Looking Forward


Hospital Cost Shifting: Why Are Private Payer Margins Higher?
The gap between private payer hospital reimbursement rates and Medicare and Medicaid rates has received renewed attention in the wake of the health care reform debate. While pricing differences between and amongst various payers are commonplace throughout the health care system, whether this results from conscious price setting on the part of providers or from other, more complex market factors remains unclear.

Analysis from both the American Hospital Association (AHA) and the Medicare Payment Advisory Commission (MedPAC) shows wide discrepancies in the overall hospital payment-to-cost ratios borne by various payers. Evidence seems to suggest that private insurers “overpay” for hospital care while Medicare and Medicaid “underpay.”

According to a recent article in Health Affairs, hospitals with strong market power—few or no competitors in a given market—can (and do) negotiate favorable reimbursement rates with insurers, and are capable of generating profits. As a result, these hospitals tend to have less pressure to improve efficiency and adjust spending. Such circumstances, in turn, can contribute to higher costs per discharge at these hospitals, a result that produces very low or even negative margins for Medicare patients. Meanwhile, hospitals without the leverage to negotiate higher third-party reimbursement rates must, by necessity, reduce their operating costs or go out of business. These hospitals have much lower per discharge costs, and are able to generate a positive margin on their Medicare patients.

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Assessing Health Care Reform’s Impact on Chronic Disease Care
President Obama recently signed into law the $938 billion Patient Protection and Affordable Care Act, a bill designed to extend health care coverage to 95% of eligible Americans. The largest health care legislation since Medicare and Medicaid were enacted, this bill is expected to have a significant impact on the treatment of chronic diseases.

By prohibiting insurance plans from dropping sick adults from coverage, the bill further enables patients with chronic diseases to maintain necessary coverage. Additionally, the bill mandates insurance coverage for most Americans by 2014; this could lower premiums, as costs absorbed by the plan—especially the charges generated in the care of chronically ill patients—are spread among more enrollees. The bill also requires plans to provide copay free preventive care screening and required immunizations, which may prove crucial in reducing the costs associated with chronic diseases.

Indeed, by increasing the number of covered individuals by 32 million, the bill places an even greater demand on an already dwindling supply of physicians. A recent national study by the Association of American Medical Colleges estimated that physician shortages could surpass 150,000 by 2025. Some experts claim physicians already handle far too many patients, making proper management of chronic illnesses extremely difficult. If such physician shortages persist, access to care for patients with chronic diseases could diminish to the point where the level of care is severely compromised.

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Balancing the Benefits and Detriments of System-Tied Health Care
Poor coordination of care among doctors, nurses, pharmacists and other providers is one of the most persistent problems plaguing the U.S. health care system. This lack of organization between and among providers regularly results in ineffective care, unnecessary hospital readmissions and inflated costs. As a solution to these deficiencies, many health care experts have advocated integrated health care system models. Under such arrangements, physicians, hospitals and health plans are structurally aligned to share vital information that promotes successful coordination of care efforts. While the integration model has its fair share of obstacles, the potential benefits appear to be worth the risk.

Recent health care industry studies have indicated that coordination of care among primary care physicians, specialists and institutions could drastically reduce health care costs. Meanwhile, adherence to established guidelines within the framework of integrated health care systems can simultaneously develop higher standards that help manage difficult patient populations. Other methods of integration, including consolidated information systems and greater accountability, likewise contribute to effective management of patients across the continuum of care.

With health care reform legislation recently enacted and changes to payment structures and reimbursement rates soon to be established, there is a clear need for physicians, primary care and specialists alike, to collaborate with each other and with hospitals. Potential implementation of pay-for-performance measures and other quality initiatives further support the need for integration.

Yet in spite of their organizational strengths, integrated health care systems must confront the challenges associated with managing several competing hospitals, physician groups and health plans. Achieving a harmonious balance among physicians and the distinct institutions of care is not an easy task. How well integrated health care systems handle this arrangement will largely determine their success, especially as the health care industry concurrently adapts to recent reform.

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Payment Relief for Physicians Still Up for Debate in Congress
The Medical Group Management Association (MGMA) recently sent a letter regarding health care reform to the Speaker of the U.S. House of Representatives. Of special concern was the “ever-increasing physician Sustainable Growth Rate (SGR) deficit and looming 21 percent cut to physician payments under Medicare.” As of this writing, the Senate has yet to vote on legislation that would have extended the freeze on the Medicare payment rate through April 30, thus allowing Congress more time to pass a longer-term payment patch. As a consequence, the 21% physician payment cut became effective April 1.

Congress has delayed the SGR mandated rate cuts since 2003, and the gap between actual and target spending on physician services has continued to grow. Perhaps out of concern that further SGR reductions might cause doctors to stop seeing new Medicare patients or even to drop out of the program, the SGR is being reconsidered.

In the meantime, the MGMA and other physician associations are seeking a permanent repeal of the SGR formula. These groups want Congress to replace the SGR formula with one that would set reimbursement rates closer to practice costs.

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