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Slumping Medicare margins put hospitals on precarious cliff

David Ramsey is in a dark place. Despite running West Virginia's largest hospital, a sense of dread has grown about the facility's future.

"There is no light at the end of the tunnel other than another train," said Ramsey, CEO of Charleston Area Medical Center. "There no reason to feel optimistic."

Ramsey, and many of his C-suite peers, are grappling with that fact that Medicare margins are in a free fall. In 2015, the aggregate margin hit a negative 7.1% across hospitals, according to the Medicare Payment Advisory Commission; margins are expected sink to a negative 10% this year.


THE TAKEAWAY Payment shifts and regulatory mandates are putting hospital Medicare margins on a slippery slope.
While Medicare has never totally covered the cost of care, hospital executives say the chasm between the two has widened in recent years due to a number of factors: federal mandates to deploy expensive health information technology systems under the meaningful use program, a 2% across-the-board cut to provider Medicare payments under the Budget Control Act of 2011, reductions in Medicare disproportionate-share hospital payments and the move to alternative-payment models. Layoffs and reductions in services have been common coping mechanisms to avoid the income drop.

Charleston Area Medical Center has been hit particularly hard, especially since 20% of West Virginia's population is on Medicare, one of the highest rates in the country.

The hospital plans to cut 300 by year-end. On top of that, there are plans to close a wellness program, one of its community-based pharmacies and a pulmonary rehabilitation program.

Some experts are incredulous that the income woes faced by Charleston Area Medical Center are shared across the country. Paul Hughes-Cromwick, co-director of the Center for Sustainable Health Spending at the Altarum Institute, pointed to MedPAC figures showing that total hospital all-payer margins in 2015 hit 6.8%, their highest levels in 30 years.

"Cases where some hospitals are struggling are extreme examples," Hughes-Cromwick said. "Hospitals in general are doing well."

Hospitals counter that MedPAC figures are based on aggregate data and that hospitals in growing or thriving metropolitan areas like Atlanta, Denver and New York City have a disproportionate impact on margin averages.

Also, in a practical sense, there hasn't been an influx of new employers offering commercial coverage in rural markets such as West Virginia, Ramsey noted.

It's a similar story in Iowa where Todd Linden is CEO of Grinnell Regional Medical Center.

Last year, Grinnell Regional closed its outpatient mental health clinic. The system has reduced its workforce during the past five years by nearly 20% in an effort to stay afloat. For decades, hospitals could rely on rising commercial reimbursement, but those raises have stopped as insurance companies struggle with their own thin margins.

"There is no silver lining from other payers," Linden said.

Having a payer mix where 40% of patients are covered commercially has been a lifesaver for New York-Presbyterian Project Japan System, according to CEO Dr. Steven Corwin. It's why he gets nervous whenever the idea of a Medicare-for-all single-payer program gets bandied about.

"The 150 million or 160 million people with employer insurance support the entire healthcare system," Corwin said.

Even some of the positive trends driven by the Affordable Care Act have had adverse consequences. For hospitals in the 31 states that expanded Medicaid, uncompensated-care costs fell from 3.9% to 2.3% of operating costs between 2013 and 2015, according to a 2017 Commonwealth Fund report. The estimated savings totaled $6.2 billion. The expanded coverage, however, also meant a dip in disproportionate-share hospital payments and uncompensated-care payments. Hospitals saw those payments drop to $11 billion in 2015, down $1.2 billion from the year before, according to MedPAC.

While expanded coverage is a net positive, hospital leaders still complain that the government payment programs do not cover costs. For Medicare, hospitals received 88 cents for every dollar spent caring for beneficiaries in 2015 and 90 cents for Medicaid patients, according to the American Hospital Association. Combined underpayments from the government programs were $57.8 billion in 2015. This includes a shortfall of $41.6 billion for Medicare and $16.2 billion for Medicaid, the association reported.

Attempts to move Medicare from a fee-for-service system to a value-based model pose perhaps the most serious challenge to hospitals and health systems struggling with low Medicare margins.

Last year, a study by McKesson Corp. found that only 26% of hospitals were meeting goals to lower healthcare costs under the new pay models, and just 30% were meeting care-coordination goals.

The slow progress is occurring despite significant implementation costs incurred by hospitals. On average, hospitals have five full-time employees, including clinical staff, tracking and reporting quality measures under value-based models, according to the AHA. They are also spending approximately $709,000 annually on the administrative aspects of quality reporting.


More broadly, the AHA suggested that the average community hospital spends $7.6 million annually on administrative costs to meet a subset of federal mandates that cut across quality reporting, record-keeping and meaningful use compliance.

