This week’s graphic highlights increasing tensions between health systems and Medicare Advantage (MA) plans as they battle over what providers see as unsatisfactory payment rates and insurer business practices.
On paper, many providers have negotiated rates with MA plans that are similar to traditional fee-for-service Medicare, but find MA patients are subject to more prior authorizations and denials, as well as delayed discharges to postacute care, whichincreases inpatient length of stay and hospital costs.
A number of health system leaders have reported their revenue capture for MA patients dropped to roughly 80 percent of fee-for-service Medicare rates due to an increase in the mean length of stay for MA patients, caused by carriers narrowing postacute provider networks.
As a result, a growing number of health systems and medical groups have either already exited, or plan to exit, MA networks due to what they see as insufficient reimbursement.
Health systems with a strong regional presence may be able to leverage their market share to get MA payers to play ball. But for health systems in more competitive markets, these hardline negotiation tactics run the risk of payers merely directing their patients elsewhere.
Regardless of market dynamics, providers exiting insurance plans is extremely disruptive for patients, who won’t understand the dynamics of payer-provider negotiations—but will feel frustrated when they can’t see their preferred physicians.
Published last week in the Wall Street Journal, this piece predicts that the era of immense profitability for Medicare Advantage (MA) insurers may be drawing to a close.
MA has experienced rapid growth over the past decade, due both to the pace of Baby Boomers aging into Medicare, and the increasing numbers of beneficiaries choosing MA plans. In 2023, MA surpassed 50 percent of total Medicare enrollment.
Payers readily embraced the MA market because they found they could earn gross margins two to three times higher than from a commercial life.
However, as the rate of enrollment growth begins to slow (the last of the Boomers will turn 65 in 2030), competition between payers increases, and government payments become less generous, the MA business—while still profitable—is poised to become less of a jackpot.
The Gist:While MA has been an outsized driver of profits for insurance companies in recent years,the nation’s two largest MA payers, UnitedHealth Group (UHG) and Humana, have been signaling growing concerns to the market.
UHG announced late last month that its 2024 MA enrollment growth will be less than half of its 2023 rate, and Humana has been engaged in merger talks with Cigna.
As the “gold rush” period ends, MA payers will have to earn their keep by better integrating their various care and data assets, and more carefully managing spending for an aging cohort of seniors with increasingly complex needs, both much harder than riding a demographic wave to easy profits.
The nation’s largest for-profit hospital systems by revenue — HCA Healthcare, Community Health Systems, Tenet Healthcare and Universal Health Services —reported mixed results during the third quarter of 2023, despite announcing strong demand for patient services.
With the exception of HCA, each operator reported lower profits in the third quarter compared with the same period last year. Health systems CHS and HCA reported earnings that fell short of Wall Street expectations for revenue.
Major operators posted declining profits in the third quarter compared to the same period in 2022
Q3 net income in millions, by operator
Health System
Profit
Percent Change YOY
Community Health Systems
$−91
−117%
HCA Healthcare
$1,800
59%
Tenet Healthcare
$101
−23%
Universal Health Services
$167
−9%
Admissions rose across the board compared to the same period last year: Same facility equivalent admissions rose4.1% at HCA , 3.7% at CHS and 0.6% at Tenet,and adjusted admissions at acute hospitals rose 6.8% at UHS.
Although the for-profit operators began cost containment strategies earlier this year — recognizing that rising expenses, including costs of salary and wages, were pressuring hospital profitability post-pandemic — expenses also rose, with growth in salaries and benefit costs once again pressuring most operators’ revenue.
Hospital operators faced new challenges this quarter, executives said, including increased physician staffing fees and what hospital executives characterizedas aggressive behavior from payers.
Hospitals highlight rising physician fees
Rising physician fees were a topic of concern on earnings calls this quarter, with executives reporting fees that were 15% to 40% higher compared with the same period last year.
