Hospitals Stand to Lose Billions Under ‘Medicare for All’

For a patient’s knee replacement, Medicare will pay a hospital $17,000. The same hospital can get more than twice as much, or about $37,000, for the same surgery on a patient with private insurance.

Or take another example: One hospital would get about $4,200 from Medicare for removing someone’s gallbladder. The same hospital would get $7,400 from commercial insurers.

The yawning gap between payments to hospitals by Medicare and by private health insurers for the same medical services may prove the biggest obstacle for advocates of “Medicare for all,” a government-run system.

If Medicare for all abolished private insurance and reduced rates to Medicare levels — at least 40 percent lower, by one estimate — there would most likely be significant changes throughout the health care industry, which makes up 18 percent of the nation’s economy and is one of the nation’s largest employers.

Some hospitals, especially struggling rural centers, would close virtually overnight, according to policy experts.

Others, they say, would try to offset the steep cuts by laying off hundreds of thousands of workers and abandoning lower-paying services like mental health.

he prospect of such violent upheaval for existing institutions has begun to stiffen opposition to Medicare for all proposals and to rattle health care stocks. Some officials caution that hospitals providing care should not be penalized in an overhaul.

Dr. Adam Gaffney, the president of Physicians for a National Health Program, warned advocates of a single-payer system like Medicare for all not to seize this opportunity to extract huge savings from hospitals. “The line here can’t be and shouldn’t be soak the hospitals,” he said.

“You don’t need insurance companies for Medicare for all,” Dr. Gaffney added. “You need hospitals.”

Soaring hospital bills and disparities in care, though, have stoked consumer outrage and helped to fuel populist support for proposals that would upend the current system. Many people with insurance cannot afford a knee replacement or care for their diabetes because their insurance has high deductibles.

Proponents of overhauling the nation’s health care argue that hospitals are charging too much and could lower their prices without sacrificing the quality of their care. High drug prices, surprise hospital bills and other financial burdens from the overwhelming cost of health care have caught the attention (and drawn the ire) of many in Congress, with a variety of proposals under consideration this year.

But those in favor of the most far-reaching changes, including Senator Bernie Sanders, who unveiled his latest Medicare for all plan as part of his presidential campaign, have remained largely silent on the question of how the nation’s 5,300 hospitals would be paid for patient care. If they are paid more than Medicare rates, the final price tag for the program could balloon from the already stratospheric estimate of upward of $30 trillion over a decade. Senator Sanders has not said what he thinks his plan will cost, and some proponents of Medicare for all say these plans would cost less than the current system.

The nation’s major health insurers are sounding the alarms, and pointing to the potential impact on hospitals and doctors. David Wichmann, the chief executive of UnitedHealth Group, the giant insurer, told investors that these proposals would “destabilize the nation’s health system and limit the ability of clinicians to practice medicine at their best.”

Hospitals could lose as much as $151 billion in annual revenues, a 16 percent decline, under Medicare for all, according to Dr. Kevin Schulman, a professor of medicine at Stanford University and one of the authors of a recent article in JAMA looking at the possible effects on hospitals.

“There’s a hospital in every congressional district,” he said. Passing a Medicare for all proposal in which hospitals are paid Medicare rates “is going to be a really hard proposition.”

Richard Anderson, the chief executive of St. Luke’s University Health Network, called the proposals “naïve.” Hospitals depend on insurers’ higher payments to deliver top-quality care because government programs pay so little, he said.

“I have no time for all the politicians who use the health care system as a crash-test dummy for their election goals,” Mr. Anderson said.

The American Hospital Association, an industry trade group, is starting to lobby against the Medicare for all proposals. Unlike the doctors’ groups, hospitals are not divided. “There is total unanimity,” said Tom Nickels, an executive vice president for the association.

“We agree with their intent to expand coverage to more people,” he said. “We don’t think this is the way to do it. It would have a devastating effect on hospitals and on the system over all.”

Rural hospitals, which have been closing around the country as patient numbers dwindle, would be hit hard, he said, because they lack the financial cushion of larger systems.

Big hospital systems haggle constantly with Medicare over what they are paid, and often battle the government over charges of overbilling. On average, the government program pays hospitals about 87 cents for every dollar of their costs, compared with private insurers that pay $1.45.

Some hospitals make money on Medicare, but most rely on higher private payments to cover their overall costs.

Medicare, which accounts for about 40 percent of hospital costs compared with 33 percent for private insurers, is the biggest source of hospital reimbursements. The majority of hospitals are nonprofit or government-owned.

