Budget Analysis: Does This Kind of Health Reform Work for You?

When President Barack Obama delivered his 2010 budget outline to Congress just days ago, he included some $630 billion in spending to pay for healthcare reform, to be paid for in part through higher taxes on the affluent.

Never mind how you might feel personally about the new taxes required to finance the plan. Or the fact that details about how that money might be spent are somewhat sketchy at this point.

There is one interesting provision that does come with some detail in the budget. It's a proposal to switch to bundled payments for hospitalizations of Medicare patients. Under the model, providers would receive a single bundled payment to cover both a hospital stay as well as care for the patient for 30 days after release. The change intends to reduce the 18% of hospitalizations that result from readmissions, and the administration claims it will save $26 billion of wasted money over 10 years, in part by reducing payments to hospitals that have high rates of readmission. In theory, that switch would keep hospitals from discharging patients too early only to have to readmit them when the patient relapses. Of course currently, the hospital bills and receives payment from Medicare for both admissions. To put things in perspective, that amount of money at current market conditions would keep General Motors going for about another three months, but that's another story entirely.

Allow me to tell a little personal story to highlight a potential problem with unintended consequences a rule like this might bring.

I have a great aunt on Medicare who had to be readmitted to a hospital last week. She won't mind me sharing her story here to make my point. Originally, she broke her hip. Once that was taken care of during a short hospital stay, she was discharged to a rehab facility nearby. I won't get too much into the ruckus she and her daughter had to raise to even have her temperature taken when she felt she was running a fever a few days later, but suffice to say, the fever was real at 103, and she had come down with pneumonia. Clearly, she needed to be readmitted to the hospital, but because there were no beds immediately available, she was held for several hours in the ER until one came free. There she remains, recuperating from an unrelated illness to her original problem. Unfortunately, I don't think hers is an unusual story.

I'm getting way ahead of the game here, but assuming this provision in the budget makes it through Congress—an extremely iffy proposition, given the way Congress works—I wonder if a new entity might spring up to take care of patients who need to be readmitted to a hospital but are still within the 30-day window. Something that in acuity, lies between a hospital and a rehab center? That's the hopeful possibility.

A darker possibility might involve hospitals finding ways to avoid the technicality of readmitting patients during the 30-day window. That's what's called an unintended consequence. Legislation will have to be carefully written to try to avoid this outcome. In any event, you'll certainly see length of stay creep up for this group of patients as the legislation would make exceedingly more difficult the decision on when to release a patient.

In my aunt's case, let's assume her pneumonia was not acquired during her hospital stay, but in the rehab facility. It could have happened at either place, obviously. But under the new system, the hospital would clearly have to "eat" her treatment costs even though it may not have been at fault. How does that strike you as a hospital chief financial officer or CEO?

Many hospitals already have bed shortages, at least at certain times. I want to assume the best of our hospitals and medical decision-makers, but what kind of pressure will this requirement put on hospitals that have two patients, for example, who need to be admitted, with one open bed. Who gets it? The one whose treatment will be reimbursed or the one whose treatment won't be reimbursed? These are painful questions, but incentives, even perverse ones, cause consequences, and they need to be asked.

If, as the president's budget intends, this provision sticks and hospitals are paid for episodes of care under the reforms, it's a big step toward eliminating some of the perverse incentives hospitals have to readmit patients who perhaps shouldn't have been discharged so early, but we have to think about the other incentives a rule like this would encourage.

Tread carefully, Mr. President.