Third-party staffing firms charge hospitals physician fees, a percentage of physicians’ salaries, on top of the salaries themselves. Physician fees are separate but related to contract labor costs, which plagued hospitals during the COVID-19 pandemic as they attempted to stem staffing shortages.
Hospitals typically contract specialty hospitalist roles — like anesthesiologists, radiologists and emergency department physicians — and incur associated staffing costs.
Physician fees at HCA, the country’s largest hospital chain, grew 20% year over year in the third quarter, according to CFO Bill Rutherford.
Physician fees were up by as much as 40% at UHS — making up 7.6% of totaloperating expenses this quarter and surpassing the company’s initial projections for the year,CEOMarc Miller said during an earnings call. Historically, physician fees accounted for about 6% of UHS’ total expenses.
Likewise, Franklin, Tennessee-based CHS attributed some of its third-quarter losses to “increased rates for outsourced medical specialists,” according to a release on the operator’s earnings.
Tenet CEO Saum Sutaria noted that physician fee expenses were up 15% year over year, but said on an earnings call that the operator had spied rising physician fees during the pandemic, and had begun efforts to contain costs — including restructuring staffing contracts and in-sourcing critical physician services.
As a result, physician fee costs at Tenet had remained “relatively flat” from the second quarter to the third quarter this year, according to the Sutaria.
Physician fee increases may be a delayed consequence of the No Surprises Act, which went into effect in January of last year, experts say.
On an earnings call, UHS CFO Steve Filton said “the industry has largely had to reset itself” in wake of the law. Tenet and CHS executives echoed the sentiment, noting that the law had disrupted staffing firms’ business models and complicated payment processes.
The No Surprises Act prevents patients who unknowingly receive out-of-network care at an in-network facility from being stuck with unexpectedbills. However, the act has had unintended ripple effects, experts say.
Staffing firms and hospitals allege that the arbitration process created to resolve disputes between providers and insurers is unbalanced and incentivizes insurers to withhold reimbursement for care. In an August survey, over half of doctors reported insurers have either ignored decisions made by arbitrators or declined to pay claims in full.
In other cases, a backlog prevents claims from being adjudicated at all. Last year, the CMS found the federal arbitration process had only reached a payment determination in 15% of cases. Federal regulators have been forced to pause and restart the arbitration process multiple times in the wake of federal court decisions challenging arbitration methodology.
Although the act went into effect more than a year ago, many hospitals are just now feeling the strain, saidLoren Adler, associate director at the Brookings Institute’s Schaeffer Initiative on Health Policy.
That’s because most insurers, hospitals and medical groups operate on three-year contracts, according to Adler. Staffing firms, which have struggled since the No Surprises Act was enacted, have passed on costs to hospitals as contracts come up for negotiation and insurers charge firms higher rates.
In the face of rising costs, some hospitals may opt to follow Tenet and CHS and in-source physicians — either to retain contracts with physicians who worked with firms that have folded or because the passing of the No Surprises Act makes outsourcing less attractive.
CHS hired 500 physicians from staffing firm American Physician Partners after the company collapsed in July. CFO Kevin Hammons said on an earnings call that hiring the physicians had saved CHS “approximately $4 million sequentially compared to the subsidy payments previously paid” to the staffing firm.
However, in-sourcing may not be an effective cost containment strategy for all operators. HCA reported it was hemorrhaging money following its first-quarter majority stake purchase of staffing firm Valesco, which brought about 5,000 physicians onto its payroll. HCA CEO Sam Hazen said the system expects to lose $50 million per quarter on the venture through 2024, citing low payments as the primary issue.
Payer problems
Hospital executives also tied quarterly losses to aggressive behavior from insurers during third-quarter earnings calls.
UHS executives said payers were improperly denying high volumes of claims and disrupting payments to its hospitals, with UHS’ Miller characterizing insurers as “increasingly aggressive” during the third quarter. Though insurers had reduced their number of claims audits, denials and patient status changes during the early stages of the pandemic, payers were increasing denials and reviews, according to UHS’ Filton.
