Does Medicare Under-Pay Hospitals?

Below, a guest-post by HealthBeat reader Pat S.

Medicare is the second largest health care payer in America, trailing only Medicaid.  The program is very popular with its enrollees, with polls showing a higher level of satisfaction than with private insurance. 
Medicare is less popular with hospitals.

Opponents of health care reform in general and of a strong public option in particular often cite hospital dissatisfaction with Medicare as a reason why the reform programs won’t work.  They report that evidence suggests that overall Medicare pays hospitals less than what it costs them to provide care. Private insurers pay more, and by “cost-shifting,” hospitals use these payments to make up the losses on Medicare.  Opponents worry that if a public option linked to or modeled on Medicare becomes the dominant payer for people under 65, hospitals will go broke without the “subsidy” from private insurers, and the health system will be destroyed. Data collected by hospital groups and the insurance industry suggests that this is unlikely to happen.

Payment Gap

Reports claim that global data–which provides a snapshot of average reimbursements to hospitals for patient care–show that Medicare pays hospitals between 93% and 97% of what it costs them to provide care, while private insurance pays between 115% and 125% of those costs. Even that crude data suggests that private insurers are paying hospitals far more than they need to make up for “underpayment” by Medicare.

However, this is global data.   Examine the payments to individual hospitals in more detail, and you discover that many hospitals actually make a profit on most Medicare patients. 
First, according to the American Hospital Association itself, 42% of hospitals make a profit on Medicare overall. 

In the remaining hospitals, most Medicare patients are profitable.  Losses on Medicare patients are related to a minority of patients who need much more care than average because of longer stays, more complications, and underlying health problems.  Since the profits on most Medicare patients are small, large losses on this small number of outliers can drive overall payments below costs.In looking at any data on payments, it is very important to distinguish between Medicare and Medicaid. Payments by Medicaid – the government plan for the poor—are significantly lower. On average, Medicaid pays 72% of what Medicare pays for the same service. Those who oppose any government plan often lump Medicaid and Medicare reimbursements together to argue that Medicare grossly underpays providers. There is no question that Medicaid needs significant revision. Medicaid reimbursements should be hiked; payments to states should cover states’ costs.  The House health care bill takes a step in that direction by mandating that Medicaid reimbursement for primary care must be raised to equal Medicare payments, and by providing direct funding to cover that raise and to cover new patients enrolled as a result of reform.

 However, it is true that while many hospitals actually make an overall profit on Medicare patients, at the other end of the spectrum some hospitals lose more than average.

Regional Variations in Payments

One reason for some disparities is that Medicare payments to hospitals are not uniform throughout the country.  In some areas, Medicare pays far more than in other areas.  The differences can be quite large, with the highest paid hospitals collecting twice as much as the lowest paid.  In some cases, this variation contributes to losses and has led to political controversy. “Blue Dog Democrats,” whose predominantly rural constituencies contain many of the low payment areas, are especially concerned. 

As usual, this is more complicated than partisans would like us to think. Many rural hospitals in Blue Dog districts actually enjoy better than average Medicare margins, partly because of special adjustments to payments specifically for rural hospitals.  Critics suggest  that much of the focus on hospital  payments was at least partially orchestrated by the Blue Cross plans to try to kill the public sector insurance option that progressive Democrats say we need to keep private insurers “honest”—and to give Americans choices.                                       

How Medicare Works

When Medicare was started, the government agreed to follow Blue Cross and Blue Shield in the way it paid hospitals and doctors.  However, that resulted in larger costs than anticipated, and when Nixon became president, Medicare switched to a new system, paying hospitals based on what it cost them to treat patients. Medicare would make a preliminary payment to hospitals as services were provided, then at the end of the year the hospitals and Medicare went through a “rectification procedure,”   figuring out what it had ultimately cost the hospital to provide treatment, and the government would make additional payments to cover the actual expense of delivering care.

