Richard L. Clarke, DHA, FHFMA

"What would you do if you couldn't cost-shift? What if Medicare prices were the best you could get from all payers"

I asked these questions in my April 2008 column. Fast forward to October 2009, and for months now the national healthcare debate has focused precisely on this question. That is, should there be a public plan option as part of overall healthcare reform with Medicare pricing authority? I am not a fortune teller (the results of my investment decisions on my 401[k] confirm this), and at press time, the answer to this question is still in doubt. What is clear is that the issue of across-the-board Medicare rates has heated up significantly during the year and a half since I wrote the column.

The emotion of the debate related to the public plan option has focused on the government's role in coverage and care decisions. But it also has created concerns among provider groups about the government determining prices for virtually all patients. Provider groups have rightfully objected to this notion. Beyond the specific question of a public-plan option, determining "fair" payment will continue to be a focus for policymakers, employers, and the public.

Various groups are looking at this issue. In March 2009, the Medicare Payment Advisory Commission (MedPAC) reported on a study that compared the quality and financial performance of hospitals that had positive Medicare margins with the quality and financial performance of all hospitals. Generally, the study found that hospitals that made money from Medicare (that is, whose total Medicare payments exceeded Medicare costs based on DRG and APG payment systems) had lower margins than non-Medicare payers, but better-than-average quality and satisfaction results. MedPAC's conclusion was that if the cost shift were not available, hospital management would have an incentive to drive down all costs, resulting in a positive Medicare margin. The study did not look at other financial performance issues, such as capital structure or age of plant, which would give a more complete financial picture. But the margin data would suggest that costs can be reduced to the level of Medicare payment without sacrificing quality or patient satisfaction.

And this August, H&HN magazine asked a question that was similar to my original question posed in 2008: "Could your organization survive on Medicare rates alone?" H&HN cited the efforts of Novant Health to reduce variation and inefficiencies in care delivery. Novant hasn't fully answered the question at this point, but its strategies are right-on given the changes that are likely to occur in the next few years. This month, HFMA will be releasing a new Leadership publication containing many other examples of such care redesign.

Medicare's costing systems, payment inequities, and other factors make its payment system inadequate for many hospitals. But the work that Novant and others are doing to focus on significant redesign of patient care and administrative systems to eliminate waste and inefficiencies is a winning strategy regardless of the final results of the healthcare reform debate. Almost all experts believe payments will not get better in relation to current cost structures, and most believe they will get significantly worse.

So can your hospital survive on Medicare rates?

A key survival strategy for the future is to try.

Publication Date: Thursday, October 01, 2009

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