Tenet’s Sutaria said that claims denials were “excessive and inappropriate” during a third-quarter earnings call, adding that the hospital system was working to push back on the volume of claims denials.
Their number one strategy is to provide “excellent documentation” to refute denials quickly, Sutaria said.
Still, excessive claims denials can drive up administrative costs for hospitals, according to Matthew Bates, managing director at Kaufman Hall.
“That denial creates a lot more work, because now I have to deal with that bill two, three, four times to get through the denial process,” Bates said. “It starts to rapidly eat into the operating margins… [becoming] both a cashflow problem and an administrative costs burden.”
Executives across the four for-profit operators said they planned to negotiate with insurers to receive more favorable rates and limit the number of denials in subsequent quarters.
HCA’s Hazen said that it was important for HCA to maintain its in-network status with insurers “to avoid the surprise billing and that [independent dispute resolution] process,” but that it would work with its payers to get “reasonable rates” going forward.
Claim denials are increasing, especially in Medicare Advantage, and it’s affecting hospital’s revenue cycles and patient care.
“We definitely are seeing an increase in denials,” said Sherri Liebl, executive director of Revenue Cycle, CentraCare Health, a large multispecialty system in Minnesota. CareCare has two acute care hospitals, seven Critical Access Hospitals and 30 standalone clinics, many of them in rural areas.
CentraCare reported a positive margin this year, but in no way realizes the profits of insurers, especially the national insurers where Liebl is having the most difficulty with claims.
CentraCare’s goal in its cost to collect – not all-around denials – is to be at 2%. The health system is closer to 7% on its cost to collect.
“The cost for our organization is exorbitant,” Lieble said.
Much of the blame for denials is falling to artificial intelligence being used in algorithms to deny claims.
UnitedHealthcare has been sued in a class action lawsuit that alleges the insurer unlawfully used an artificial intelligence algorithm to deny rehabilitative care to sick Medicare Advantage patients.
Cigna has also been suedfor allegedly using algorithms to deny claims. The lawsuit claims the Cigna PXDX algorithm enables automatic denials for treatments that do not match preset criteria, evading the legally required individual physician review process.
A Cigna Healthcare spokesperson said the vast majority of claims reviewed through PXDX are automatically paid, and that the PXDX process does not involve algorithms, AI or machine learning, but a simple sorting technology that has been used for more than a decade to match up codes. Claims declined for payment via PXDX represent less than 1% of the total volume of claims, the spokesperson said.
Industry consultant Adam Hjerpe, who formerly worked for UnitedHealth Group, said there’s nothing new about payers using artificial intelligence. AI has been used for 20 years in robotic processes, statements in Excel and algorithms, he said.
Everybody is working with good intent, Hjerpe said. There are reasonable controls in place to avoid fraud and abuse.
Claims are being denied for missing information, or for the information being out of sequence, or for the claim giving an incomplete picture of the care.
“We don’t want care delayed,” he said.
Nobody wins in claims denials, said Susan Taylor, Pega’s vice president of Healthcare and Life Sciences.
While payers save money in the short-term, in the long-term, the best arrangement is to have payers and providers work together to prevent denials, said Taylor, who has worked in healthcare for more than 25 years, starting on the health system side before moving into IT.
“There are more claims of note being denied,” Taylor said. “If you look at the ecosystem, there are a lot of opportunities for error.”
The solution is building an agility layer to streamline workflows throughout the revenue cycle, from initial claim submission to the complex denials processing stage.
WHY THIS MATTERS
Liebl said that denials have increased over the past two years and that there’s also been an uptick in payer audits months after payment has been made.
Insurers want justification for why CentraCare should keep its payments, and this is especially true for Medicare Advantage claims, she said.