Under that program, the government tried to control costs primarily through the “Certificate of Need” (CON) program, which required that hospitals get approval for spending on capital improvements, including building, remodeling, and purchase of equipment above a certain cost, as well as creation of new service programs.  The system was designed to inject rational behavior into the process of hospital growth, and to prevent costly duplication of services.  The CON system quickly created a cottage industry of experts able to guide CON applications to approval, often by getting politicians to intervene. 

The “cost and CON” system had major problems.   When hospitals are paid for what it “costs” them to treat patients, hospitals are rewarded for inefficiency and profligate spending.  Then as now, in some hospitals patients stayed longer and underwent more aggressive and more intensive care.  These hospitals were rewarded with the highest reimbursements. The Dartmouth research, just beginning back then, showed that outcomes were no better for these patients, and often were worse. Meanwhile, under the cost-based payment system and its cousin, the CON, payments spiraled.  Between 1967 and 1985, Medicare payments to hospitals soared twenty fold.

In the 1980s, the Reagan administration, with the consent of Congress, abolished the cost-based payment system for Medicare Part A payments to hospitals and replaced it with the Diagnosis Related Group (DRG) payment system,  which breaks illnesses down by diagnosis and pays a certain amount for each patient diagnosed with a particular health problem. The DRG system remains in place today.

DRG is a prospective payment system that covers payment for all patient costs for each hospitalization except doctors’ fees, which are covered separately under Part B.  For each patient and each admission, the hospital is paid a fixed amount that is meant to cover all hospital costs and charges for services that would be needed to treat a patient with a particular problem.  About five hundred DRG categories have been created, each associated with a specific disease or injury.   Modification for other co-existing or underlying health problems alters the payments, in effect creating thousands of categories.  For example, there is a DRG for acute cholecystitis (gall bladder infection) that can be modified by other DRG’s for complications like co-existing infections, gallbladder rupture, and pancreatitis, or for underlying conditions like diabetes or heart disease, and so on.
 
The values of DRG’s are set empirically, based on actual data collected about costs of hospital services, and modified on a regular basis to reflect changes in costs and management approaches.  There is one baseline DRG for each condition, but that baseline payment for hospitals is adjusted for other factors, including local labor costs, hospital location, teaching and training programs, large Medicaid and non-paying populations, and so on.  The dollar value of the modifiers often exceeds the dollar value of the underlying DRG.   It is these modifiers that account for the large region to region variation.  
 For example, a hospital in San Francisco may receive an added labor cost allowance that is 50% of DRG, and receive ad
ditional payments for having a teaching program and for having a large Medicaid population, resulting in a payment of more than twice the DRG baseline.  Meanwhile, a hospital in rural Nebraska might actually receive less than the standard payment for a particular DRG because labor costs are lower than average, and there are no additional modifiers, resulting in a payment which is less than the baseline.
However, there are some special modifiers for rural hospitals that are sole providers or regional referral centers that can increase payment for services in rural areas as well.

The value of DRG’s and modifiers are supposed to be derived from evidence, but in reality there is also a large political component, with members of Congress intervening aggressively to force changes in payments for their areas, both rural and urban. 

The political factor leads to some strange results, with areas blessed with involved congressmen receiving higher payments than those with more passive representatives.  Labor payment indices are set county by county, and Dade County, FL, (Miami) has the highest payments, higher than other areas where the cost of living is clearly higher—such as New York City and San Francisco. Reimbursements in Miami also are substantially higher than in cities with fairly similar costs, like Minneapolis. 

This uneven payment pattern is behind the recent statement by the Blue Dog caucus that they would not support health care reform unless the Medicare payment system was changed to reduce the disparities that put hospitals in their regions at a disadvantage. Some of the perception of inequality is no doubt correct, but some of it may be due to complaints by doctors and hospital administrators that are not grounded in reality.  One truism in health care is that almost everyone believes they are not receiving fair payments.

Anger about these regional variations impacts both liberals and conservatives. These discrepancies are at the root of the recent pledge by the entire (Democrats and Republicans) Minnesota congressional delegation to announce they would oppose any health care reform that does not at least partially remedy these variations. Minnesota has a national reputation for lower than average health costs and excellent results, and Minnesota providers are quick to complain to their representatives that the payment system fails to recognize that and thus is unfair. Of course, providers and the congressional delegations from California, New York, Florida, and so on are equally adamant that the advantages enjoyed in their regions are deserved and should be left in place.

