Summary
Healthcare Reform, Where are we, how will the Federal Government pay for it, what does it mean for hospitals, and what does it mean in the long run? Congress is under pressure to develop a healthcare reform bill, which makes me nervous. The issues of Tort Reform and sustainable payments to providers need to be addressed in order for the healthcare reform to be a long term success.
Analysis
The CBO has priced the House version of the Healthcare Reform legislation at a little over $1 trillion. It is expected that the Senate version will come it at a similar number. The House is anticipating paying for the legislation through tax increases on the wealthy and corporations ($580 billion, married couples with adjusted gross incomes over $350,000) and savings on the Medicare and Medicaid programs ($500 billion). The HELP committee had been discussing taxing health benefits until the Senate leadership directed the committee to take that proposal off the table. The removal of the proposal is not due to the democratic leadership being opposed to tax increases, but the unions are very opposed to taxing health benefits. The hospital industry has already made a deal to accept $155 billion in lower Medicare reimbursement (most of the reduction coming in later years). The feeling is that the Hospitals saw the train was going to leave the station and wanted to get on board while the ticket price was still reasonable. Hospitals are expected to provide more charity care, institute electronic health records that will lead to productivity gains (reduction in duplicate tests being ordered), and institute quality programs to cut re-admission rates. I also do not read anywhere where Tort reform is part of the deal or is even being discussed. The senate bill has about a $320 billion funding gap that was created by removing the tax on health benefits. The senate is exploring a variety of different taxes to make up the difference. The legislation in both houses changes daily, but there is a push to have the drafting finished by the summer recess. The deal for hospitals includes a reduction in the market-basket increases of 1% over the next 10 years. For instance, if the market basket inflation factor indicated there is a 4% increase in hospital costs, the amount per discharge in the inpatient PPS formula would only be increased 3%, a 25% reduction in the inflation factor. This is the mechanism for internalizing the “productivity” gains into payment reductions. A prospective payment system (PPS) hospital receives a set payment for an entire hospital patient episode of care. If hospitals reduce the number of procedures or test performed, then their cost per admission will decrease. The thought is that regional healthcare information exchanges will be developed and treating providers can view tests performed on patients from different providers and then not repeat those tests. With the majority of PPS hospitals now running negative Medicare margins, this will increase the funding gap (an indirect tax on hospitals) and increase the hospital pressures to cost shift, where they can. There will be a reduction in disproportional share hospital payments (DSH). This provision makes some sense, provided hospitals will see increased reimbursement on the medically indigent with the expanded coverage included in the reform bill. Hospitals will see a reduction in payments for “avoidable” re-admissions that are related to the original admission. The feeling in the industry is that the current payment reductions for certain hospital acquired conditions or never events will be expanded to apply to other situations. Also, with the expansion of the quality reporting data and customer satisfaction reporting, there is the possibility hospital payments will be affected by poor quality or customer satisfaction scores. It is uncertain how any of these provisions would affect critical access hospitals currently being paid 101% of their “Medicare” costs, as defined by CMS. Of course, the trade-off for hospitals is an anticipated reduction in bad debts and self-pay discounts. Payments for services covered by the new insurance program would be made to network providers. To belong to the network, providers will need to sign contracts with “negotiated” rates. Part of the hospital deal is that the established rates be higher than current Medicare rates. My opinion on these proposals is that the cost will be higher than the government anticipates, and the savings not as great, putting more long run pressure on Congress to raise taxes or to induce the oversight bureau cry to either further lower provider payments or to institute priorities of service (rationing). We do not have a good way to predict how utilization will increase once a segment of the population is now covered by a third party payer. The nation’s experience with Medicare is that utilization increased dramatically and the cost estimates in the enabling title XVIII legislation were far exceeded. Secondly, the productivity increases that the federal government is banking on will not take place without significant tort reform. Tort reform is not being considered, more than likely due to the bias for the executive branch (our president is a lawyer) and the high number of elected congressmen that come from the legal profession. In discussing this issue with physicians, the threat of a malpractice suit will prevent them from reducing the test they order, even if the results from a similar test are available in the electronic record. I have been told numerous times that patient conditions change and a physician cannot rely on the results from a test taken yesterday. The threat of being sued if a physician misses something when a test would have identified the problem is a driving headwind keeping the productivity gains from being realized. Third, to the extent these pressures pay out, the government will have pressure to not increase payments to providers as their costs increase. This has been the government’s response to the increased costs in the Medicare program. In some markets, providers have no ability to cost shift as their payments are largely contractually set. Between Medicare, Medicaid, and Managed Care some providers are seen in excess of 88% of their payments coming from fixed payment sources. Add to this the new government program, and hospitals will have virtually no ability to cost sift. With Medicare paying less than costs, and this new program will more than likely quickly get to the same point, hospital margins will suffer. In the grand scheme, between the recipients of benefits, the tax payers, providers, and insurance companies; the providers and insurance companies do not have the political clout that the other two groups do. In the long run, I anticipate hospital margins to decline and hospitals to be a bad investment.
