Weaning Your Hospital Off of Medicare

As the system works to make that shift, Wolterman is working on the cost structure by slashing corporate overhead expenses. "A couple years ago we said customer service would be important to centralize across the system, so we staffed up a central team," he says. "We probably can't afford that and may have to send that back to the individual hospitals. We haven't made any final decisions, but every single cost center is under scrutiny and needs to be reduced."

Focus on quality
Away from the legislative front, a focus on providing value to the patient seems to be the regulatory avenue Medicare is traveling—albeit glacially, say some hospital leaders who would like to see how their facility would do in an environment that rewards innovation and efficiency. For instance, Medicare offers financial incentives for quality reporting, but reporting the measures is the basis of whether hospitals get a full market basket payment update, not how well they do on these measures. Baby steps are OK, says Atkinson, as long as eventually payment becomes based on value added.

"If the reward potential doesn't change from providing procedures to providing outcomes, we're going to drown with the weight of these programs as they are today," he says. "The lack of efficiency in the Medicare program is going to be the downfall of all of us."

Atkinson admits his attitude has something to do with the fact that he thinks his system would do well under an outcomes-based system of reimbursement.

"We've developed our work force to be at the forefront of quality measurement, and we tie that to their compensation. For example, our entire organization has had a percentage of pay based on reduced mortality, so we don't complain about the changes that are coming. We're cheering from the sidelines."

At this point, tying performance on quality measures to reimbursement is farther than Medicare is willing to go. For now, hospitals get extra benefit simply for reporting quality measures—not necessarily for improving them.

Personal responsibility
Hospital leaders have another option when it comes to controlling costs and improving efficiency, but it's a lot harder than it sounds: Make patients care. Spectrum Health's Freed laments the lack of healthcare cost responsibility among patients, who face little negative incentive for managing their own healthcare, putting a significant financial burden on the system, he argues. "I just gave directions to a patient who showed up at our hospital today," he says. "She didn't know the doctor she was supposed to see. She had no idea what floor or what time her appointment was. I laughed to keep from crying. I thought to myself, ‘Why are you showing up?'"

People say "the system" is broken, says Freed, but he argues that what's broken isn't the system. "It's not a system, it's people. The system is working exactly as it was designed. If you don't like the way it's working, then change the way it was designed. We're slouching toward socialism when we assume someone else is going to take care of me and I don't have to worry about taking any responsibility."

Perhaps creating a sense of personal responsibility is beyond the scope of an individual hospital or system, no matter how large. But absent a tectonic political shift that would provide some sort of universal healthcare, the conclusion at which many senior leaders seem to have arrived is that the industry is balancing between increased personal responsibility for care and some form of socialized medicine.

"As an industry, we had better get a much more retail orientation as we deal with the customer. We have to have payment mechanisms for them," says Freed. "I've got a generation of healthcare workers here who think the billing process is largely paper-based and through third-party insurers. At the same time, I've got a generation of patients who have never seen a check in their lives and they only pay with debit cards. We have to change the way we do business."

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.

Come Down from the Ledge

Boomers on Medicare are not as bad for business as you think.

The large-scale movement of baby boomers onto the rolls of the Medicare system has many hospital leaders concerned, given that Medicare does not pay for the true cost of caring for its beneficiaries.

"Not only are we dependent on government payers, which account for more than half of the revenue for hospitals in this country, but add to that the demographics that the nation is facing with baby boomers," says Michael D. Rowe, vice president of finance and CFO at Sisters of Charity of Leavenworth Health System in Lenexa, KS. "It's almost unavoidable that the Medicare population will be the dominant force in the future."

But what some leaders have perhaps failed to consider is the number of formerly uninsured patients who will be transferring over to the Medicare rolls in the coming decade. That might be bad for Medicare's budget, but is a net positive for hospitals.

"There are a fair number of people who reach 65 and don't have coverage. When they were under 65 years of age, they were in your uncompensated pool," says Jim Bentley, senior vice president for strategic policy planning with the American Hospital Association. "Similarly, depending on how the state Medicaid program is administered, some patients will be dual-eligible," Bentley says, invoking the term for patients who qualify for both Medicare and Medicaid coverage. "Whether that means the revenue for that patient goes down or up, I don't know, but there are two cases where hospital leadership ought not to panic."

But those potential positives are tough for numbers-minded CFOs to hang their hats on, says Rowe, who says cost shifting will only get worse without some form of fundamental reform that introduces some new money into the government payer system based on incentives to hospitals for providing coordinated care instead of just expensive individual procedures.

"Absent changes in the regulatory environment that prevent us from reducing cost, we have no other choice but to turn to payers we have leverage with to try to extract another nickel, because service to the Medicare population is mandatory and that service generally produces negative net margin," he says.

—Philip Betbeze

Creative Destruction

Other industries have a certain appreciation for the reality that economic upheaval isn't necessarily a bad thing in the long run, says Sisters of Charity of Leavenworth Health System's Michael Rowe.

"We at one time bankrupted most of the railroad capacity in this country. In the past decade we bankrupted most of the fiber optic cable that was laid. We've bankrupted nearly every airline. In the long run, there's a reason why we've had those events, and economically we've emerged the better for it," he says, arguing that those traumatic events caused investors to learn hard lessons, caused cost structures to be realigned, and prompted adjustments to be made. The difference between those events and the challenges facing healthcare is that all of those events have been borne by individual or groups of investors who have chosen to take the risk.

"In this case we're dealing with the societal need for healthcare, so it's more like bankrupting the public utilities," he says. "Something like that truly is a disaster for the community, and you just can't do that without significant consequences."

More specifically, though, Rowe sees a role for creative destruction in healthcare.

"Not everything about healthcare is a public utility," he says, arguing that the United States should move to a public utility model for some healthcare that provides preventive care, primary care, emergency care, and the fundamentals of restorative care—and reimburses providers at cost plus a margin.

"The only way you can get there is through some sort of payment controls," he says. "That's how we run public utilities. It's not nationalized—it's a competitive model." Public utilities are independent corporations—many nonprofit, many for-profit—regulated through a quality-focused, rate- controlled centrally administered public commission. Rowe argues it's possible for the healthcare industry to adopt a similar model.

But one tough hurdle is distinguishing between what is a public utility and what isn't.

"Deciding what's covered and what's not are societal challenges that we have simply been unwilling to face up to until now."

—Philip Betbeze