Making the System Work

There are things hospitals can do to break even or even make a profit from Medicare.For one, they can introduce programs that would reduce the number of patients who become “outliers” because they suffer complications from surgical infection, hospital acquired pneumonia, falls, mistakes, and so on. Paul O’Neill, one of George Bush’s treasury secretaries, wrote an op-ed for the New York Times urging that steps to limit these complications be incorporated in any reform, reporting that his working group had found that this could save hundreds of billions each year. Health Beat reader and commentator Lisa Lindell has written a book describing how one patient, her husband, nearly died and ran up months of extra hospital time and over a million dollars in extra expenses because of complications caused by management problems.The program described by Atul Gawande in his article “The Checklist”  serves as an example of the type of program that can be implemented to prevent these problems, saving a large amount of money for very little investment.

Another way to reduce cost is to work to enhance the underlying health of patients so they do not incur higher costs and longer stays.  The program created by the SMDC health system in Northeastern Minnesota to improve the health of patients with severe congestive heart failure is an example of one way hospitals can lower costs by improving management without introducing expensive new changes 

In some settings, use of the electronic medical record has reduced costs by avoiding redundant services and by keeping providers better informed about patient status. 

The Mayo Clinic has shown that rapid availability of consultation – obtaining help from other specialists in minutes to hours rather than hours to days – can reduce costs.

A less desirable way to contain costs is to “cherry pick” patients who will not become outliers.  One way to do this is by persuading doctors to admit patients with more complicated histories to other hospitals.  Being located in areas where patients tend to have fewer problems or working with doctors who tend to have patients with fewer problems – mostly by avoiding low-income people – is another. Atul Gawande, in his now- famous New Yorker article about high costs in some counties, reported cases in which doctors who were investors in for- profit hospitals steered profitable patients to their hospital while admitting high cost outlier patients to other hospitals, often public hospitals.

A more desirable way to minimize cost is simply to run a more efficient business. Hospitals can reduce their costs by streamlining processes ranging from OR throughput to billing.  Most hospitals work on this all of the time, but some are better at it than others.

Appropriate Hospital Costs

The other big question regarding Medicare reimbursements to hospitals is whether hospitals are spending their money in appropriate ways. Everyone agrees that hospitals need to spend the money necessary to provide high quality care.  However, many hospitals spend a great deal of money that is not directly related to patient care. More and more hospitals have invested large amounts in décor and esthetics, creating marble lobbies and hallways, building large patient rooms with features that mimic expensive hotel rooms, purchasing art installations, and so on.  These amenities do not contribute to patient care.  A visit to most European hospitals or to most VA hospitals illustrates that excellent care can be obtained in hospitals considerably less elaborate than many “flagship” hospitals.  A few years ago I had the experience of visiting a friend who was a surgeon for Kaiser in the Bay Area.  When I first saw his hospital, I was startled – it looked a lot more like a Motel 6 than a Four Seasons.  Kaiser is a prospective payment system, so that when the money is gone there is no more.  Kaiser also has to compete, at least partly on price, with other HMO’s and insurers in its market.  That obviously results in closer attention to what is essential and what is not.  However, the results attained at the hospital were excellent – according to the Dartmouth Data, better than at some of the “marble palaces” they compete with.

Salaries for hospital administrators have risen sharply in the last twenty years, with many hospital CEO’s now making seven figure salaries (and a few making eight figures,) and with lower ranked administrators paid proportional amounts.  This makes its own contribution to costs.

Hospitals often invest large amounts of money in pleasing doctors who will bring them profitable patients.  Many hospitals have overbuilt their angiography and OR capacity to make OR’s and angiography suites available at times when doctors prefer to operate, rather than distributing use through the day.  OR’s are sometimes built to fit the personal demands of a surgeon, with side by side OR’s for other surgeons.  An OR might be used only
by a single surgery group or even a single surgeon and stand vacant when they are not operating.  Angiography suites and their staffs might be jammed with work from eight AM to noon, but be shut down while the doctors tend their office practices, or take time off, in the afternoon.

