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Payment Cut: If It's Truly That Bad, Hospitals Should Drop Government

Philip Betbeze, for HealthLeaders Media, April 23, 2010

If their lobbying group is truly representative of its membership, hospitals are very unhappy with a hospital inpatient and long-term care prospective payment system proposed rule for fiscal 2011 that would cut average inpatient payments by 0.1%. Unhappy, but not desperate.

A tenth of a percent cut doesn't sound like much, but the American Hospital Association says if the proposed rule is allowed to stand as is, billions of dollars would be taken out of the system just as hospitals are grappling with sweeping changes and payment reductions contained in the new health reform legislation.

Besides, says the AHA, the estimate does not include the 0.25% mandated market basket cut that was included in the healthcare reform legislation signed into law last month. When that cut is put into place, average payments will decrease by 0.35%—compared to fiscal 2010 payments. So now we're up to a little more than three-tenths of a percent cut for 2011. I won't argue that 0.35% isn't real money for hospitals operating on a 1%-5% annual margin—if they're lucky. If they're not lucky—or good—many hospitals, including those that are incurring annual losses already, will have to reduce the amount of care they're able to provide to patients.

Let's be honest. With apologies to the AHA, I thought cost reduction (through quality improvement) for healthcare services and supplies was exactly the point of the health reform law. The idea was to streamline, but not to cut patient care.

At least that was the stated goal, but the real goal appeared to be to cover more of the uninsured. What level of coverage, and at what reimbursement rate, was the underlying issue that none of your elected politicians would touch with a 10-foot pole in the agonizing run-up to the law's final passage, and during the interminable negotiating process, I never heard much about future reimbursement from the associations of industries that would be affected under reform.

Look, no one likes to be told by their main payer that they'll get a cut in reimbursement, no matter how small, for the services they provide, especially at a time when prices for supplies, salaries, and energy, among other necessities for hospitals, aren't falling. Similarly, the biggest payer out there can be something of a bully.

Hospitals, like many other healthcare service providers, are caught in a pretty strong trap. They can't consider a draconian response of their own by cutting government out as a payer for a variety of reasons. Or can they? I would argue that many, especially in the long term, can at least consider it.

Many large academic medical centers are probably not able to consider this "nuclear option." They operate teaching programs that are big money-losers but that are necessary to bring along clinicians of the future. They're already constrained, through capital investments whose cost is fixed, to treat a certain volume of patients. And besides, even if they lose money on government patients, commercial patients have picked up the slack—at least up to now. But community hospitals, as well as big chains that don't operate AMCs, may be a different story, although they share the volume challenge. Certainly they can't consider cutting out government in the short term, but can they in the long term? I'd argue that some can.

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