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I read with great interest Stephen Brill’s exposé on healthcare costs in the March 4 issue of TIME magazine, “Bitter Pill: Why Medical Bills are Killing Us.” I have been deeply involved with healthcare financial issues for the past 40 years as a professor of healthcare finance at Ohio State University (1973 to 2001) and as the president of a firm that helps over 300 hospitals set CDM prices. We have received comments from many of our clients looking for a reaction to Mr. Brill’s indictment of hospital pricing, and my purpose in this communication is to react to the article.
The article was well written and for the most part accurate in what was stated. Hospital CDM prices are very high and to be honest are not usually related to cost in any uniform and logical manner. A number of specific uninsured or underinsured hospital bills were used throughout the article to illustrate flaws in the healthcare/hospital system—e.g. high CEO salaries, profiteering by not-for-profit hospitals, medical technology, etc. Most of these issues have been cited for a long time and in a large number of both academic and nonacademic media. Although the article highlights those uninsured or underinsured patients who were faced with large hospital bills, no mention is made of the countless cases of patients without insurance who do not pay.
Cost shifting is the primary cause of high medical prices and was never really acknowledged in this article. Governmental payers, largely Medicare and Medicaid, do not pay the full cost of delivering care. Even the federal government recognizes that it pays less than cost. MedPAC in its 2012 report showed that not-for-profit hospitals had a negative 6.5 percent margin for the period of 2006 to 2010. The burden of nonpayment by government and the uninsured must be shifted to patients with private insurance coverage. Many of the insurance firms operate as oligopolies in their markets and receive large discounts from provider prices. Prices are raised not to push this burden to the uninsured who pay less than 5 percent of their charges—or 15 percent of actual costs, but rather to recover from the commercial payers who may pay on a discounted charge basis. Medicare and Medicaid continue to pay a smaller percentage of their cost, and insurance firms demand larger discounts from billed charges, which further escalates the rate increase. In short, provider charges are increasing, but actual provider payments are increasing at a much smaller rate.
Mr. Brill indicates that many hospitals operate as public utilities, a concept that I would endorse. In fact, we conduct a “Rate Defensibility Study” for our clients as part of the pricing engagement. We believe that, if a hospital is not making excessive levels of profitability and it does not have excessive costs, then by definition it must have a defensible revenue structure. This is the same type of process that a Public Utility Commission would pursue in approving rates. Please note, however, that a defensible revenue structure does not necessarily equate to low prices, because the hospital may be faced with a high percentage of Medicaid and indigent patients, which will require cost shifting.
There are two tests for determining whether a hospital’s prices are defensible, involving two questions:
Mr. Brill tries to answer these questions but in an anecdotal fashion. For example, he cites profit margins for many of the hospitals singled out in his article and indicates that they are high. Perhaps part of the problem may be the methodology used to define margins and profit. He references an IRS tax return for Stamford Hospital with a Sept. 30, 2011, year-end. I am assuming that this is the IRS 990 report. Mr. Brill stated that Stamford realized $63 million in operating profit on revenue of $495 million. The actual report shows $37.6 million of revenue over expenses for a profit margin of 7.6 percent, far lower than the 12.7 percent reported by Mr. Brill. To be sure, this is still a high margin relative to other U.S. not-for-profit hospitals, but it is not typical of most not-for-profit hospitals.
Mr. Brill also made a generic statement about profit levels in not-for-profit hospitals. He states that a McKinsey study showed 2,900 not-for-profit hospitals with higher operating margins than 1,000 for-profit hospitals. Data derived from Medicare cost reports in 2011 contradict this finding.
Second, Mr. Brill does not focus on the reasonableness of costs. Costs can be unreasonable for three primary reasons:
There is minimal discussion of medical services being provided that were not medically necessary. There is much more discussion about whether the costs were proper—e.g., whether the hospital paid too much for the resource used. It is in this area that Mr. Brill spends much time outlining what he believes to be excessive compensation. For example, the CEO of Stamford hospital received $1.86 million in 2011, which Mr. Brill clearly regards as excessive. Although we cannot comment on the merits of the CEO’s salary, it is useful to point out that total salaries at Stamford were $181 million and total expenses were $495 million. Slicing key executive salaries by 50 percent would most likely not have a material effect on total expenses. Executive salaries may be a lightning rod for attention, but they rarely have a significant effect on total expenses and therefore pricing.
My overall reaction to Mr. Brill’s article is that it did not really provide any new information about why medical bills are killing us. In fact, I believe that it confuses the issue with anecdotal stories that make for interesting reading but little substantive analysis.
William O. Cleverley, PhD, is president, Cleverley & Associates, Inc., Worthington, Ohio.
Publication Date: Wednesday, March 20, 2013
TriMedx helps health systems control costs and uncover savings opportunities by optimizing the clinical engineering function.
Patient financial engagement is more challenging than ever – and more critical. With patient responsibility as a percentage of revenue on the rise, providers have seen their billing-related costs and accounts receivable levels increase. If increasing collection yield and reducing costs are a priority for your organization, the metrics outlined in this presentation will provide the framework you need to understand what’s working and what’s not, in order to guide your overall patient financial engagement initiatives and optimize results.
A leader from McKesson discusses how healthcare reform is forcing hospitals and health systems to take a different approach to capacity management and patient flow.
