The Financial Impact of Medicare for All on Hospitals



With all of the focus on M4A recently, in its many permutations, we’re hearing a growing concern among hospital executives and physician leaders that their economics could be in serious peril. (For more on this, see the below anecdote from “on the road”.) That concern is justified, as you can see from the graphic below.

On the left, we show data on payment-to-cost ratio for hospitals since the start of the 2000s. As you can see, hospitals rely heavily on a cross-subsidy model—Medicare and Medicaid reimbursement covers only 86 to 88 percent of the total cost of inpatient care delivery. Hospitals make up this difference, and generate a positive margin, by negotiating rates for commercially-insured patients that cover almost 145 percent of costs. As health systems have consolidated and built negotiating leverage, that percentage has steadily risen over the past several years, more than offsetting losses on publicly-insured patients.

The problem? Those lucrative commercial patients only account for a third of admissions, as shown at the bottom right. And across the past decade and a half, commercial admissions have dropped by more than 20 percent. In other words, hospitals have been consolidating and raising commercial rates on a declining book of business in order to compensate for underpayment on a growing volume of government-paid cases.

Now imagine that the commercial business disappeared entirely, and you can see what would happen—hospital finances would crater. Under M4A, Medicare rates would have to go up substantially to make up for the lost margin on commercial cases. Even if M4A turned out to be “Medicare Advantage for More”, trading commercial admissions (say, for the 55-65 population) for MA admissions (which are generally paid at Medicare FFS rates), this would create a difficult situation for hospitals.

In our view, this economic reality is not getting discussed enough in the current debate over M4A


Hospital profits in Massachusetts shriveling due to financial pressure

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Hit especially hard were Massachusetts’ community hospitals, with median operating margins plunging to 0.9 percent.

Acute care hospitals in Massachusetts are turning a profit for the most part, but in many cases those profits are less than robust. The state’s Center for Health Care Information and Analysis found that many are in a financially precarious position.

According to the report, about 65 percent of the commonwealth’s hospitals have operating margins below three percent. Overall, hospitals’ operating margins hovered around 1.6 percent. That’s down from 2.8 percent during the previous fiscal year.

While 49 of 62 hospitals were profitable in the fiscal year ending Sept. 30, many low margins low enough not to be considered financially healthy.

Hit especially hard were Massachusetts’ community hospitals, with median operating margins plunging to 0.9 percent — down two full percentage points from the previous year.

The northeastern part of the state saw the lowest margins geographically, at 1.6 percent, with some facilities operating on negative margins and hemorrhaging cash. North Shore Medical Center in Salem was among the hardest hit, seeing $57.7 million evaporate in fiscal year 2017.

Not all Massachusetts hospitals are feeling those kinds of pressures. Northeast Hospital enjoyed a 9 percent operating margin during the past fiscal year, translating into a $33.1 million surplus.

That the state’s rural hospitals are struggling isn’t surprising, given the national trend. A recent report found that nearly half are operating at negative margins, fueled largely by a high rate of uninsured patients. Eighty rural hospitals closed from 2010 to 2016, and more have shut their doors since.

Aside from the high uninsured rate, a payer mix heavy on Medicare and Medicaid with lower claims reimbursement rates is a contributing factor. More patients are seeking care outside rural areas, which isn’t helping, and many areas see a dearth of employer-sponsored health coverage due to lower employment rates. Many markets are also besieged by a shortage of primary care providers, and tighter payer-negotiated reimbursement rates.




Scripps Sees ‘Sober Warning,’ Slashes CEO Positions

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Organizational overhaul prompted by signs of ‘harder times to come.’

Scripps Health failed to meet its operating budget last fiscal year for the first time in 15 years, prompting the San Diego-based health system to restructure its executive team and look to cut corporate services costs by $30 million.

Although the system remains on solid financial footing, the news came as “a sober warning of harder times to come,” Scripps president and CEO Chris Van Gorder wrote in a memo to staff and physicians last week. The memo, which Scripps released in full to HealthLeaders Media, was as much a rallying cry as it was a bulletin of somber news.

“We can sit back and fool ourselves into thinking change is not really needed, and risk the consequences,” Van Gorder wrote. “Or like our founders, we can have the courage to boldly move ahead and do what’s needed for our patients, our community and their legacy.”

The memo outlined several organizational changes coming to Scripps in the next 30-60 days, including the following:

  • CEOs: Rather than keeping a CEO at each Scripps hospital, the system will establish three regional CEOs.
  • COOs: In the absence of a CEO, COOs will take over daily operations at each hospital.
  • Corporate services: Scripps will look to cut costs on corporate services by $30 million. It will evaluate a shared-services model for corporate services to improve accountability.

The southern region—which will get one of the three new CEO positions—includes Scripps Mercy San Diego and Chula Vista, overseen by current CEO Tom Gammiere. The northern region will include sites in Encinitas, Green, and La Jolla, which are overseen by CEOs Carl J. EtterRobin B. Brown Jr., and Gary G. Fybel, respectively. The third region will comprise Scripps ancillary services.