Hospital units are customized to please doctors in other ways.  Special parking garages for physicians, expensive meeting and dining facilities, and so on are all set up to attract the “right” doctors.

In the last few years, hospital advertising has exploded.  In many cities you cannot drive very far, read the newspaper, or watch TV very long without seeing expensive ads for hospitals.  Despite the recession, in 2008 total advertising spending by U.S. hospitals increased to more than two and one half times what hospitals paid for ads in 2001.  The costs of these ads are added into hospital overhead—in other words, the charge for your appendectomy includes the cost for the ads.  Ironically, this type of advertising is often the hallmark of “overbuilding.” When hospitals wind up with excess capacity, they are then forced to compete aggressively to fill the added beds. This gives costs a double whammy, first incorporating the costs of overbuilding, then absorbing the costs of advertising dictated by the overbuilding.
There is also a well documented hospital “arms race” going on in many markets.  Hospitals vie to buy the latest and most impressive equipment, regardless of utilization or cost effectiveness.  Relatively new and still useful equipment is discarded because of the perception that something is better.  A two year old CT scanner may be replaced because a newer and shinier model is available.  In a sense, this is a form of advertising aimed at both physicians and patients, trying to sell the notion that the hospital is the best and most modern.

All of this adds significantly to hospital costs without providing any real health benefit to patients.

Marginal Costs

When looking at Medicare and hospital costs it also is worth looking at the business management issue involving the “marginal” cost of services.

What this means is that although the hospital has some fixed costs as well as some costs specific to each service provided, once a certain number of services are provided, the costs of additional services are much lower.

The cost of having one more patient admitted on a unit, or doing one more CT or MR in a day, or even of performing one more surgery in an OR is much lower than the average cost of using of these resources.
Just as a hotel can rent a vacant room for a much lower price, and an airline can reduce the price of an empty seat to fill it, hospitals could calculate reduced cost calculations when the marginal utilization costs them little.  However, hospital cost calculations usually ignore this factor.  The nineteenth CT or the fifth surgery is reported as if it cost the same as the first.  The issue of marginal costs is complicated, but it is a management fact that exists in every industry, and health care is not an exception.  Health care managers know this, and frequently consider lower payments for Medicare to be worth taking because the real costs are lower than they will generally admit.

Effective Patient Management

Finally, there is our old favorite, cost effective, efficient, and quality oriented patient management.
The data collected by the Dartmouth Atlas project have demonstrated, year after year, that some hospitals and systems can achieve better health care results at much lower costs than other systems. The main difference lies in the appropriate use of high tech diagnostic and treatment approaches.

The data clearly show that many hospitals could achieve striking reductions in cost by using more efficient approaches to managing patient care.  These cost reductions could make calculations of “losses” on Medicare irrelevant.

And Another Thing…

One other consideration deserves attention.
Hospitals base their cost calculations on spreading the costs of various operating expenses evenly over all patients.  However, there is at least one important area where Medicare patients actually cost hospitals considerably less than private insurance patients: the cost of billing for services.

Study after study shows that it costs hospitals 50% to 75% less to bill Medicare than to bill private insurers. In fact, for the mythical “average” hospital, the loss from Medicare of 3% to 7% may actually be cancelled out by the lower costs of billing.  This is an area of hospital management where costs are actually being shifted from private insurance to Medicare, rather than the classic opposite.

The Bottom Line

The situation with Medicare payments and hospital profits is much more complicated than some people would like to suggest.

The losses many hospitals report may be real, but there is tremendous variation depending on management choices, location, and the ways in which costs are incurred.

Some hospitals are indeed losing large amounts on Medicare services, while others actually are making a profit.  Most individual Medicare patients are profitable.  Many others could make a profit if hospitals improved their operations.