No two patients are the same. Each has a very personal healthcare experience, and each has distinct financial needs and preferences that have an impact on how, when and if they chose to pay their healthcare bill. It’s no longer effective to apply static billing techniques to solve the complex challenge of collecting balances from patients. The need to tailor financial conversations and payment options to individual needs and preferences is critical. This presentation provides 10 recommendations that will not only help you improve payment performance through a more tailored approach, but take control of rising collection costs.
Emad Rizk, MD, president and CEO of Accretive Health, discusses the uncertainty facing hospitals and the transitions affecting revenue cycle management.
This white paper, written by Apex Vice President of Solutions and Services, Carrie Romandine, discusses the importance of patient segmentation and messaging specifically related to the patient revenue cycle. Applying strategic messaging that is tailored to each patient type will not only better educate consumers on payment options specific to their billing needs, but it will maximize the amount collected before sending to collections. Further, targeted messaging should be applied across all points of patient interaction (i.e. point of service, customer service, patient statements) and analyzed regularly for maximized results.
Jim Bohnsack, vice president, solution & corporate development for Conifer Health Solutions, explains how the company helps healthcare providers leverage data to deliver better outcomes while optimizing reimbursement for all payment arrangements.
This white paper, written by Apex President Patrick Maurer, discusses methods to increase patient adoption of online payments. Providers are now seeking ways to incrementally collect more payments due from patients as well as speeding up the rate of collections. This white paper shows why patient-centric approaches to online payment portals are important complements to traditional provider-centric approaches.
Steve Scibetta, senior director of channel sales for Ontario Systems' healthcare product line, shares insights into effectively managing receivables.
Increased electronic engagement between healthcare providers and patients provides significant opportunities for improving revenue cycle metrics and encouraging patients to access EHRs. This article, written by Apex Founder and CEO Brian Kueppers, explores a number of strategies to create synergy between patient billing, online payment portals and electronic health record (EHR) software to realize a high ROI in speed to payment, patient satisfaction and portal adoption for meaningful use.
Elena White, vice president of risk, quality, and network solutions for Optum, discusses how healthcare providers can leverage data and technology as they enable risk in their organization.
Faced with a rising tide of bad debt, a large Southeastern healthcare system was seeing a sharp decline in net patient revenues. The need to improve collections was dire. By integrating critical tools and processes, the health system was able to increase online payments and improve its financial position. Taking a holistic approach increased overall collection yield by 10% while costs came down because the number of statements sent to patients fell by 10%, which equated to a $1.3M annualized improvement in patient cash over a six-month period. This case study explains how.
Somnia President and CEO Marc Koch, MD, MBA, explains how hospitals can drive transformative change in the perioperative experience for outstanding clinical and financial outcomes.
With the ICD10 deadline quickly approaching and daily responsibilities not slowing down, final preparations for October 1 require strategic prioritization and laser focus.
PMMC President Roger L. Shaul discusses the effects of healthcare reform on revenue cycle management and how PMMC's products help clients adapt to a changing financial environment.
Read how Gwinnett Medical Center provides clear connections to financial information, offers multiple payment options for patients, and gives onsite staff the ability to collect payments at multiple points throughout the care process.
Greg Burgess, Founder and Chief Product Officer at Burgess Group shares insights and opportunities for payment integrity in the rapidly changing healthcare IT landscape.
Read how Orlando Health was able to perform deeper dives into claims data to help the health system see claim rejections more quickly–even on the front end–and reduce A/R days.
To maintain fiscal fitness and boost patient satisfaction and loyalty, healthcare providers need visibility into when and how much they will be paid–by whom–and the ability to better navigate obstacles to payment. They need payment clarity. This whitepaper illuminates this concept that is winning fans at forward-thinking hospitals.
Financial services staff are always looking for ways to improve the verification, billing and collections processes, and Munson Healthcare is no different. Read about how they streamlined the billing process to produce cleaner bills on the front end and helped financial services staff collect more than $1 million in additional upfront annual revenue in one year.
Effective revenue cycle management can be a challenge for any hospital, but for smaller providers it is even tougher. Read how Wallace Thomson identified unreimbursed procedures, streamlined claims management, and improved its ability to determine charity eligibility.
Before launching an energy-efficiency initiative, it’s important to build a solid business case and understand the funding options and potential incentives that are available. Healthcare leaders should consider taking the steps outlined in the whitepaper to ease the process of gaining approval, piloting, implementing, and supporting sustainability projects. You will find that investing in sustainability and energy efficiency helps hospitals add cash to their bottom line. Discover how hospitals and health systems have various options for funding energy-efficient and renewable-energy initiatives, depending on their current financial structure and strategy.
Health care is a dynamic mergers and acquisitions market with numerous hospitals and health systems contemplating or pursuing formal arrangements with other entities. These relationships often pose a strategic benefit, such as enhancing competencies across the continuum, facilitating economies of scale, or giving the participants a competitive advantage in a crowded market. Underpinning any profitable acquisition is a robust capital planning strategy that ensures an organization reserves sufficient funds and efficiently onboards partners that advance the enterprise mission and values.
The success of healthcare mergers, acquisitions, and other affiliations is predicated in part on available capital, and the need for and sources of funding are considerations present throughout the partnering process, from choosing a partner to evaluating an arrangement’s capital needs to selecting an integration model to finding the right money source to finance the deal. This whitepaper offers several strategies that health system leaders have used to assess and manage capital needs for their growing networks.
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