One insurer said the claim didn’t meet inpatient criteria and downgraded the claim to an observation patient.
“We have a pretty good success rate as far as being able to justify we did the right care,” Liebl said.
Asked what’s driving the higher denial rates Lieble said, “Everybody wants to keep margins and expand their business. I think it comes down to profit margins, trying to keep profit margins high; we’re just trying to stay afloat.”
To combat denials and work with payers, CentraCare founded a joint operating committee to have successful partnerships. They’ve been more successful with the local Minnesota plans than the national plans, but Liebl is optimistic, she said.
“I am hopeful we can create partnerships …” she said. “Some of the denials we receive are against their payer policy. We need to be able to hold payers accountable.”
Larger health systems have a little more clout, and CentraCare is able to partner with other health systems through the Minnesota Hospital Association.
What’s being lost in all this is the patient, Liebl said. Sometimes a patient is getting a bill up to a year after a procedure.
“Sometimes the patient focus is lost when we work through some of this,” she said.
“They keep our money longer,” Liebl said. “They hold our money hostage. We have denials sitting out there for 300 days. It’s a lot of administrative burden on our part. We’ve spent a lot of money just to get the money in the door. Finally when that claim has been resolved, it’s a year later. No one wins? I think there is some winning going on one side.”
Not long ago, I opened a new box of cereal and found a lot fewer flakes than usual. The plastic bag inside was barely three-quarters full.
This wasn’t a manufacturing error. It was an example of shrinkflation.
Following years of escalating prices (to offset higher supply-chain and labor costs), packaged-goods producers began facing customer resistance. So, rather than keep raising prices, big brands started giving Americans fewer ounces of just about everything—from cereal to ice cream to flame-grilled hamburgers—hoping no one would notice.
This kind of covert skimping doesn’t just happen at the grocery store or the drive-thru lane. It’s been present in American healthcare for more than a decade.
What Happened To Healthcare Prices?
With the passage of the Medicare and Medicaid Act in 1965, healthcare costs began consuming ever-higher percentages of the nation’s gross domestic product.
In 1970, medical spending took up just 6.9% of the U.S. GDP. That number jumped to 8.9% in 1980, 12.1% in 1990, 13.3% in 2000 and 17.2% in 2010.
This trajectory is normal for industrialized nations. Most countries follow a similar pattern: (1) productivity rises, (2) the total value of goods and services increases, (3) citizens demand better care, newer drugs, and more access to doctors and hospitals, (4) people pay more and more for healthcare.
But does more expensive care equate to better care and longer life expectancy? It did in the United States from 1970 to 2010. Longevity leapt nearly a decade as healthcare costs rose (as a percentage of GDP).
Then American Healthcare Hit A Ceiling
Beginning in 2010, something unexpected happened. Both of these upward trendlines—healthcare inflation and longevity—flattened.
Spending on medical care still consumes roughly 17% of the U.S. GPD—the same as 2010. Meanwhile, U.S. life expectancy in 2020 (using pre-pandemic data) was 77.3 years—about the same as in 2010 when the number was 78.7 years.
How did these plateaus occur?
Skimping On U.S. Healthcare
With the passage of the Affordable Care Act of 2010, healthcare policy experts hoped expansions in health insurance coverage would lead to better clinical outcomes, resulting in fewer heart attacks, strokes and cancers. Their assumption was that fewer life-threatening medical problems would bring down medical costs.
That’s not what happened. Although the rate of healthcare inflation did, indeed, slow to match GDP growth, the cost decreases weren’t from higher-quality medical care, drug breakthroughs or a healthier citizenry. Instead, it was driven by skimping.
To illustrate this, here are three ways that skimping reduces medical costs but worsens public health:
1. High-Deductible Health Insurance
In the 20th century, traditional health insurance included two out-of-pocket expenses. Patients paid a modest upfront fee at the point of care (in a doctor’s office or hospital) and then a portion of the medical bill afterward, usually totaling a few hundred dollars.