Medicare is an excellent program, has high levels of approval from its enrollees, and has provided good care for many patients who would otherwise be excluded from the health care system.  Hospitals need to be protected from true underpayment, but Medicare itself and the American public also need to be protected from poor management that leads to increased costs and poor health care.

48 thoughts on “Does Medicare Under-Pay Hospitals?

  1. Pat
    Well done. Can you post a solid source to substantiate below.
    Thanks
    Brad
    “Losses on Medicare patients are related to a minority of patients who need much more care than average because of longer stays, more complications, and underlying health problems.”

  2. From my understanding, there is often very little relationship between the hospital bill and the cost of providing medical services. In reality, combined hospital/doctor payment is much closer to what the services are worth. Hospital list price rates are often five to six times what they routinely accept as full payment from insurers.
    A commentary on The Health Care blog stated that friend had a surgical procedure done on an outpatient basis. The list price of the bill for the hospital, surgeon and anesthesiologist came to about $14,000. Insurance paid 18% of the hopsital charge and 31% of the doctor’s fees with both accepted as full payment.

  3. I watched as “cost” to “price” went from triple to quadruple systematically as the health care provider grew. It was not random, it couldn’t be, it was a business decision implemented over time.

  4. Pat S., thank you SO MUCH for this, you have done a real service, basically writing “Medicare Reimbursemnt to Hospitals for Dummies” when it did not exist before. I know, I tried to research this a couple of years ago for a close family member, I had to slog through tons of hard-to-find bureaucrat-ese to even get a gist of what the story was.

  5. Another point on losses being due to ICU patients.
    There is a well described issue regarding ICU admission. It turns out that ICU admission is,of course, largely due to the patient health status.
    However, it is also due to some extent to availability of ICU beds. When the ICU is full or near full, patients are frequently put in non-ICU beds who might have been admitted to ICU otherwise. There is no good evidence that this type of triage harms patients.
    Conversely, there is some evidence that hospitals with an oversupply of ICU beds tend to admit patients who are less sick to ICU.
    This is yet another complication of the issue of cost and hospital management, overbuidling of facilities, and specifically of the issue of marginal costs and its application to hospitalization. While hospitals “lose” money on Medicare ICU admissions, they would often lose even more on staffing and other overhead for empty ICU beds.

  6. WOW!
    I cannot imagine a more perfect job explaining and analyzing this issue. Nothing of significance was missed or misunderstood

  7. Wow is right. What a great article. I’ve been piecing together a lot of this information for my job over the past few months. If this had been written earlier this year, it would have saved me tons of work. I’m going to distribute this to others in my office so they can understand how Medicare payment works. You did a real service by pulling all this info together and explaining it so clearly.

  8. Pat S, Superb article. Best I’ve seen on this subject. Now get to work on how private insurance pays hospitals! Just kidding. Really, though, does BC/BS, Aetna, et al use DRGs or pay fee-for-service? I know how I get paid but have never thought to ask how our local hospital gets paid.

  9. call me madman muntz, but I cannot understand how most hospitals can be doing fine when medicare, on average, pays less than their cost. sure, the law of averages says some do okay, but at the expense of others. if you accept this logic, then why be offended if medicare advantage pays more than 100% of aapc as long as there’s data showing that some lose some money on outliers, as they do. doesn’t same logic apply.

  10. JRossi – I have no idea how private insurers in California work. In my state the private insurers pay hospitals based on “shadowing” Medicare – paying a few percentage points more than Medicare. There is one monster exception to this rule: if the hospitals are parts of organizations with enough negotiating power, either due to market domination in some geographic area or due to high prestige among patients and insured clients that make their inclusion a requirement for an insurer to be competitive, they can and do negotiate higher rates of payment as a condition for cooperating with the insurer. One insurance executive told me at a meeting that one of the large health care systems in my state was demanding payment of 250% of the Medicare rate in order to accept the insurance.

