in Health Affairs in 2006 observes: “Peer-reviewed research finds that lower unadjusted mortality rates in cardiac specialty hospitals [owned by physicians] are largely attributable to the fact that these facilities admit healthier patients. After adjusting for procedural volume and patient characteristics, mortality rates and outcomes were similar” to outcome at large non-profit community hospitals.
Moreover, even though the patients are healthier, MedPAC reports that care at specialty hospitals owned by doctors tends to be more expensive.
Finally, there is evidence that when physicians own hospitals, they are more likely to over-treat. A study published in Health Affairs, comparing “practice patterns of physician owners before and after they became owners” confirms that rates of use of [magnetic resonance imaging], physical therapy treatments . . . increased significantly” when physicians have a financial interested in the hospital. Business Week highlights a separate survey by the Center for Studying Health System Change which suggests that specialty hospitals owned by doctors may also drive up aggregate health-care costs by spurring demand for pricey elective surgeries.
The bottom line then, is that, too often, physician-owned facilities help drive health care spending higher, while providing care that is no better. Meanwhile, they undermine the community hospitals that we all need by siphoning away health care dollars that could support essential but low-margin service.
Nevertheless, reforms’ critics charge that by restricting the growth of doctor-owned hospitals, the legislation will leave us with too few hospitals beds. This is yet another myth. The truth is that we have more inpatient beds than we need in most parts of the nation—and excess capacity leads to over-treatment. As Dr. Donald Berwick pointed out in a 2008 speech at Famlies USA’s annual health care conference, after adjusting for differences in local prices and the underlying health of the population as well as the age and race of the patients–Medicare spends $3,000 more per beneficiary per year, in some parts of the country–for no apparent reason.
Berwick, who President Obama has tapped to head the Centers for Medicare and Medicaid, asked what high spending regions in parts of Louisiana, Texas, Florida, New York, New Jersey, and Southern California have in common. The answer: “32 percent more hospital beds, per capita, and 65 percent more medical specialists. . . . Supply drives demand. When more technology, more beds and more specialists are available, the extra resources are automatically used, without anyone thinking too much about it.” Outcomes are no better, sometimes they are worse.
I have often wondered why research shows that Medicare spends more in Louisiana than in other states—even after researchers correct for the low incomes and relatively poor health of the population. Then I discovered that Louisiana ranks second only to Texas in the number of doctor-owned specialty hospitals in the state. This helps explain both the number of beds, and the higher Medicare bills.
MYTH #4: Hospitals cut a sweetheart deal with Washington. Reform will do little to rein in hospital bills that have been climbing by over 7% a year.
FACT: As I noted in Part 3 of this post, when you consider who won and who lost under reform legislation, hospitals emerge as winners—for the short term. When it came to negotiating with reformers, they “got into the tent early,” and the reductions in Medicare increases that they accepted will be offset by an influx of paying patients.
It’s also true that our hospital bills have been spiraling– up more than 7% a year, from 2005 through 2007. In 2008, higher fee-for-service hospital spending once again spurred inflation; by year-end, hospital care accounted for fully 31% of the nation’s health care bill.
But as Moody’s, a bond rating agency that rates hospital debt, points out, over time “as governmental auditing and oversight of revenue is tightened, hospitals will be pressured to operate more efficiently, forcing spending cuts and mergers among smaller hospitals.” “After 2014,” Moody’s observes, “many key provisions will be implemented.”
For example, beginning in 2014, the U.S. Health and Human Services Department will report every hospital’s record for medical errors and infections involving Medicare patients on its hospital web site, notes Consumers Union, publisher of the highly-regarded Consumer Reports. “It’s definitely a step forward,” says Lisa McGiffert who leads Consumer Union’s Safe Patient Project. “It’s not everything we wanted,” McGiffert adds. “But it will create a lot more attention on hospital acquired infections.”
In 2014, Medicare will trim payments by one percent for hospitals with the highest rates of medical harm as measured by “hospital-acquired conditions.” Consumers Union explains what the term means: “These include certain preventable infections and medical errors, such as serious bedsores, catheter-associated urinary tract infections and certain types of falls and trauma.”
Moody’s expects “additional Medicare cuts for high-cost, less efficient hospitals in high-cost markets.” As Moody’s analyst Mark Pascaris explains: “The key longer-term challenge for not-for-profit hospitals is reform’s reliance on extracting long-term cost efficiencies from hospitals, probably resulting in diminished hospital revenues.” This is, of course, good news for patients. “More efficient” hospitals mean fewer errors and higher quality care as well as lower costs. Medicare also will be experimenting with ways to pay hospitals for value, not volume. Those that have relied on overtreatment and over-testing to stay in the black will be in trouble. And Moody’s notes, “We also expect hospitals will face more difficult negotiations with commercial and managed care insurers who themselves face increased scrutiny and fees and are most affected by sweeping changes in the legislation.”
Finally, reform legislation calls for closer scrutiny of the federal income tax exemption that non-profit hospitals now enjoy. The bills requires that non-profits conduct a community health needs analysis at least once every three years, soliciting input from the communities that they serve. In addition, if they want to hold onto their tax-exempt status, they will be expected to be a little more forthcoming when it comes to helping the poor. They must notify patients of financial assistance policies through “reasonable efforts,” before initiating various collection actions or reporting accounts to a credit rating agency. Even after reform, some families will remain uninsured. But under the legislation, hospitals will no longer be allowed to charge uninsured, indigent patients more than they generally charge insured patients.
Going forward, the Internal Revenue Service will review the exempt status of hospitals every three years. In addition, the legislation requires the U.S. Department of the Treasury, in consultation with the U.S. Department of Health and Human Services (HHS), to prepare an annual report for the U.S. Congress on charity care, bad debt expenses, certain unreimbursed costs and costs incurred for community benefit activities.
Recently, an Illinois Supreme Court made headlines by denying property tax exemption to a nonprofit hospital. It’s likely that in the years ahead, these new standards will lead to debate as to whether and to what extent nonprofit hospitals are distinguishable from for-profit hospitals. Do they all deserve their tax breaks?
For related articles:
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.