Weaning Your Hospital Off of Medicare

Some of those consolidations may not consist of closures or acquisitions. Instead, they might be agreements to work together—a virtual consolidation that allows a financially shaky hospital to improve efficiency in multiple aspects of its operation. Such arrangements let smaller hospitals partner to share best practices for patient care, quality improvement, and financial systems to reduce the cost of innovation. These partnerships might take the form of operating agreements, referral support, or sharing of physicians, including residents.

But some hospitals will close.

"Everyone talks about efficiencies, but that will favor the larger hospitals and systems," says Leigh Walton, chair of the healthcare practice in the Nashville office of law firm Bass, Berry & Sims. "People expect an onslaught of acquisitions. I can't fathom that that trend won't accelerate."

Some states, including New York and New Jersey, have established commissions to determine which hospitals need to close in order for others to survive and thrive in an era of lower reimbursement and, hopefully, lower utilization of acute services in which most hospitals specialize. In states that are less centrally controlled and have an older or declining population, market forces—including a growing patient desire for services provided outside the hospital—may force hospitals to close or be acquired.

"There are areas of the country where hospitals are overbedded," says John M. Cousins, a senior vice president of healthcare intelligence at CIT Healthcare who spent his early career as a chief financial officer at one hospital in New York state and in senior finance positions at other facilities in the Northeast. "In New York, the Berger commission has closed and consolidated hospitals and nursing homes. So far it's working," Cousins says. "There are some bumps in the road, but it got communities to sit down and actually decide what's the best way to provide healthcare. It's not just about the livelihood of the hospital. The hospitals were eating each other up."

BBA—the sequel?
Many experts don't see a future filled with the kind of draconian cuts in Medicare reimbursement that accompanied BBA '97, which mandated deep cuts in Medicare spending to teaching institutions, hospitals and home health agencies—at least for a few years yet. For one, politicians have such a short time horizon—the election cycle—that they won't act until there's a true crisis that will roost during an election cycle, says Cousins, who now makes a living monitoring countless congressional and regulatory meetings regarding Medicare for CIT, a commercial finance company. He predicts that until the so-called Medicare trust fund is scheduled to be liquidated within five years, Congress won't act rashly. "Even (Rep.) Pete Stark said it."

Congress won't act to cut hospital reimbursement across the board—partially because hospitals have some powerful friends there, but also because "it's political suicide to do a long-term fix," says Cousins. In addition, Medicare is still in the transition to the cost-based diagnostic-related groups from charge-based DRGs, and Congress wants good information on what that shift is achieving before acting.

"So it's still shaking out. I don't foresee drastic change for at least two to three more years until they get some good historical information on how the DRG reform is working."

Dan Wolterman, president and CEO of Memorial Hermann Health System, which includes 14 hospitals in the greater Houston area, sounds resigned to more cuts in the short term, but insists hospitals can't endure them over the long term. "The numbers just don't add up for Medicare, and they only have a few options to pursue to bring financial stability," he says.

Additionally, Medicare is experimenting with various "value-based" ideas to improve quality and value for the money it spends. In the recent past, it's done so through a variety of demonstration projects, with mixed results. But it's also rolling out some programs nationwide through its requirement that hospitals report quality data—now approved for 30 quality measures in 2008, in return for a market basket update of 2%. And that trend seems on the upswing. The proposed rule for 2009 requires reporting on 73 quality measures in return for an update of 3%.

"The demonstration project that Medicare did with Premier Inc. provides a window to look at where they're pleased with the economic and behavioral results. I expect we'll see more of those things," says the AHA's Bentley. The original pay-for-reporting initiative put 0.5% of hospitals' reimbursements on the line. "They'll use reimbursement as a directed tool rather than a blunt instrument," he says.

Some hospital leaders are fans of such an approach. In fact, they'd like to see it progress faster so that severe cuts aren't needed five years from now.

"There are plenty of things we can do that can encourage a more efficient way to deliver care that don't mean less money to provide those services," says Bill Atkinson, president and CEO of WakeMed Health & Hospitals, which includes a 720-staffed-bed Level I trauma center in Raleigh, NC. "I'm of the school that believes there's too much money available. Hospitals are so busy chasing the large dollars that they don't really take time to figure out how to provide care more efficiently, because there's always another pool of money to chase. If it were finite, we would all have to stop and figure it out. But it's never been that way."