“Medicare Rates Bad, So Shift to Private Payers,” and Hospitalist Does What? (PART III)

By  |  July 31, 2011 | 

In part three, I will speak to why the watchful eye of hospitalists must not stray from the hospital’s balance sheet; more so in assertive facilities, i.e., those possessing market power that have a history of securing favorable rates from insurers.

The CEO says the following:

Third, hospitals need to compete for the most profitable segment of the health care market: patients with commercial insurance and disposable income to pay for extra amenities.  These patients are more likely today to shop around for the latest and greatest in technology and comfort before choosing a facility, especially for non-emergency and outpatient procedures.

It may seem simplistic to excerpt one quote from an article and gesture it as if its representative of all hospital conduct.  That is not the point.  What is is the emblematic nature of that segment of the hospital market that relies on commercial insurance, patients with surplus capital or minimal first dollar coverage, or privileged out of towners desiring “first-class” care.

In my last post, I referenced hospitals that, due to competitive forces, generate higher Medicare margins.  Obliged to make due with lower payments from commercial payers, they circumvent the medical arms race and operate more efficiently.  By the latter, I infer less use of redundant interventions of debatable efficacy that spawn substantial profits, or Versailles like comforts that enhance cachet, but minimally enhance care.

Small numbers of insurers dominate the marketplace in some regions, dictate rates, and sometimes underpay for services.  Given the bloat that exists in our system and the urgency to reduce cost growth, prices are often excessive.  However, despite perceptions insurers are overly profitable—not an overly prevalent circumstance, many health economists’ suggest they have done little to pursue strategies to manage costs.  Largely, they charge, customers remunerate, and merely act as conduits yielding to provider demands (“price follows cost”).  It is an endless inflationary cycle.

However, some markets do tilt heavily in favor of MCO’s, bestowing them with excessive power—and they leverage it in a manner beyond “conduit” grade, as noted above. Conversely, insurance companies may experience a role reversal when hospitals and physicians engage in a similar power grab, extracting their own pound of flesh.  Yes, docs play that hand too (“price follows cost”).

The cause is heterogeneous then.  Apportioning blame to any side exclusively is dangerous, and given the opportunity, both sides will promote cost growth.

Even “safe” hospitals are at risk then.  Failure to consider operational repercussions when the system corrects, as it inevitably will, leave groups unprepared when administrations decides to trim procedure-based resources…or worse for us, our mid-level personnel, night coverage extenders, or non-clinical time.

Unfortunately, the initial adjustments hospitals will endure will not be in response to value-based payment, i.e., those stemming from a pragmatic long-term strategy (favoring cognitively focused, coordinated care), but forced cuts in a FFS world.  We will feel the hurt before the catherization lab.

However, as mentioned, some hospitals have disproportionate power and contribute more to the  slanted inflationary trend.  The question is, will they feel pressure before others that are straddling the line of profitably, mainly, institutions in concentrated markets forced to compete, those without brand recognition (but still doing terrific work), or those serving less affluent populations.

In the former case, if commercial payments drop precipitously, along with Medicare reimbursements—which is manifest, these hospitals will remain solvent, but cuts will materialize rapidly, and of more concern, chaotically.  A real cost shift may emerge for a short period, but will be fleeting as MCO’s get leaner.  Groups will survive, but with holes.

In the latter case, as commercial payments are already lesser for these institutions, with lower Medicare reimbursements, many facilities will undergo a true crunch.  There is no capacity for shifting—again, MCO compensation is already minimal, and cuts will be painful, if not devastating.  Groups will still survive, but on life support or SSRI’s—depending on your CFO.

From the above scenarios, you can fill in the missing pieces.  Rapid alterations in reimbursement will not allow planning, and programs will agonize—probably in a pennywise, dollar poor fashion.

When the historian scribes the book a generation from now encapsulating this transformative moment in healthcare–when the cuts come down in our sector and we start to manage are global structural debt and change how we do our business, the legacy of these reductions and their effect on our approach to readmissions, transitions, etc., will seem absurd.  This applies to primary care as well, and all practitioners seeking to enhance care coordination.  As the character in the movie says, “you got the wrong guy!”

Before closing, it is worth mentioning why Medicare rates will diminish for hospitals of every stripe:

  • Disproportionate Share Payments (DSH):  You probably have heard them referred to as “DISH” payments, and they are decreasing.  These are payments to facilities caring for excessive numbers of patients with suboptimal reimbursement, i.e., uninsured, undocumented, and the underinsured.
  • Market Basket Updates: You may not have heard of these, and it was (is) the annual bump hospitals received for their customary budgetary increases.  Guess what?  They are dwindling.
  • GME: If you are in a facility with trainees, you are familiar with both direct and indirect subsidies from CMS.  Guess what?  They are toast.
  • VBP: Medicare begins to pay smart, and hospitals will be at greater risk for losing all-inclusive payment.

Let me know when you  say UNCLE.  Welcome to the world of the hospital as a cost, not profit center.


Unrelated BONUS: The definition of awesomeness!



One Comment

  1. […] courtesy to a financials – a indicate Brad Flansbaum creates utterly compellingly in his post on a impact of medicare rates, private payers, and their impact on […]

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About the Author: Brad Flansbaum

Brad Flansbaum
Bradley Flansbaum, DO, MPH, MHM works for Geisinger Health System in Danville, PA in both the divisions of hospital medicine and population health. He began working as a hospitalist in 1996, at the inception of the hospital medicine movement. He is a founding member of the Society of Hospital Medicine and served as a board member and officer. He speaks nationally in promoting hospital medicine and has presented at many statewide meetings and conferences. He is also actively involved in house staff education. Currently, he serves on the SHM Public Policy Committee and has an interest in payment policy, healthcare market competition, health disparities, cost-effectiveness analysis, and pain and palliative care. He is SHM’s delegate for the AMA House of Delegates. Dr. Flansbaum received his undergraduate degree from Union College in Schenectady, NY and attended medical school at the New York College of Osteopathic Medicine. He completed his residency and chief residency in Internal Medicine at Long Island Jewish Medical Center in New York. He received his M.P.H. in Health Policy and Management at Columbia University. He is a political junky, and loves to cook, stay fit, read non-fiction, listen to many genres of music, and is a resident of Danville, PA.


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