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.”

 

 

 

Cutting costs top 2019 priority for healthcare finance execs & other survey findings

https://www.kaufmanhall.com/sites/default/files/documents/2019-01/2019-cfo-outlook-healthcare.pdf

https://www.beckershospitalreview.com/finance/cutting-costs-top-2019-priority-for-healthcare-finance-execs-other-survey-findings.html?origin=cfoe&utm_source=cfoe

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Many senior finance executives are not fully prepared to manage the financial impact of evolving business conditions in today’s healthcare environment, according to a survey by strategic and financial consulting firm Kaufman Hall.

The survey, conducted in September and October, asked CFOs, vice presidents of finance, directors of finance, and other senior finance executives more than 20 questions to gauge performance management progress and trends. Participants represented more than 160 U.S. hospitals, health systems, and other healthcare organizations.

Five findings:

1. Only 13 percent of respondents said their organizations are very prepared to manage evolving payment and delivery models with the financial planning processes and tools now available.

2. Additionally, only 23 percent said they are very confident that their teams can quickly and easily adjust to strategies and plans.

3. Ninety-six percent of respondents said they believe their organizations should be making greater efforts to leverage financial and operational data as part of decision-making.

4. Cost reduction and management is the biggest priority for senior finance executives this year, followed by predicting and managing changing payment models.

5. Along those lines, more than half of respondents cited the following as top improvement priorities for financial planning and analysis:

  • Cost management and efficiency
  • Reporting and analysis to support decision-making
  • Operational budgeting and forecasting
  • Profitability measurement across specific dimensions

 

 

Health Systems Need to Completely Reassess How They Manage Costs

https://hbr.org/2018/11/health-systems-need-to-completely-reassess-how-they-manage-costs

A recent Navigant survey found that U.S. hospitals and health systems experienced an average 39% reduction in their operating margins from 2015 to 2017. This was because their expenses grew faster than their revenues, despite cost-cutting initiatives. As I speak with industry executives, a common refrain is “I’ve done all the easy stuff.” Clearly, more is needed. Cost reduction requires an honest and thorough reassessment of everything the health system does and ultimately, a change in the organization’s operating culture.

When people talk about having done “the easy stuff,” they mean they haven’t filled vacant positions and have eliminated some corporate staff, frozen or cut travel and board education, frozen capital spending and consulting, postponed upgrades of their IT infrastructure, and, in some cases, launched buyouts for the older members of their workforces, hoping to reduce their benefits costs.

These actions certainly save money, but typically less than 5% of their total expense base. They also do not represent sustainable, long-term change. Here are some examples of what will be required to change the operating culture:

Contract rationalization. Contracted services account for significant fractions of all hospitals’ operating expenses. The sheer sprawl of these outsourced services is bewildering, even at medium-size organizations: housekeeping, food services, materials management, IT, and clinical staffing, including temporary nursing and also physician coverage for the ER, ICU and hospitalists. More recently, it has come in the form of the swarms of “apps” sold to individual departments to solve scheduling and care-coordination problems and to “bond” with “consumers.” There is great dispersion of responsibility for signing and supervising these contracts, and there is often an unmanaged gap between promise and performance.

An investor-owned hospital executive whose company had acquired major nonprofit health care enterprises compared the proliferation of contracts to the growth of barnacles on the bottom of a freighter. One of his company’s first transition actions after the closure of an acquisition is to put its new entity in “drydock” and scrape them off (i.e., cancel or rebid them). Contractors offer millions in concessions to keep the contracts, he said. Barnacle removal is a key element of serious cost control. For the contracts that remain, and also consulting contracts that are typically of shorter duration, there should be an explicit target return on investment, and the contractor should bear some financial risk for achieving that return. The clinical-services contracts for coverage of hospital units such as the ER and ICU are a special problem, which I’ll discuss below.

Eliminating layers of management. One thing that distinguishes the typical nonprofit from a comparably-sized investor-owned hospital is the number of layers of management. Investor-owned hospitals rarely have more than three or four layers of supervision between the nurse that touches patients and the CEO. In some larger nonprofit hospitals, there may be six. The middle layers spend their entire days in meetings or on conference calls, traveling to meetings outside the hospital, or negotiating contracts with vendors.

In large nonprofit multi-hospital systems, there is an additional problem: Which decisions should be made at the hospital, multi-facility regional, and corporate levels are poorly defined, and as a consequence, there is costly functional overlap. This results in “title bloat” (e.g., “CFOs” that don’t manage investments and negotiate payer or supply contracts but merely supervise revenue cycle activities, do budgeting, etc.). One large nonprofit system that has been struggling with its costs had a “president of strategy,” prima facie evidence of a serious culture problem!

Since direct caregivers are often alienated from corporate bureaucracy, reducing the number of layers that separate clinicians from leadership — reducing the ratio of meeting goers to caregivers — is not only a promising source of operating savings but also a way of letting some sunshine and senior-management attention reach the factory floor.

However, doing this with blanket eliminations of layers carries a risk: inadvertently pruning away the next generation of leadership talent. To avoid this danger requires a discerning talent-management capacity in the human resources department.

Pruning the portfolio of facilities and services. Many current health enterprises are combinations of individual facilities that, over time, found it convenient or essential to their survival to combine into multi-hospital systems. Roughly two-thirds of all hospitals are part of these systems. Yet whether economies of scale truly exist in hospital operations remains questionable. Modest reductions in the cost of borrowing and in supply costs achieved in mergers are often washed out by higher executive compensation, more layers of management, and information technology outlays, leading to higher, rather than lower, operating expenses.

