Is Health Reform a Disaster or Opportunity for Hospitals?

Cheryl Clark, March 24, 2010

Health industry analyst Nathan Kaufman is surprised by those who are applauding health reform.

"Most of the people with boots on the ground believe that—as is the case in Massachusetts—healthcare reform as passed will be a disaster for hospitals and physicians," says Kaufman, a well-known San Diego health consultant. "This will really, really hurt most hospitals."

Fear and loathing over what the package will do to acute care providers characterized much of the reaction he was hearing in Chicago, where he was attending the annual American College of Healthcare Executives conference.

Instead of supportive comments like those issued by the American Hospital Association, he heard health leaders trembling over how they were going to traverse the rocky road ahead.

Other health industry experts note that health reform will reduce disproportionate share funding to safety net hospitals, making those facilities that treat the poor nervous about how they will manage costs of caring for more patients, many of whom have gone for years without necessary care.

Reform may also impose crippling limits on 235 physician-owned surgical hospitals, their ability to grow, and their owners' ability to refer patients to their facilities, according to the Physician Hospitals of America.

Kaufman's view on how reform will affect hospital finances was echoed to some extent by a dispatch from Moody's Investors Service, which said "not-for-profit hospitals and health systems, and many stand-alone community hospitals will have difficulties dealing with future constraints on reimbursement from payers and demands to operate more efficiently."

Moody's predicted that many independent hospitals will seek to consolidate in order to retain the financial strength to weather the cuts.

Why are hospitals concerned? For starters, Kaufman says, "We have to look at everything that's going on with Medicare and Medicaid."

  • First, hospital costs are going up 4% to 5%, while CMS plans to give hospitals not even half that amount, he says. And while that Medicare margin "is on the downward trajectory, Medicare is 40% of the average hospital's business."
  • Second, legislation will dramatically expand Medicaid, which only pays 65 cents per dollar of cost. Nearly 40 states are now planning to freeze their Medicaid payments. And 12% of hospitals' current volume is Medicaid, he says.
  • Third, commercial insurance companies subsidize government underfunding, but they will now have to incur costs of paying for care to people with pre-existing conditions. "Many of these insurance companies are for-profit. To protect their profits, they'll have to go after their costs. Their biggest costs are physicians and hospitals."
  • Fourth, prescription drug and device suppliers have agreed to reduce their costs by about $21 billion apiece. "Where do you think they will recoup those losses? By increasing rates," he says.
  • And fifth, he says, in regards accountable care organizations (ACO), physicians will be in direct competition with hospitals, working hard to keep patients away from being admitted. This, Kaufman says, will lead to a "massive kind of restructuring of the traditional hospital-physician relationship.

"In the long run, it will probably be good for patients, but in the short run, it will create huge tensions between hospitals and doctors," says Kaufman.

On the plus side, Kaufman acknowledges hospitals will see more revenue from previously uninsured, low-income patients. who will have coverage, "but what hospitals really need is to get paid fairly for the patients they have, not get more underfunded patients," he says about government programs. "You can't make the math work."

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