Weaning Your Hospital Off of Medicare

No more cost shifting
Incentives are well and good, but incentive-based reimbursement doesn't change the fact that Medicare doesn't cover the cost to hospitals for caring for its beneficiaries, according to CFOs, with reimbursements coming in somewhere between 85% and 90% of hospitals' costs. That's not as bad as Medicaid, which often is below 70% of cost, but traditionally, hospitals have depended on cost shifting to commercial plans to cover the government's shortfall.

"Cost shifting won't carry the freight anymore because businesses are putting pressure on commercial insurers to bring premiums down," says Cousins. "The way they've been able to do that is through cost shifting themselves, back to the patients." As commercial health plans follow companies' directives to do so by setting up higher deductibles and coinsurance rates for their employees, the insured are being asked to foot more of the bill for those deductibles. Although those deductibles are supposed to be paid tax-free from health savings accounts set up to work in tandem with high-deductible plans, only about one third of HSAs are funded, says Cousins. That puts patients at risk for those deductibles. They often don't pay, resulting in bad debt and thus putting hospitals at risk, too.

Michael Freed welcomes further scrutiny about how hospitals are paid, and he's doing his part to publicize the "hidden tax" on the commercially insured sector that keeps hospitals afloat—to mixed results. Freed, CFO at Spectrum Health, an integrated delivery system with seven hospitals and more than 2,000 beds in western Michigan, took the extraordinary step of publishing not only the list price Spectrum charges for a variety of procedures but also the amount it's reimbursed for those procedures, illustrating the great disparity in reimbursement between government and commercial payers. The system trumpeted the move to transparency, but Freed is disappointed his initiative hasn't gotten more publicity. "I'm getting very little reaction from posting this stuff about cross-subsidies and the role they play. It's disappointing," he says.

But Freed remains certain that hospital leaders would be well-served to tell the story to the public, which remains largely unaware that they pay a hidden tax that allows government payers to pay less than they should. "If Medicare and Medicaid continue to cut away and nobody calls them on it, it will continue to move more of the payment responsibility to the private sector, and the private sector will continue to move it to individuals."

That's exactly what Freed is seeing in his patient population. Nearly 45% of Spectrum's health plan lives are now in deductible plans.

"What's happening is that most employers are putting in the deductible plan but not contributing to the HSA. That cuts right to the heart of it," he says. "If Congress wants to means-test Medicare, then do it. Let's have it out. To just say that you're going to cut fees and wash your hands is irresponsible. It isn't right."

With cost shifting becoming a less viable solution, how will hospitals cover the government's shortfall? They'll have to be more efficient at what they do, for one—and they'll have to subsidize the intensive part of their business model with more services that don't depend on third-party payers at all.

The power of diversification
Smart hospitals are diversifying their offerings to focus less on acute care and more on convenient outpatient and wellness care, say many. Walton says her hospital clients with Bass, Berry & Sims are "definitely increasing their service continuum so that it's not totally inpatient-focused."

Even large academic medical centers like Memorial Hermann, which makes much of its margin on cutting-edge treatments for acute conditions, is broadening its offerings.

"You have to diversify your income stream in this environment. You have to look at all the revenue sources," Wolterman says. "We're doing that, whether it's retail, like with physician clinics in stores, or freestanding imaging or surgical centers and sports medicine. We're growing that business rapidly."

Based in the heart of perhaps the world's biggest oil metropolis, Memorial Hermann's leaders have identified such services as "upstream" business in comparing their system to the oil industry. "Oil companies have the same problem," says Wolterman. "If they aren't getting the barrel of oil out of the ground and they're depending on someone else setting the price, they're in trouble."

Memorial Hermann's payer mix includes about 33% Medicare and 15% Medicaid, which is its fastest-growing book of business. Wolterman insists his leadership team has to change that equation and focus on services with more dependable reimbursement earlier in the care continuum. "The patient is upstream. A couple years ago we realized that all our investments have been downstream—in hospitals and intensive stuff. We're getting killed by not being able to get upstream."