Providers Must Cut Costs as Reimbursements Slide, Study Says

John Commins, July 14, 2010

Hospitals would have to cut direct costs by an average of $1,082 per case—14%—to sustain operating margins if average inpatient reimbursements from commercial insurers were paid at today's Medicare rates, according to a new study by the healthcare information company, Sg2.

"This changing environment requires a radical shift in behavior. The onus firmly resides with the provider," Sg2 Chairman/CEO Michael Sachs says. "The healthcare leader of the future must recognize incremental and long-term cost saving strategies today, while still delivering cost-effective, quality care."

With MedPAC projections of overall Medicare margins to be -5.9% in 2010 and performance-based penalties looming, Sachs says the threat of commercial insurance reimbursement rates approaching Medicare levels in some markets adds tremendous financial pressure to health providers.

"In order to survive and thrive, it is imperative for all organizations—regardless of size—to create a clinically integrated framework and understand financial implications of the growing Medicare population and performance-based incentives," Sachs says. "Now is the time to implement a disease-centered approach that not only uncovers financial opportunities, but addresses clinical performance across both inpatient and outpatient settings."

Sachs says demographic and economic forces are driving the pressure to reduce costs. The Medicare population will nearly double by 2030 as the 78 million Baby Boomers begin turning 65 in 2011.

Additionally, a slow economy makes health insurance coverage expensive for employers, and places pressure on commercial payers to reduce premium costs. Consequently, payers are forced to reduce reimbursements to providers— rates that could eventually approach Medicare levels in some regions, Sachs says.

The good news is that there is a lot of fat in the system that can be cut.

Sachs notes that Centers for Medicare & Medicaid Services estimates that 40% of total Medicare spending is waste in the form of provider error, unnecessary care, avoidable admissions and lack of care coordination.

To identify waste, Sachs says providers can use a disease-centered clinical approach that will identify the top Medicare severity diagnosis-related groups with the highest cost-reduction opportunities. He says hospitals can also improve clinical integration by assessing their performance across inpatient and outpatient settings.

Sg2's analysis is based in part on comparative data gleaned from the National Inpatient Sample. The analysis indicates that hospitals' cost reductions vary by market, provider type, case mix, payer mix, relative payment levels, and size. For example, large community hospitals would require a cost reduction averaging 17% to maintain overall operating margins at today's Medicare reimbursement rates. The average cost for small-to-medium-sized community hospitals would be $849 per case, and for academic medical centers it would be $1,168 per case.

John Commins

John Commins is a senior editor at HealthLeaders Media.

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