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Hospitals Help Pay For Doc Fix While Pharma Gets A Pass

Philip Betbeze, for HealthLeaders Media, July 2, 2010

President Obama stands ready to sign a bill that will postpone the controversial 21% cut in physician reimbursement from Medicare. Finally. But it's not as simple as that. Included in the bill is a provision that would cause hospitals to at least partially fund the "doc fix," as it's become known.

By way of explanation, Congress has to jump through this doc fix every year to relieve themselves of a law they passed in the '90's, which automatically cuts physician reimbursement to fill the budget hole.

Those cuts are determined by the sustainable growth rate formula which is intended to keep Medicare cost growth at par with inflation. So much for that. With so many "fixes" to the SGR over so many years, the annual cuts have risen to ridiculous amounts. It would have been a 21% cut in reimbursement to physicians had Congress not acted. Incidentally, some of the supposed savings contained in the health reform act depend on the SGR being allowed to do its job, but that's another story.

What's interesting about this doc fix is that it will cut hospital reimbursement to pay for it, under a mechanism known as the 72-hour rule. The 72 hour rule states that hospitals will be reimbursed one amount for all related services within 72 hours of a patient admission, including the admission. Related is defined as having the same primary diagnosis. But under the new legislation, according to Rob Sutton, founding partner of IMA Consulting in Chadds Ford, PA, Congress wants hospitals to get one payment for all services within 72 hours—including those that aren't related.

Never mind that hospitals' median annual profit margin is 1% to 2%, which is not even enough to maintain staffing and technology needs. I suppose Congress sees that and assumes "they can afford it." Meanwhile, the pharma industry, which was the first to cut a "deal" with the president over healthcare reform, makes money hand over fist.

"Both physicians and hospitals should be paid fairly, and I understand the methodology, but what I struggle with is that the hospitals and physicians have little to no control over prescription drugs," says Sutton. "But pharma is not impacted at all, and they're making 60% profit margins and nobody seems to say anything about it."

On the lobbying front, the American Hospital Association did send two letters to Congress protesting that part of the legislation, but apparently their argument fell on deaf ears.

"Hospitals all of a sudden, if 30% of their business is Medicare, about 2% of that 30% is going to be impacted," says Sutton. "Now you're cutting a third of their profit margin.

Look, nothing is going to change the fact that people believe hospitals and physicians have control over much of healthcare costs. They don't. In large part, hospitals price things in order to stay in business. There are plenty of inefficiencies hospitals need to address as a group—that's true—but hospitals are inefficient in large part because of regulatory law. Nurses can only do certain things, for example. That specialization costs money.

"Does that mean the healthcare system is not broken? No. But there's no stopping the pharma and device manufacturers and surgical equipment manufacturers from charging whatever they want," Sutton says.

Politicians are great at finding and exploiting the weakest constituent in painful legislation that has the potential to affect all stakeholders. With few exceptions, hospitals' primary customer is not patients, it's physicians, so they don't want to be seen as the ones who are holding up the fix to the 21% physician pay cut.

In this case, hospitals are that weakest constituent. So they pay the price.


Philip Betbeze is senior leadership editor with HealthLeaders Media.
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