Pro­fil­ing from Medi­care pay rates

Anal­y­sis: De­spite over­all gap, some hos­pi­tals are prof­it­ing on the pro­gram

Modern Healthcare - - FRONT PAGE - Joe Carl­son

In 2009, not-for-profit com­mu­nity hos­pi­tals say the fed­eral govern­ment un­der­paid them by a col­lec­tive $8.2 bil­lion. That re­sult—drawn from an exclusive Modern Health­care anal­y­sis of about 1,800 not-for-profit hos­pi­tal tax forms for 2009— may not sur­prise hos­pi­tal ex­ec­u­tives who have dealt with Medi­care re­im­burse­ment rates that dipped be­low av­er­age costs in 1997 and have never come up for air.

In­creas­ingly, ex­ec­u­tives are see­ing that $8 bil­lion gap not as a fed­eral lob­by­ing fail­ure, but a per­sonal chal­lenge—a bench­mark of sorts to test hos­pi­tals’ ef­fi­ciency in the face of dwin­dling re­im­burse­ment in­creases, an ex­pand­ing Medi­care pa­tient pop­u­la­tion and the grow­ing re­luc­tance of pri­vate pay­ers to ab­sorb cost- shifted Medi­care losses.

Brian Wal­ton, vice pres­i­dent and chief fi­nan­cial of­fi­cer at Bap­tist St. An­thony’s Health Sys­tem, Amar­illo, Texas, says his sys­tem has made a strate­gic ini­tia­tive out of turn­ing around its Medi­care losses—a 9.65% neg­a­tive op­er­at­ing mar­gin for Medi­care pa­tients in 2009.

Do­ing more with less

“No one knows what’s go­ing to hap­pen. But one thing that is for sure is, we have to fig­ure out how to pro­vide equal or bet­ter qual­ity with less re­im­burse­ment,” Wal­ton says. “If we can get to a point where we can break even or make a small mar­gin on Medi­care re­im­burse­ment, it just sets us up to a bet­ter po­si­tion to tran­si­tion to what­ever that new model will be in the fu­ture.”

Bap­tist St. An­thony’s will have to make up about twice as much ground in Medi­care prof­itabil­ity as the me­dian U.S. hos­pi­tal just to break even, although it is by no means alone in post­ing siz­able Medi­care losses.

Not-for-profit U.S. hos­pi­tals re­ceived an ag­gre­gate $81.3 bil­lion in Medi­care rev­enue in 2009, ac­cord­ing to a Modern Health­care anal­y­sis of new in­for­ma­tion re­quired to be re­ported on the Sched­ule H of the IRS Form 990. The in­for­ma­tion—based on data on 1,739 not-for-profit, non­fed­eral health­care or­ga­ni­za­tions that re­ported Medi­care re­im­burse­ments and ex­penses in 2009—was pro­vided by char­ity watch­dog Guidestar.

The mag­a­zine’s lin­ear re­gres­sion anal­y­sis of the data plot­ting each hos­pi­tal or­ga­ni­za­tion’s Medi­care mar­gin shows that higher pro­por­tions of Medi­care rev­enue tend to cor­re­late with lower over­all hos­pi­tal prof­its.

That re­sult re­flects the in­dus­try’s long­stand­ing po­si­tion that hos­pi­tals are un­der­paid for Medi­care. The Amer­i­can Hos­pi­tal As­so­ci­a­tion has cal­cu­lated that hos­pi­tals re­ceived about 90 cents on the dol­lar to pro­vide Medi­care ben­e­fi­cia­ries care in 2009.

Fi­nan­cial rat­ings agen­cies reg­u­larly cite hos­pi­tals’ mix of pub­lic and pri­vate in­sur­ance pay­ments as ev­i­dence of a hos­pi­tal’s cur­rent and fu­ture credit- wor­thi­ness— even though Martin Ar­rick, a man­ag­ing di­rec­tor in the cor­po­rate and govern­ment rat­ings divi­sion of Stan­dard & Poor’s, notes that it’s im­pos­si­ble to con­clude from pay­ment data that Medi­care alone causes the lower prof­itabil­ity.