It appears Etter, Brown, and Fybel are the most likely candidates to fill the new northern-region CEO and ancillary-services CEO positions. It’s possible, though, that Scripps could bring in outside talent, promote from within, or even shift Gammiere to the northern region. This is an overhaul, after all.

Scripps Not Alone

In his memo last week, Van Gorder noted that Scripps is far from the only healthcare organization to face the kind of financial pressures that prompted these changes.

“Hospitals and health systems across the country, small and large, are being affected in similar ways,” he wrote, citing two peer institutions: Partners HealthCare and the Cleveland Clinic.

Partners HealthCare, based in Boston, reported an operating loss of $108 million last year, Van Gorder noted. Last spring, Partners offered buyouts to 1,600 workers at its Brigham and Women’s Hospital and announced plans to cut costs by more than $600 million over three years, as The Boston Globereported.

“This is an effort fundamentally to change not our values and our culture, but how we manage ourselves, how we focus on efficiency, the patient experience, the service we deliver, and try to be reflective of the pressures of being efficient,” Partners CFO Peter K. Markell told the Globe.

Cleveland Clinic, meanwhile, saw its operating income slump 71% last year, Van Gorder noted. The clinic’s president and CEO, Toby Cosgrove, MD, said the healthcare challenges putting pressure on systems these days are “unprecedented in their size, speed, and scope.”

Harvard Business Review (HBR) and other publications have covered the problem, Van Gorder told his team, noting that declining reimbursement rates are squeezing healthcare organizations nationwide.

“For the past decade, the consensus strategy among hospital and health-system leaders has been to achieve scale in regional markets via mergers and acquisitions, to make medical staffs employees, and to assume more financial risk in insurance contracts and sponsored health plans,” HBR’s Jeff Goldsmith wrote in October. “In the past 18 months, the bill for this strategy has come due, posing serious financial challenges for many leading U.S. health systems.”

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

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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.


Moody’s maintains for-profit hospitals’ stable outlook

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Dive Brief:

  • Moody’s Investors Service announced in a recently released report that the outlook for U.S. for-profit hospitals is stable.
  • Outpatient services will drive revenue growth. Moody’s said outpatient service growth will result in EBITDA growth of 2.5-3% for for-profit hospitals over the next 18 months. That growth will be offset somewhat by higher patient costs and more uninsured Americans, which may lead to more bad debt for hospitals.
  • Moody’s warned that recent hurricanes in Florida and Texas, which are the two largest states by revenue among for-profit hospitals, may cause short-term financial issues, but Moody’s expects those hospitals will recover quickly.

Dive Insight:

Payers, both private and public, continue to squeeze hospital margins as they push patients to outpatient services. Moody’s said volumes to lower-cost settings will continue. Revenue growth from outpatient services will rise faster than inpatient services.

Moody’s said patients with high-deductible health plans, who pay more out-of-pocket costs, are going to seek less costly settings than hospitals to save money. Also, the CMS’ proposal to allow several orthopedic procedures on an outpatient basis could cause more financial harm for hospitals. “If finalized, this will further push surgeries out of the inpatient setting.”

For-profit hospitals will capture some of the added outpatient volume through their own outpatient departments and associated ambulatory surgery centers. However, some volume will go to competitors, Moody’s warned.

Moody’s expects payer rates will rise, but lower than usual — 1.5-2% net revenue per adjusted admission over the next 18 months. Some factors that will affect the slower growth include the CMS changing disproportionate share payments and proposing 1.75% rates for hospital outpatient procedures, and private payers implementing cost-controlling policies. These policies include Anthem’s plan to no longer pay for MRIs and CTs scans in hospital outpatient departments. Instead, patients will need to get the services at lower-cost, freestanding imaging centers.

Moody’s also warned that rising bad debt and expenses are pressuring margins.

“Higher patient responsibility and fewer insured patients will lead to lower volumes, but also higher costs of uncompensated care. Even with strong cost controls, given the high fixed costs of operating hospitals, it will be difficult to expand margins in an environment of weak patient volumes and rising bad debt expense. At the same time, nursing shortages and rising fees associated with medical specialists (including outsourced emergency departments) will also pressure margins,” said Moody’s.

However, some for-profit systems may see improved margins in the coming months. Moody’s said Quorum Health and Community Health Systems (CHS) will benefit from shedding less profitable facilities, while LifePoint Health and HCA Healthcare will improve margins over time as they improve efficiencies at recently acquired facilities.

Moody’s also warned that Hurricanes Harvey and Irma, which destroyed portions of Texas and Florida, will affect the largest for-profit hospitals: HCA Healthcare, Tenet Healthcare and CHS, which all have “significant presence” in those areas. For those states, Moody’s expects “incremental expenses,” such as cleanup and remediation, staffing and overtime, as well as transporting critically ill patients to other facilities, will play a financial role for those systems in the next two quarters.

Anthem’s Good, Bad and Ugly News

Anthem had some good headlines on Wednesday. The insurer reported second-quarter earnings and revenue that topped estimates, with the latter jumping 7.2 percent from a year earlier. It expects to insure more people than it initially forecast this year, after surprisingly robust growth in its Medicaid business.

But beneath the good, there was also bad and ugly.