7.14.2008

More Medicare Patients are a Problem for Hospitals

I’ve written before about how financial incentives drive improvement in healthcare. A new article from HealthLeaders describes one such incentive I hadn’t thought about before: growing numbers of Medicare patients.

I previously discussed – and praised – the fact that Medicare is no longer paying for treatment of some medical mistakes. The problem pointed out by this new article (written by Philip Betbeze) is that, when it does pay, Medicare doesn’t pay all that well.

You depend on Medicare. That's too bad, because Medicare's a lousy payer. And here's a disturbing thought: You're going to be depending on Medicare a lot more in the coming decade. As the baby boomers age, more of your income is likely to hinge on a payer that reimburses hospitals about 90% of costs, at best, and doesn't do much better for physicians. Depending on many factors, a given facility's reliance on Medicare is relative, of course—but for many hospitals, Medicare represents 50% or more of their payer mix.

What does a patient mix that skews more heavily toward Medicare mean for the long-term viability of hospitals? The forecast is far from clear, but one thing is certain: Hospital leaders are going to have to get much more creative to maintain the level of service they're used to providing and the margin they're used to producing…

Even as government payers, including Medicare, are under severe pressure to cut costs, a glut of beneficiaries will move onto Medicare's rolls in the coming years as the baby boom generation ages. For hospitals, those patients are likely to need far more services—but bring in far less money per capita—than they did as commercially insured patients. Hospitals' age-old coping method of cost shifting to commercial plans also becomes problematic under the boomer load. For years, hospitals have used their negotiating clout with insurers to supplement the money they lose with government payers to make a small margin. But as fewer people remain on commercial plans while Medicare swells, this tactic loses its effectiveness. And as commercial premiums continue to rise faster than gross domestic product, companies are catching on to the disproportionate burden they shoulder to keep hospitals whole in the face of Medicare's failure to pay its fair share.

The article suggests that some hospitals are likely to close as a result. Others are looking at ways to increase revenue by offering additional services not dependent on Medicare.

But the best option is, almost certainly, to deliver services more efficiently, at lower cost. And at least a few hospital leaders recognize this.

"There are plenty of things we can do that can encourage a more efficient way to deliver care that don't mean less money to provide those services," says Bill Atkinson, president and CEO of WakeMed Health & Hospitals, which includes a 720-staffed-bed Level I trauma center in Raleigh, NC. "I'm of the school that believes there's too much money available. Hospitals are so busy chasing the large dollars that they don't really take time to figure out how to provide care more efficiently, because there's always another pool of money to chase. If it were finite, we would all have to stop and figure it out. But it's never been that way."

Medicare is now requiring hospitals to report quality measures. Hospitals get extra benefit for reporting those measures. But ironically, the benefit is just for the reporting. There is, at this point, no extra benefit for actually improving results.

Healthcare is on the very edge of what I would call a tectonic shift in its financial systems. Those hospitals that embrace a lean approach, enabling them to do more with less, and do it better, are the ones that will survive and prosper.

By the way, I will be on vacation the next two weeks, so you may not see many posts during that period. Enjoy your summer, and I'll be back soon.

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