The profit margins on Medicare are “razor thin,” said Laura Kaiser, the chief executive of SSM Health, a Catholic health system. In some markets, her hospitals lose money providing care under the program.

She says the industry is working to bring costs down. “We’re all uber-responsible and very fixated on managing our costs and not being wasteful,” Ms. Kaiser said.

Over the years, as hospitals have merged, many have raised the prices they charge to private insurers.

“If you’re in a consolidated market, you are a monopolist and are setting the price,” said Mark Miller, a former executive director for the group that advises Congress on Medicare payments. He describes the prices paid by private insurers as “completely unjustified and out of control.”

Many hospitals have invested heavily in amenities like single rooms for patients and sophisticated medical equipment to attract privately insured patients. They are also major employers.

“You would have to have a very different cost structure to survive,” said Melinda Buntin, the chairwoman for health policy at the Vanderbilt University School of Medicine. “Everyone being on Medicare would have a large impact on their bottom line.”

People who have Medicare, mainly those over 65 years old, can enjoy those private rooms or better care because the hospitals believed it was worth making the investments to attract private patients, said Craig Garthwaite, a health economist at the Kellogg School of Management at Northwestern University. If all hospitals were paid the same Medicare rate, the industry “should really collapse down to a similar set of hospitals,” he said.

Whether hospitals would be able to adapt to sharply lower payments is unclear.

“It would force health care systems to go on a very serious diet,” said Stuart Altman, a health policy professor at Brandeis University. “I have no idea what would happen. Nor does anyone else.”

But proponents should not expect to save as much money as they hope if they cut hospital payments. Some hospitals could replace their missing revenue by charging more for the same care or by ordering more billable tests and procedures, said Dr. Stephen Klasko, the chief executive of Jefferson Health. “You’d be amazed,’ he said.

While both the Medicare-for-all bill introduced by Representative Pramila Jayapal, Democrat of Washington, and the Sanders bill call for a government-run insurance program, the Jayapal proposal would replace existing Medicare payments with a whole new system of regional budgets.

“We need to change not just who pays the bill but how we pay the bill,” said Dr. Gaffney, who advised Ms. Jayapal on her proposal.

Hospitals would be able to achieve substantial savings by scaling back administrative costs, the byproduct of a system that deals with multiple insurance carriers, Dr. Gaffney said. Under the Jayapal bill, hospitals would no longer be paid above their costs, and the money for new equipment and other investments would come from a separate pool of money.

But the Sanders bill, which is supported by some Democratic presidential candidates including Senators Kirsten Gillibrand of New York, Cory Booker of New Jersey, Elizabeth Warren of Massachusetts and Kamala Harris of California, does not envision a whole new payment system but an expansion of the existing Medicare program. Payments would largely be based on what Medicare currently pays hospitals.

Some Democrats have also proposed more incremental plans. Some would expand Medicare to cover people over the age of 50, while others wouldn’t do away with private health insurers, including those that now offer Medicare plans.

Even under Medicare for all, lawmakers could decide to pay hospitals a new government rate that equals what they are being paid now from both private and public insurers, said Dr. David Blumenthal, a former Obama official and the president of the Commonwealth Fund.

“It would greatly reduce the opposition,” he said. “The general rule is the more you leave things alone, the easier it is.”




Hospitals Still Lagging on Cost Transformation Measures

Health system executives have to pick up the pace on implementing effective cost transformation initiatives, according to a new survey from Kaufman Hall.

The focus on adequately addressing the rising cost transformation issues facing health systems has not resulted in significant progress, according to an annual survey from Kaufman Hall.

The healthcare management consulting firm reported that less than 20% of healthcare executives surveyed saw cost reductions exceed 5% in priority areas in 2017. Additionally, the report raised concerns on the lack of accountability measures in place to ensure that leaders have consequences for achieving cost transformation goals for their respective organizations.

Data from executives surveyed:

  • 32% saying that goal setting for cost reduction is absent in their organizations.
  • More than 70% indicating a lack of confidence in the accuracy of their current costing accounting solutions.
  • 12% increase reporting that their organizations have implemented processes to hold leaders accountable for cost transformation goals.
  • 56% witnessing effective use of clinical pathways, protocols, and guidelines to develop a common approach to treatment, a 9% increase compared to last year.
  • 73% saying cost transformation improvement targets have been distributed across the organization, up from 53% in 2017.