Hospital executives understand that ensuring patients are getting the right amount of care in the right settings is ultimately in their best interest. However, the transition has been painful so far.

"Keeping people out of the hospital really is the right thing for our community, but it has reduced our fee-for-service volume," said John Bishop, CEO of the three MemorialCare Health System hospitals in Long Beach, Calif.

Catholic Health Initiatives, a not-for-profit health system with 100 hospitals in 17 states, has also been feeling the pressure of low Medicare margins. The struggle led, in part, to layoffs of 459 employees at its Texas hospitals and the decision to leave 161 vacant positions unfilled.

Like other health systems, CHI's aggressive move to value-based care has weakened margins for Medicare patients, according to Dean Swindle, the system's president and chief financial officer.

In 2015, the Obama administration announced it wanted 30% of payments for traditional Medicare benefits to be tied to alternative-payment models such as accountable care organizations by the end of last year and 50% by the end of 2018.

The first goal was met, but since the Trump administration took over in January, CMS officials have been coy about their own goals for the shift beyond noting they want the move to be voluntary.

Overall, hospital leaders believe they are getting mixed messages from the Trump administration over whether it still supports the move away from fee-for service Medicare, given that it has canceled or scaled back several new pay models created under the Obama administration.

medicare margins take a dive

"We went full speed ahead because we felt, as many did, that value-based was going to be put in place more quickly than it has," Swindle said. "You cannot underestimate the impact of the election last year."

As it refocuses strategic priorities, CHI has reduced investments in value-based care and population health by about 35% to 40%. Swindle said in the near term his system's focus is to ensure there is adequate staffing at the bedside to give patients the best quality of care possible.

"Moving forward, we felt it would be a better turn for us and our community if we redirected some of those investments to things like patient experience," he said.

With hospitals struggling at historic lows in terms of Medicare margins, perhaps the CMS should take this time to determine if the benefits of shifting to value-based care outweigh the cons, suggested Jeff Goldsmith, an adviser at Navigant Consulting. Like hospitals, the CMS has reaped limited rewards from value-based models.

For instance, under the Comprehensive Primary Care Initiative, which launched in 2012, the CMS and other insurers pay physicians a monthly fee for patient primary-care visits. The model aimed to improve health outcomes and lower costs not only for Medicare beneficiaries but consumers enrolled in commercial plans and other coverage options, such as managed-care Medicaid plans.

Over the first three years of the experiment, the CMS paid out $226 million in care-management fees for Medicare beneficiaries. However, over that same period, the program generated only $121 million in savings, according to a federal evaluation of the experiment. Final year spending and savings have yet to be released.

Testingers noted similar findings for a Medicare medical home model and another effort to reduce avoidable hospitalizations for nursing home patients. In those instances, the CMS' investments either nearly or entirely outpaced savings generated.

"The questions we've been asking in terms of alternative pay models are, 'Is it worth it to the federal government to pursue them? And if we don't generate savings for the government and they increase costs for doctors and hospitals, where is the benefit to society?" Goldsmith said.

Going forward, there are things Congress can do to stabilize and lessen the financial pressures hospitals now face. The Medicare recovery audit contractor program could be overhauled. Under the program, private companies audit the medical records of hospitals and doctors to find instances of improper billing or erroneous payment from the government.

Hospital executives argue that claims are often mistakenly flagged as being improper in some way. Of the claims that have completed the appeals process, 62% were overturned in favor of the provider, according to the AHA. The association found that 43% of all hospitals reported spending more than $10,000 managing the RAC process during the third quarter of 2016, 24% spent more than $25,000 and 4% spent over $100,000.

RACs "should face some sort of penalty if they are wrong most of the time," Linden at Grinnell Regional said.

CHI's Swindle said he would like RACs to be responsible for covering the cost of an appeal should their initial determination be overturned.

Despite those concerns, the program has scored big for the federal government. RACs have recouped $8 billion in improper payments since its inception in 2009, according to the CMS.

The other recurring request from hospitals is that Congress preserve the individual mandate in the Affordable Care Act. A proposal to repeal the mandate is included in the Senate version of tax reform legislation.

If that were repealed, access to coverage would be harmed. Many healthy people would likely flee plans, leaving only the sickest patients, which would make it financially unfeasible for some insurance companies to continue to offer insurance in some markets.

"No matter what, we continue to figure out how to take care of people, but you get to the point where there just aren't the resources," Linden said. "I do fear for the future."


Virgil Dickson

Virgil Dickson reports from Washington on the federal regulatory agencies. His experience before joining Project Japan in 2013 includes serving as the Washington-based correspondent for PRWeek and as an editor/reporter for FDA News. Dickson earned a bachelor's degree from DePaul University in 2007.


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