Cor­re­lat­ing lower prof­its and higher pro­por­tions of Medi­care rev­enue doesn’t mean Medi­care is di­rectly caus­ing prof­itabil­ity prob­lems, he says.

How­ever, the Modern Health­care anal­y­sis of not-for-profit hos­pi­tal data also found that at least one-third of the 1,739 not-for­profit Medi­care health­care providers that filed a Sched­ule H in 2009 man­aged to turn a profit pro­vid­ing care at Medi­care rates.

Among the 603 or­ga­ni­za­tions that re­ported a profit on Medi­care pa­tients in 2009, the me­dian Medi­care profit mar­gin was 5.54%.

The in­for­ma­tion comes from line-by-line analy­ses of hundreds of pub­lic tax dis­clo­sures in­cluded in a new sec­tion of the Form 990 called the Sched­ule H, which was man­dated by Congress as a way to en­able the pub­lic to gauge how char­i­ta­ble not-for-profit hos­pi­tals are. Be­cause 2009 was the first year that hos­pi­tals had to fill out the sched­ule, it re­mains the only com­plete tax year avail­able to date for anal­y­sis by the pub­lic.

The data were com­piled by Guidestar, which re­ceives its in­for­ma­tion di­rectly from the In­ter­nal Rev­enue Ser­vice and dou­blechecks it in­ter­nally be­fore post­ing. The data

Prof­its and losses

in­clude only the na­tion’s not-for-profit hos­pi­tals, which are con­sid­ered char­i­ties for the pur­poses of tax law.

Although the num­ber of non­govern­ment tax-ex­empt com­mu­nity hos­pi­tals was around 2,900 in 2009, the IRS re­ceived fewer forms than that be­cause many in­clude in­for­ma­tion from in­te­grated health sys­tems that of­ten in­clude mul­ti­ple hos­pi­tals on a sin­gle tax re­turn.

The Medi­care-prof­itable hos­pi­tals on the list in­clude many fa­mil­iar names, in­clud­ing 466-bed Univer­sity Hos­pi­tal in Cincin­nati ($18.7 mil­lion in profit), 918-bed Johns Hop­kins Hos­pi­tal in Bal­ti­more ($19.6 mil­lion) and 1,039-bed Mount Sinai Hos­pi­tal in New York ($35 mil­lion), along with scores of smaller re­gional hos­pi­tals with vary­ing lev­els of prof­itabil­ity.

North Shore Univer­sity Hos­pi­tal is one of the hundreds of health­care providers that man­aged to beat the Medi­care game in 2009.

The Man­has­set, N.Y., ter­tiary-care hos­pi­tal, an 812-bed fa­cil­ity owned by North Shore-long Is­land Jewish Health Sys­tem, recorded $378 mil­lion in Medi­care al­low­able costs in 2009. (All fig­ures on the Sched­ule H are listed as es­ti­mated ac­tual costs, not the marked-up charge­mas­ter rate).

But North Shore Univer­sity Hos­pi­tal also recorded $380.5 mil­lion in Medi­care rev­enue, leav­ing it with a Medi­care mar­gin of 0.54%.

Mark So­lazzo, ex­ec­u­tive vice pres­i­dent and chief op­er­at­ing of­fi­cer for North ShoreLIJ Health Sys­tem, says hav­ing hos­pi­tals such as North Shore Univer­sity fo­cus on Medi­care mar­gins is a good ex­er­cise be­cause it brings at­ten­tion to the cost side of op­er­a­tions. For the most part, hos­pi­tals can’t ex­pect to be­come Medi­care-prof­itable through changes in rev­enue, he says.