Lance Robinson, managing director of Kaufman Hall’s performance management improvement practice, told HealthLeaders that while health system executives have focused on traditional areas of cost, like labor operations, they have overlooked other areas like service rationalization, clinical variation, length of stay, and integrating the physician enterprise. Robinson said those areas require immediate attention from hospital executives in order to sustain opportunities going forward.

“One thing I found surprising was that they’re not actually holding people accountable to the targets that are set,” Robinson said. “On the positive side, I think they have a good idea of what needs to happen. If you look at what factors are driving the need for cost transformation, like the move toward value-based care models and the advent of many disuptors in the industry, they need to be more price conscious and competitive.”

The report added that the need to generate capital to fund strategic initiatives is also driving system executives to revisit their cost transformation goals. Robinson said that as factors surrounding the system change, such as labor market and supply chain operations, executives have to evolve their cost transformation goals as well rather than seeking a “shot in the arm” to fix organizational weaknesses. 

While focus still revolves around traditional areas like labor and non-labor costs, Robinson said leading health systems are analyzing ways to address clinical variation, service rationalization, and other areas that can create meaningful change to their capital structure rather than reducing costs “around the edges.”




Turn-Around Efforts Start with a Look at Operations

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Even before a hospital shows signs of financial distress, the responsible action is to take a head-to-toe look at hospital operations to fully address financial and performance issues.

Hospital leaders may recognize the need for improvement but may not know where to turn. Since operations span the entire hospital, a head-to-toe operational assessment may be warranted to fully address financial and performance issues.

Following are high-level best practice tips that serve as cost-reduction and revenue enhancement strategies, and can help redirect an ailing situation toward a partial or full turnaround.

Evaluate labor and its costs. 
Labor costs typically account for 50 to 60 percent of a hospital’s operating revenue, so a thorough review of productivity is critical. While a productivity tool can help to set productivity targets, it also integrates a level of accountability toward helping to control labor expenses. Productivity standards, manager involvement, and executive oversight will move you toward your goals of greater efficiency while reducing labor costs.

Analyze supply costs.  
Second only to labor costs, supply spend represents significant expense for hospitals. Often, small hospitals don’t have the negotiating power, so look to the expertise of a group purchasing organization (GPO), or evaluate whether you have the right GPO with your interests in mind. The right GPO relationship can mean supply savings from 10 to 14 percent.

One key area to look at is your supply inventory. Have quantities been adjusted based on volumes, or types of procedures such as those performed in orthopedics or the cath lab? It may be possible to work with vendors to be charged for supplies when they’re needed (just-in-time delivery) versus overstocking for procedures that may be scheduled; this practice helps to free up dollars for other purposes. Also examine inventory “turns,” the number of times per year that supplies are being replaced. Based on our experience, a reasonable level of inventory turn is 9 to 12 times per year.

Examine revenue cycle management. 
Because the revenue cycle is a complex function, points in the process may be overlooked or broken. Your hospital may also face common challenges such as keeping your chargemaster current and competitively priced, and keeping up with each payer’s unique rates and payment methodology.

Additional areas to evaluate and address: ·

  • Have managed care contracts been updated or renegotiated? ·
  • Compare charges to reimbursement. Although you may be charging for an item at a fixed cost, it doesn’t necessarily mean that you will be reimbursed at that level.

Move ahead with greater confidence. 
Your overall action plans should identify who is responsible and accountable for each area of evaluation and opportunity. The discipline of frequent review helps to ensure that you are not drifting off the plan and that progress is occurring across all areas. A new level of accountability across team members is one indication that you have arrived. Be mindful that it does take time and diligence to impact turnaround efforts.

Catholic Health Initiatives CFO Dean Swindle’s advice to other systems: ‘Don’t get too comfortable with your past success’

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Englewood, Colo.-based Catholic Health Initiatives embarked on a turnaround plan several years ago with the goal of improving its financial picture while providing high-quality care at its hospitals and other facilities across the nation. The system has made great strides toward its goal, yet there is still a lot of work to be done.

CHI has been laser-focused on performance improvement over the past three years, but rolling out a comprehensive turnaround plan across an organization with 100 hospitals is challenging, and progress is slow. The health system’s efforts just began to take hold in the second half of fiscal year 2017. Although CHI has encountered obstacles on its path to financial stability, the system is pleased with the headway it has made and expects more improvement in the coming months.

