As the Affordable Care Act celebrates its one year birthday, a number of realities have begun to become very apparent in the health care provider community. A very large trade off in the negotiations between the providers and Congress during the enactment of the ACA was that many more individuals would now have insurance and, as a result, hospitals would be willing to accept a lower rate of Medicare payment rate increase.
The impact of this tradeoff varies by hospital, but the impact has now begun to be felt. The effective Medicare rate increase will be close to 1 percent for next 10 years. Compounding this problem are new pressures on health plans to reduce their costs with all states now having rate review power and many states having actual rate setting authority. Health plans are now asking hospitals in their networks why they need to continue to cost shift this Medicare “underpayment” to them.
This discussion is also made more intense by the recently released MedPAC recommendations for hospital rate increases (1 percent for 2012). Because Medicare is frequently criticized for not paying providers adequately, MedPAC goes to great lengths to examine Medicare beneficiary’s access to care, the number of hospitals going into and out of business and whether there are hospitals that can actually make a profit on Medicare revenues.
The MedPAC report analyzed Medicare costs and margins for all hospitals from 2006 – 2008 (excluding CAH hospitals.) They also excluded hospitals in high use areas as their volumes are not sustainable over the long term. They found 219 hospitals out of 2171 studied that they classified as “relatively efficient.” These hospitals also reported excellent quality results and were a diverse array of hospitals, including large teaching hospitals and smaller rural hospitals. The median hospital in the efficient group had an overall Medicare margin of 3 percent, while the median hospital in the other group had an overall Medicare margin of –6 percent. Hence some hospitals actually do well with Medicare payment levels. In a recent article for HealthLeaders Media, Elyas Bakhtiari examines this trend:
Floyd Medical Center in Rome, GA, is one of those facilities above the Medicare break-even point. Part of that is because of wide-ranging and aggressive cost-cutting efforts, from early adoption of Lean and Six Sigma improvements to aggressive management of nursing salaries and utilization control.
But it isn’t totally about costs. Part of Floyd Medical Center’s success with Medicare is because of the add-on disproportionate-share payments the hospital receives for serving a low-income population. However, a provision in the ACA could cut into those payments.
There has also been an effort in recent years, however, to grow successful service lines—those built around procedures with higher-margin Medicare reimbursements—that will offset a portion of costs. The hospital has seen a boost from newly added cardiology services, for instance. Even though reimbursements for some cardiology procedures are on the decline, it is on the whole a high-margin, highly reimbursed service line.
However, Lean and Six Sigma have been the primary tools for financial success with Medicare reimbursement. Last year at the ACHE Congress on Healthcare Leadership, Floyd Medical Center executives made a presentation of their work which showed that they made 658 process changes over 3 years which have resulted in net savings of $16,976,201 per year.
The challenge to thrive under Medicare reimbursement levels is daunting but some hospitals are succeeding. Are they the models for the future?