A key question that must be addressed by a larger system is how many facilities that could not have survived on their own can it manage without damaging its financial position?  As the U.S. savings and loan industry crisis in the 1980s and 1990s showed us, enough marginal franchises added to a healthy portfolio can swamp the enterprise. In my view, this factor — a larger-than-sustainable number of marginal hospital franchises — may have contributed to the disproportionate negative operating performance of many multi-regional Catholic health systems from 2015 to 2017.

In addition to this problem, many regional systems comprised of multiple hospitals that serve overlapping geographies continue to support multiple, competing, and underutilized clinical programs (e.g., obstetrics, orthopedics, cardiac care) that could benefit from consolidation. In larger facilities, there is often an astonishing proliferation of special care units, ICUs, and quasi-ICUs that are expensive to staff and have high fixed cost profiles.

Rationalizing clinical service lines, reducing duplication, and consolidating special care units is another major cost-reduction opportunity, which, in turn, makes possible reductions in clinical and support personnel. The political costs and disruption involved in getting clinicians to collaborate successfully across facilities sometimes causes leaders to postpone addressing the duplication and results in sub-optimal performance.

Clinical staffing and variation. It is essential to address how the health system manages its clinicians, particularly physicians. This has been an area of explosive cost growth in the past 15 years as the number of physicians employed by hospitals has nearly doubled. In addition to paying physicians the salaries stipulated in their contracts, hospitals have been augmenting their compensation (e.g., by paying them extra for part-time administrative work and being on call after hours and by giving them dividends from joint ventures in areas such as imaging and outpatient surgery where the hospital bears most of the risk).

The growth of these costs rivals those of specialty pharmaceuticals and the maintenance and updating of electronic health record systems. Fixing this problem is politically challenging because it involves reducing physician numbers, physician incomes, or both. As physician employment contracts come up for renewal, health systems will have to ask the “why are we in this business” and “what can we legitimately afford to pay” questions about each one of them. Sustaining losses based on hazy visions of “integration” or unproven theories about employment leading to clinical discipline can no longer be justified.

But this is not the deepest layer of avoidable physician-related cost. As I discussed in this HBR article, hospitals’ losses from treating Medicare patients are soaring because the cost of treating Medicare patient admission is effectively uncontrolled while the Medicare DRG payment is fixed and not growing at the rate of inflation. The result: hospitals lost $49 billion in 2016 treating Medicare patients, a number that’s surely higher now.

The root cause of these losses is a failure to “blueprint,” or create protocols for, routine patient care decisions, resulting in absurd variations in the consumption of resources (operating room time; length of stay, particularly in the ICU; lab and imaging exams per admissions, etc.).

The fact that hospitals have outsourced the staffing of the crucial resource-consuming units such as the ICU and ER makes this task more difficult. Patients need to flow through them efficiently or the hospital loses money, often in large amounts. How many of those contracts obligate the contractual caregivers to take responsibility for managing down the delivered cost of the DRG and reward them for doing so? Is compensation in these contracts contingent on the profit (or loss avoidance) impact of their clinical supervision?

These are all difficult issues, but until they are addressed, many health systems will continue to have suboptimal operating results. While I am not arguing that health systems abandon efforts to grow, unless those efforts are executed with strategic and operational discipline, financial performance will continue to suffer.  A colleague once said to me that when he hears about someone having picked all the low-hanging fruit, it is really a comment on his or her height. Given the escalating operating challenges many health systems face, it may be past time for senior management to find a ladder.

 

 

4 financial, strategic and revenue cycle issues health systems are facing

https://www.beckershospitalreview.com/finance/4-financial-strategic-and-revenue-cycle-issues-health-systems-are-facing.html

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From uncertainty around the future of the ACA to dwindling reimbursement, hospitals and health systems across the nation are facing a myriad of challenges.

Four healthcare industry experts discussed some of the most pressing challenges facing healthcare organizations today at the Becker’s Hospital Review 3rd Annual Health IT + Revenue Cycle conference in Chicago.

1. Hospitals across all credit rating categories are feeling financial pressure. A few years ago, hospitals with an A+ or higher credit rating typically had strong margins and a lot of options for improvement. “The big difference today is we’re seeing more hospitals that are struggling with operating margin, regardless of rating,” said Charles Alston, market executive and senior vice president at Bank of America Merrill Lynch. To address this issue, hospitals and health systems must examine how to fix the problem and then determine how to sustain those results long term, he said.

2. Hospitals are faced with uncertainty around the future of health reform. “I’m really worried about the future of the ACA and how much bad debt we’re going to have,” said Charles Ayscue, senior vice president of finance and CFO of Asheville, N.C.-based Mission Health. “We’re going to see a lot more self pay and we don’t have the workforce to handle that self pay.” He said Mission Health is taking proactive steps to prepare for the influx of patients with high deductible health plans, with a focus on revenue cycle improvement. “We’ve tried our best to educate our physicians on documentation and coding,” he said.

3. Health system mergers can create new challenges. Chicago-based Presence Health was formed in 2011 through the merger of Resurrection Healthcare in Chicago and Provena Health in Mokena, Ill. Presence Health CFO Mark Rafalski said hospitals involved in the transaction operated on disparate IT systems, which led to some revenue cycle management issues. “We’ve struggled in the area of [claim] denials,” he said. In an effort to turn around its finances, Presence has made a lot of changes in its revenue cycle, including using analytics and outsourcing to key partners, said Mr. Rafalski.

4. Healthcare organizations need to simultaneously cut costs and innovate.  Hospitals and health systems across the nation are facing cost pressure. “On the flipside, you have to change your strategy and innovate. You have to invest in the patient experience and the physician experience,” said Keith Lohkamp, senior director of industry strategy at Workday, a provider of cloud-based applications for finance and human resources. These competing priorities have fueled consolidation in the industry, as hospitals look for ways to drive efficiency and improve quality of care.