CHI’s cost-cutting initiative

To improve its finances, CHI set out to cut costs across the system. It put a great deal of energy into lowering labor and supply costs, which combined can make up two-thirds or more of the system’s operating expenses. CHI developed plans and playbooks focused on reducing these costs several years ago, knowing it would not immediately see results.

In the labor area, CHI President of Enterprise Business Lines and CFO Dean Swindle says the system had to incur costs to cut costs. “In the second half of the year [fiscal 2017] we began to see the benefits of our labor activities in the markets, but we also had cost,” he says. For example, CHI incurred the one-time expense of hiring advisers to help the system develop new labor management techniques. The system also cut jobs, which resulted in severance costs.

“When we got to the second half of 2017, we were very confident and felt very pleased that we were seeing benefit … but it was difficult for others to see it because it was for half of the year, and we had the one-time costs that were burdening that,” Mr. Swindle says.

After factoring in expenses and one-time charges, CHI ended fiscal year 2017 with an operating loss of $585.2 million, compared to an operating loss of $371.4 million in fiscal year 2016.

However, CHI saw its financial situation improve in the first quarter of fiscal year 2018. The system’s operating loss narrowed to $77.9 million from $180.7 million in the same period of the year prior. “What you were able to see in the first quarter [of fiscal 2018] … was the one-time costs had gone away for the most part; those weren’t burdening our results,” says Mr. Swindle.

He says although the system employed more physicians, its absolute labor costs were lower year over year. CHI’s supply costs, including drug costs, were also lower in the first quarter of fiscal year 2018 than in the first quarter of last year.

Mr. Swindle says CHI saw its finances improve in a difficult operating environment. Patient volume was lower in the first quarter of fiscal year 2018 than a year prior, and the system also experienced a nearly $26 million loss from business operations as a result of Hurricane Harvey.

“[This has] given us a level of confidence that we can move forward and address the difficulty that our industry is going to be facing over the next several years,” he says.

In early January, Fitch Ratings affirmed CHI’s “BBB+” rating and upgraded its credit outlook to stable from negative. The credit rating agency cited the health system’s strong start to the 2018 fiscal year and financial improvements in several markets as key reasons for the upgrade.

Preparing for new challenges

Although healthcare organizations are currently facing many challenges, including regulatory uncertainty and dwindling reimbursement rates, Mr. Swindle anticipates hospitals and health systems will face new obstacles over the next few years.

For example, hospitals will be challenged by changes to the 340B Drug Pricing Program. CMS’ 2018 Medicare Outpatient Prospective Payment System rule finalized a proposal to pay hospitals 22.5 percent less than the average sales price for drugs purchased through the 340B program. Medicare previously paid the average sales price plus 6 percent.

“I don’t think 340B was by chance and in isolation,” says Mr. Swindle. “I think we’re entering one of those cycles that the whole economic environment of our industry is going to be working against us.”

The pressures in the industry are driving hospitals and health systems to join forces. After more than a year of talks, CHI and San Francisco-based Dignity Health signed a definitive merger agreement in December 2017. The proposed transaction will create a massive nonprofit Catholic health system, comprising 139 hospitals across 28 states.

In the short term, the combination of the two systems is expected to drive synergies in the $500 million range, according to Mr. Swindle. In the coming months, the two systems will dive deeper into the synergies they expect to achieve over a multiyear period. “We do believe beyond the synergies there are some strategic initiatives we can put into place as a combined organization that we couldn’t do individually,” Mr. Swindle says. “You won’t see the benefit of those as much in the short term.”

“Take a deep breath”

Mr. Swindle knows firsthand that developing and executing an operational turnaround plan is no easy task. However, today’s healthcare landscape requires health systems to re-engineer their business models.

“Regardless of how good your results … have been over the last five to 10 years, we’re all going to have to transform ourselves in our own way to meet the characteristics of our organizations,” says Mr. Swindle.

When embarking on a performance improvement plan, the first thing health system CFOs should do is “take a deep breath,” he says. Then, they should focus on the things they have more control over. Mr. Swindle says it is critical for health systems to continue to drive improvement in patient experience and quality. They also need to be strategic cost managers.

“It’s not going to be as easy as just saying we’re going to take these [full-time employees] out or reduce this service. You’re really going to have to be very smart and very thoughtful about how you become a good cost manager that adds value to your communities,” says Mr. Swindle. “Don’t get too comfortable with your past success and your past models.”


The Single Greatest Hospital Success Indicator

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Is your hospital part of a health system? A turnaround and consulting firm’s data suggest much of your organization’s success can depend on just that one factor.

