Ken PerezHealthcare reform, the recent fiscal cliff “patch,” and the Budget Control Act’s sequester (postponed for two months) together constitute a formidable mix of imminent and prospective Medicare payment cuts for hospitals. Some have described this situation as “death by a thousand cuts.” The Affordable Care Act (ACA) mandates $260 billion in reduced funding for hospitals over a 10-year period. The American Taxpayer Relief Act of 2012 includes a $11 billion documentation and coding adjustment in 2014 through 2017 that allegedly seeks to recoup past overpayments by Medicare to hospitals resulting from the shift to Medicare severity diagnosis-related groups (MS-DRGs) and a $4.2 billion rebasing of Medicaid disproportionate share hospital (DSH) payments. And there is the specter, per the Congressional Budget Office, of a $5.8 billion reduction to hospital payments in 2013, if the sequester is implemented.

Even before these developments, The Medicare Payment Advisory Commission (MedPAC) estimated that Medicare margins were –7 percent in 2012, and with the ACA’spayment cuts, the chief actuary for the Centers for medicare & Medicaid Services (CMS) concluded that up to 20 percent of hospitals could become unprofitable.

Faced with these challenges, numerous hospitals and health systems have resorted to layoffs to get their cost structures more in line with the new financial realities.

Since October 2012, some 50 hospitals or health systems in 21 states have publicly announced layoffs totaling approximately 3,400 positions, with five organizations not disclosing figures. Although multiple reasons have been provided for these workforce reductions, virtually every entity has cited reduced payment from Medicare as a major factor, with one hospital association spokesperson stating bluntly, “The math doesn’t add up.”

Although hospitals should certainly not be faulted for making these moves—which provide fairly immediate expense relief—in the face of southbound Medicare funding, over the longer term, given the expected coverage expansion that will commence in 2014, hospitals will need to explore other ways to operate more efficiently and strengthen their ability to focus resources on the delivery of high-quality patient care.

Ken Perez, Senior Vice President and Director of Healthcare Policy, MedeAnalytics, Inc.

Publication Date: Monday, January 28, 2013