Both those numbers began skyrocketing around 2010 when employers adopted high-deductible insurance plans to offset the rising cost of insurance premiums (the amount an insurance company charges for coverage). With this new model, workers pay a sizable sum from their own pockets—up to $7,050 for single coverage and $14,100 for families—before any health benefits kick in.
Insurers and businesses argue that high-deductible plans force employees to have more “skin in the game,” incentivizing them to make wiser healthcare choices.
But instead of promoting smarter decisions, these plans have made care so expensive that many patients avoid getting the medical assistance they need.Nearly half of Americans have taken on debt due to medical bills. And 15% of people with employer-sponsored health coverage (23 million people) have seen their health get worse because they’ve delayed or skipped needed care due to costs.
And when it comes to Medicaid, the government-run health program for individuals living in poverty, doctors and hospitals are paid dramatically lower rates than with private insurance.
As a result, even though the nation’s 90 million Medicaid enrollees have health insurance, they find it difficult to access care because an increasing number of physicians won’t accept them as patients.
2. Cost Shifting
Unlike with private insurers, the U.S. government unilaterally sets prices when paying for healthcare. And in doing so, it transfers the financial burden to employers and uninsured patients, which leads to skimping.
To understand how this happens, remember that hospitals pay the same amount for doctors, nurses and medicines, regardless of how much they are paid (by insurers) to care for a patient. If the dollars reimbursed for some patients don’t cover the costs, then other patients are charged more to make up the difference.
Two decades ago, Congress enacted legislation to curb federal spending on healthcare. This led Medicare to drastically reduce how much it pays for inpatient services. Consequently, private insurers and uninsured patients now pay double and sometimes triple Medicare rates for hospital services, according to a Kaiser Family Foundation report.
These higher prices generate heftier out-of-pocket expenses for privately insured individuals and massive bills for the uninsured, forcing millions of Americans to forgo necessary tests and treatments.
3. Delaying, Denying Care
Insurers act as the bridge between those who pay for healthcare (businesses and the government) and those who provide it (doctors and hospitals). To sell coverage, they must design a plan that (a) payers can afford and (b) providers of care will accept.
When healthcare costs surge, insurers must either increase premiums proportionately, which payers find unacceptable, or find ways to lower medical costs. Increasingly, insurers are choosing the latter. And their most common approach to cost reduction is skimping through prior authorization.
Originally promoted as a tool to prevent misuse (or overuse) of medical services and drugs, prior authorization has become an obstacle to delivering excellent medical care. Insurers know that busy doctors will hesitate to recommend costly tests or treatments likely to be challenged. And even when they do, patients weary of the wait will abandon treatment nearly one-third of the time.
This dynamic creates a vicious cycle: costs go down one year, but medical problems worsen the next year, requiring even more skimping the third year.
The Real Cost Of Healthcare Skimping
Federal actuaries project that healthcare expenses will rise another $3 trillion over the next eight years, consuming nearly 20% of the U.S. GDP by 2031.
But given the challenges of ongoing inflation and rapidly rising national debt, it’s more plausible that healthcare’s share of the GDP will remain at around 17%.
This outcome won’t be due to medical advancements or innovative technologies, but rather the result of greater skimping.
For example, consider that Medicare decreased payments to doctors 2% this year with another 3.3% cut proposed for 2024. And this year, more than 10 million low-income Americans have lost Medicaid coverage as states continue rolling back eligibility following the pandemic. And insurers are increasingly using AI to automate denials for payment.
Currently, the competitive job market has business leaders leery of cutting employee health benefits. But as the economy shifts, employees should anticipate paying even more for their healthcare.
The truth is that our healthcare system is grossly inefficient and financially unsustainable. Until someone or something disrupts that system, replacing it with a more effective alternative, we will see more and more skimping as our nation struggles to restrain medical costs.
HENRY KOTULA 