But it’s rapidly becoming less so. Since I wrote this column years ago, the pressures on standalones have only increased.

Hospitals that are part of a system do far better financially than their counterparts.

“Over the past two years, we’ve noticed that the single greatest indicator of success for hospitals is whether or not they’re part of a multi-hospital system,” says Scott Phillips, managing director of Healthcare Management Partners, a Nashville-based turnaround and consulting firm that focuses on hospitals that are experiencing financial challenges and is led by experienced former C-level executives such as Phillips.

“Just that one factor provides a bottom-line advantage of four to nine percentage points [in profitability], which is almost insurmountable.”

Means to an End

Not that financial success is the overarching goal of healthcare—especially in nonprofit or government-owned healthcare, which still makes up 78.7% of hospital systems, according to Kaiser Family Foundation. But as I’ve heard countless CEOs say, “no margin, no mission.”

As a standalone hospital, you’re distressed almost by definition, Phillips says.

The firm’s data, based on Healthcare Cost Report Information System (HCRIS) data from more than 200,000 Medicare Cost Reports filed by hospitals, nursing homes, home health agencies, and other providers since 1994, supports this contention overwhelmingly. Standalone hospitals still represent roughly a third of hospitals and 30% of the beds, but they tend to be small, and are disproportionately government- or health district–owned.

When you look at standalones closely, Phillips says, usually they’re not in a position to choose their own market in any way, and single-market nonprofit systems haven’t wanted them as acquisitions for those reasons. This dynamic creates an increasing canyon between the so-called “haves” and “have nots.”

“For the have-nots, life is getting increasingly difficult,” he says. “Will many, or even most of those hospitals continue to operate inpatient beds?”

Maybe they shouldn’t. And maybe they should instead switch to providing ambulatory health services.

Many standalones have such an increasing disadvantage, he says, that they, and healthcare costs generally, would be better off if they could convert. But many can’t afford the investment to do so in either dollar terms—access to capital—or in political will.

“If they can convert to diagnostic and ambulatory centers, they would be very busy,” Phillips says.

To convert into an attractive ambulatory center is a $6 million to $10 million investment, he says, and most of them don’t have that money.

Better Management

Phillips says HMP’s data shows that every year in the system hospitals, particularly the larger hospitals, management keeps getting better. Hospitals in the top two quartiles keep getting more profitable in spite of the uncertainty around the changes in healthcare’s business model from volume to value, he says. They’re getting that principally through greater economies of scale but they are extracting more profitability at the expense of their competitors.

One of the bigger differentiators in terms of profitability is in labor efficiency, he says, the biggest element of cost.

“There’s a pretty dramatic difference in labor costs between hospitals that are in systems than are not in systems,” he says.

Government-owned hospitals are further challenged in this regard in the form of pension costs.

Declining Populations

Secondly, standalone hospitals are in 90% of the counties in the U.S., many, if not most, of which are experiencing loss of population, he says. People are moving into cities, not into the hinterlands.

“Healthcare, whether you’re talking nursing homes or hospitals, is essentially a fixed-cost business,” Phillips says. “If your population is declining, your demand for services will decline. So the best you can hope for is an increasing share in a declining market.”

That leads to declines in inpatient utilization, and for a few years, there’s been a dramatic shift from inpatient to outpatient. Another distinguishing trend is that standalones are well behind the curve in reinvestment, particularly in new clinical technologies and information technology.

Phillips says rural areas could be better served by investing in remaking many hospitals into outpatient centers and taking advantage of telemedicine, where state laws and regulations have not made that impossible or impractical.

“It’s insane that state policymakers have not opened that whole market to telemedicine,” he says. “It could be a tremendous antidote to many of the problems these hospitals have.”

3 factors that will tank your workforce management

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“No more overtime will be approved!” How many times have we heard declarations like this in an attempt to control labor costs? Considering that labor costs are a hospital’s largest expense exceeding 50% of their operating budgets, it’s no wonder that remarks like this are frequently heard. Healthcare providers have spent millions of dollars on analytics and other systems to find a way to get these costs under control. Yet, they still do not have clear insights into their labor costs and are unable to implement sustainable programs to manage and control costs. I’m going to look at three areas that limit a healthcare provider’s ability to manage their workforce in a way that optimizes labor, controls costs and drives outcomes.

Healthcare providers keep close tabs on labor costs to keep spending in check

Executives say providing high quality at the leanest possible cost is all about efficiency.