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Weaning Your Hospital Off of Medicare

Philip Betbeze, for HealthLeaders Magazine, June 12, 2008
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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.

The numbers are working against hospitals. Medicare will start drawing on its trust fund for the first time in 2008 as it begins paying out more in benefits than it receives in taxes and other dedicated revenues. That situation will only worsen without new taxes, means-testing for senior benefits, or other politically unpalatable funding solutions. Absent changes, the trust fund is expected to be exhausted by 2019. (Five years prior to the last trust-fund doomsday date, the Balanced Budget Act of 1997 was passed. That measure spearheaded a period of serious financial pain for hospitals and other healthcare providers.)

Don't look for demographic relief—and don't look for payments to get any better. To put the situation into perspective, the Medicare program could be brought into actuarial balance over the next 75 years by an immediate 122% increase in the payroll tax, or an immediate 51% reduction in program outlays or some combination of the two, according to the 2007 Medicare trustees' annual report.

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.

How will hospitals survive in this brave new world? Some won't.

Joining forces
Even the American Hospital Association seems resigned to that fact. "We'll see more consolidation," says Jim Bentley, senior vice president for strategic policy planning with the AHA. "We've got to find ways to be more efficient, and healthcare organizations will be taking various consolidation strategies to reach those efficiencies."

A flood of baby boomers are set to join Medicare's rolls. Reimbursement cuts are looming. And some traditional cost-shifting solutions are growing steadily less effective. How can your hospital maintain its level of service and its margin? It's time to get creative.

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