Healthcare Business Trends

Hospital Medicare Margins Decline Further

December 10, 2018 8:42 am

Declining profit margins underscore the need for hospitals to take steps to control their costs, says one industry adviser.

Dec. 7—Hospitals’ overall Medicare margins deteriorated to -9.9 percent in 2017, according to an analysis by Congress’s primary advisory group.

The Medicare Payment Advisory Commission (MedPAC) reported at its meeting this week in Washington, D.C., that the overall Medicare margin for all hospitals had fallen below 2016’s then-worst -9.7 percent margin.

The 2017 decline especially affected non-teaching hospitals (-12.2 percent margin), not-for-profit hospitals (-11 percent), and urban hospitals (-10 percent). Margins were best at for-profit hospitals (-2.6 percent) and at rural hospitals and critical access hospitals (-5.9 percent combined).

The commission projected earlier this year that the overall hospital Medicare margin would fall to -11 percent in 2018.

Even the 291 most efficient hospitals (as defined by MedPAC staff) had -2 percent median Medicare margins. Key features of those hospitals included 30-day mortality rates and 30-day readmission rates that both were 7 percent lower than the median. Additionally, standardized costs were 9 percent lower than the median.

Despite the margin deterioration, MedPAC staff were positive about Medicare payment adequacy, noting that access to care is good, access to capital is strong, and quality is improving. The positive assessment was based on 0.7 percent volume increases for both inpatient and outpatient services in 2017, which was an improvement over inpatient volume declines in recent years but a deterioration relative to recent outpatient volume growth.

In January, the commission will vote on its chairman’s recommendation of a 2 percent increase in overall hospital Medicare payment rates in 2020 and an additional 0.8 percent increase tied to a new quality incentive program. That program, called the Hospital Value Incentive Program (HVIP), would replace four existing hospital quality programs.

The HVIP would:

  • Utilize a small set of population-based outcomes, patient experience measures, and value measures
  • Score hospitals based on absolute and prospectively set performance targets
  • Account for differences in patients’ social risk factors by distributing payment adjustments through peer grouping

Unlike existing hospital quality programs, which cut about $1 billion in hospitals’ Medicare funding annually, the HVIP would provide a net payment increase.

MedPAC’s newly released data included good news, such as the finding that hospitals had 7.1 percent margins from all payers (compared to 6.4 percent in 2016), and improvement in their operating margins (from 5.8 percent in 2016 to 5.9 percent in 2017) and cash flow measures (from 10.2 percent EBITDA in 2016 to 10.4 percent in 2017).

Another positive finding was that fewer hospitals closed in 2017 (18) than in 2013 (30), although fewer opened (5 versus 14).

MedPAC members similarly downplayed the significance of the 2016 negative Medicare margin in their 2018 report to Congress.

“While average Medicare payments were lower than average costs, Medicare payments were higher than the variable costs of treating Medicare patients in 2016—resulting in a marginal profit of about 8 percent. Therefore, hospitals with excess capacity still have a financial incentive to serve more Medicare patients,” MedPAC wrote.

MedPAC found the same 8 percent average marginal Medicare profit in 2017. The published report on the commission’s 2017 findings will be released early next year.

Hospital Options

The declining margins increase the pressure on hospitals to lower their costs, Benjamin Isgur, leader of the Health Research Institute at PwC, said in an interview.

It’s a view echoed by industry leaders. For example, 60 percent of hospital executives in an October survey by Kaufman Hall said either that their organizations have set a goal of achieving revenue and expense breakeven in Medicare or that they believe their organizations should consider that goal.

The feasibility of such an achievement was illustrated by a clinic system in Denver that has reduced costs enough to garner positive margins from Medicaid payments, Isgur said.

Among other operational changes, the clinic has replaced the use of scheduled appointments with “100 percent walk-in” to increase their patient volumes.

“They are looking for every operational way, in that population, to deliver those services as cheaply and efficiently as possible,” Isgur said.

Some providers are resistant to reorienting their healthcare delivery toward the most economical approaches because of concerns that such changes could impact their appeal to higher-paying commercial insurers.

“But the reality is that there is so much pressure on the price side of the house now because utilization has run out,” Isgur said, referring to the efforts of employer-sponsored plans to control utilization through high-deductible health plans and other coverage designs.

The financial standing of a provider can affect its ability to pursue such belt tightening.

A September report from Fitch Ratings noted that large-system providers have longer-term goals of cutting billions of dollars from their expense bases through a combination of basic cost-cutting (efficiency), clinical efficacy (elimination of waste), and a rethinking of how health care is delivered (transformation). The goal of those efforts is to break even or profit on Medicare rates.

“And Fitch continues to assert that higher-rating credits have the resources available to allow ongoing focus on improving both clinical and nonclinical efficiencies to help offset the impact of compressed commercial rate increases and little, if any, net rate increases from Medicare and Medicaid,” the report stated. “By comparison, lower-rated credits are characteristically less able to trim expenses and are less likely to be a ‘market maker’ versus a ‘market taker,’ and able to negotiate higher rates from commercial insurers as a must-have provider in their markets.”

At for-profit hospitals with better Medicare margins, strategies to further improve margins include “same-facility net revenue growth and benefits from cost-cutting and merger-related synergies, as well as the renegotiation of services and supply contracts,” according to an October report from Moody’s Investor Service.

However, Moody’s noted that “headwinds, including wage inflation due to staffing shortages in certain markets, and rising medical specialist and supplies expense, will continue.”

Other MedPAC Findings

Hospitals’ fee-for-service Medicare revenue increased by 2.5 percent, or $2.6 billion, for inpatient care and by 8.4 percent, or $4.9 billion, for outpatient care. Uncompensated care payments declined by 6.4 percent, to $6 billion.    

MedPAC also found that hospital quality continues to improve for Medicare patients.

The patient experience continues to improve, with 73 percent of patients rating their overall hospital experience at a 9 or 10, compared with 71 percent in 2012.

Readmission rates continue to decline. In 2017, 15.8 percent of patients were readmitted, compared with 16.4 percent in 2012.

Mortality rates fell to 6.4 percent of patients in 2017 from 7.7 percent in 2012. 

Hospital occupancy rates remained low (62.5 percent) in 2017. Rates were lower (40.2 percent) for rural hospitals.

Outpatient spending per beneficiary increased by 8.4 percent. Total outpatient spending increased by $4.9 billion. Forty percent of that increase, $2 billion, was spent on separately payable drugs. Drug spending increases were driven by higher prices on existing drugs and growth in spending on pass-through drugs.

Bond issuances ($35 billion) in 2017 were described as consistent with 2016.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare


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