“When we look out 10 years from now, we know we need to be­come more ef­fi­cient. So we are con­cen­trat­ing on im­prov­ing our ef­fi­ciency at each hos­pi­tal and across our sys­tem,” So­lazzo says.

The task takes on a new ur­gency when ex­ec­u­tives take a wider view of the health­care land­scape and see that while Medi­care is a pri­mary payer to­day, its shares of hos­pi­tal costs and re­im­burse­ments are only ex­pected to grow given changes in the de­mo­graphic and reg­u­la­tory changes at work.

Hos­pi­tal groups ne­go­ti­ated roughly $500 bil­lion in cuts to sched­uled Medi­care rate in­creases through 2019, and ob­servers across the in­dus­try are war­ily watch­ing to see whether the fed­eral govern­ment will make an­other $123 bil­lion in Medi­care cuts be­tween 2013 and 2021 based on the con­gres­sional su­per­com­mit­tee’s fail­ure to ne­go­ti­ate a pack­age of spend­ing cuts in Novem­ber (Nov. 28, 2011, p. 6).

Ex­ec­u­tives also note that ef­fi­ciency im­prove­ments de­signed to bring over­all costs in line with Medi­care re­im­burse­ment rates could ben­e­fit pa­tients and qual­i­ty­care goals.

For ex­am­ple, de­creas­ing hos­pi­tal lengths of stay—a near-uni­ver­sal goal of hos­pi­tal cost-cut­ting ef­forts—can ben­e­fit pa­tients by short­en­ing the amount of time they are ex­posed to med­i­cal er­rors and hos­pi­ta­lac­quired in­fec­tions.

Still, So­lazzo re­coils at the idea of “man­ag­ing to Medi­care” be­cause it im­plies that pub­licly in­sured pa­tients could re­ceive less­costly treat­ments while higher-pay­ing com­mer­cially in­sured pa­tients are get­ting more.

“I ban the phrase ‘man­age to Medi­care’ around here,” So­lazzo says. “I hate that phrase. I re­ally do. It sort of leads one to be­lieve that you’re try­ing to pro­vide two lev­els of care, and that is com­pletely op­po­site of who we are and how we pro­vide care.”

Tar­get­ing vari­abil­ity

Wal­ton, the CFO at Bap­tist St. An­thony’s, says his sys­tem has adopted an ex­ten­sive new cost-ac­count­ing sys­tem to pin­point which ser­vice lines are least ef­fi­cient while bring­ing Lean and Six Sigma vari­abil­i­tyre­duc­tion tech­niques to bear on hos­pi­tal pro­ces­sim­prove­ment.

Health­care of­fi­cials around the coun­try are in­creas­ingly us­ing the tech­niques to re­move vari­abil­ity and er­rors in clin­i­cal and busi­ness pro­cesses. Wal­ton says it’s a strat­egy that has worked for his de­part­ments in the past.

He says that un­der his watch, Me­mo­rial Her­mann Health­care Sys­tem’s South­east Hos­pi­tal cam­pus in Hous­ton was able to climb out of Medi­care losses to be­come the sys­tem’s first fa­cil­ity to post a modest profit on Medi­care through Lean and Six Sigma tech­niques.

Af­ter he started at Bap­tist St. An­thony’s, he got his former Lean and Six Sigma ex­pert at Me­mo­rial Her­mann to help train his new staff. Even with ex­per­tise, he knows the path to Medi­care prof­itabil­ity won’t be easy, as is the case for any health­care provider.

“It’s a pretty big job,” he says. “It could take you mul­ti­ple years just to get close to it. In this day and age, with Medi­care con­tin­u­ing to hold the line or even make cuts, it might al­most be im­pos­si­ble. But we are go­ing to strive to do it.”

For most hos­pi­tals, Medi­care pa­tients are a los­ing propo­si­tion fi­nan­cially, but ex­ec­u­tives are work­ing to mit­i­gate that.

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