  11. Jim Jaffe —
    I am not quite sure what you are getting at, but I will make a couple comments.
    First, many hospitals would argue that the only reason they can survive is because private insurance pays them more than Medicare, covering their losses on Medicare and Medicaid. Denis Cortese, the CEO of Mayo Clinic, has been running a road show in which he claims that extending Medicare to non-seniors would destroy US health care, since it would cause a loss of the extra payments from private insurance that he claims sustains health care now. Mayo, of course, is in an excellent position to negotiate aggressively for better payments from private insurers since it is, after all, the Mayo Clinic.
    Second, it is my impression that Medicare Advantage payers do not necessarily pay more than Medicare or less than Medicare. Some Medicare Advantage players seem to pay quite a bit less. In my city, the largest provider system recently created a tempest by refusing to accept four Medicare Advantage insurers which had become popular with enrollees by issuing policies that had monthly fees lower than Medicare Part B. According to the health care system, one of the ways they were doing that was by paying providers and hospitals less than Medicare. I happen to know, through a friend of my wife’s who had the misfortune to have chosen one of those insurers, that they were also not paying as much in benefits for insured clients, in particular paying for only five days of rehab coverage, as opposed to Part B’s standard of 59 days.
    Medicare Advantage comes in three flavors, as far as I can see. First, there are systems – mostly good HMO’s like Group Health in Seattle and Kaiser – that provide a good package for their clients. Second, there are systems that entice clients with frills like gym memberships and so on, which they buy in bulk for low costs, partly because so few of their clients actually take advantage of the frill. They can be good, bad, or indifferent. Third, there are systems that entice clients by offering their coverage for less than the cost of Medicare Part B premiums. In addition to the usual subsidy from the government, those systems do that partly by paying out less in claims, like the offenders in my home town.

  12. Pat S, Thanks for the info. In your state, do private plans bundle there hospital payments, as Medicare does, or is it more like fee-for-service. Also, i don’t live in California (thank goodness).

  13. JRossi —
    That varies with the arrangement that the insurers have with the hospitals. The default is fee for service, usually with discounts to insurers either negotiated or imposed, but many hospitals have arrangements with insurers, ranging all the way from DRG plus added percentage of payment to set fee payments based on PPO membership to open panel HMO’s to a few hospitals that are members of closed panel HMO’s.
    As I say, the most basic arrangement is fee for service with discounts, either negotiated or imposed, but almost every form of payment exists.
    Sorry to slander you with being in California. As I recall, you have moved around a lot, but thought you were based in LA area now. Where are you now?

  14. Thanks for the info, Pat. Wow, this insurance stuff sounds too complicated for a dumb family doc like me. I live in rural eastern Washington state but went to med school and residency at UCLA.

  15. One of the worst incidents of “overcharging” occurred after my wife’s back surgery, with “slips”: the dura was penetrated, she had a seizure and a heart problem (1st time ever) after the operation and could not be still for a CT. An MRI was ordered. The MRI building was 70 steps from the main building. Instead of wheeling the gurney there, she was loaded into an ambulance, taken <200ft, and wheeled into the MRI. Afterward, the procedure was reversed.
    We got a copy of the ambulance bill from Kaiser:
    $1950 going, $1450 return.
    The $3400 was considered a normal charge.
    If billed to Medicare, I know why that program is going broke.
    The neurosurgeon also failed to recognize the characteristic symptoms of hydrocephalus on the return visit, until prompted to look at a CT scan taken that morning.
    He denied that the hydrocephalus had anything to do with the slip in surgery and damaging the dura. But he put in a shunt the next morning, though he could not tell us what model valve he had used.

  16. Pat S., Marc Stone, Everyone, Art Appraisor, Brad, Gunther
    First, I want to thank Pat S. for a superb post.
    With Pat’s permission, I plan to put this post on the website for the film based on Money Driven Medicine (See moneydrivenmedicine.org)
    There, we are creating a section called “Health Care 101”) that will include a series of articles and posts that explain what people need to understand about U.S. healthcare–and debunk some of the myths.
    Marc– I know that some readers –you, in particular– know far more than I do about Medicare. (I rmemver that you have worked for Medicare in Washington.)
    So I greatly appreciate your confirmation that Pat has covered this subject very well.
    EVeryone– Let me add that this post began when Pat wrote a comment on this blog about
    Medicare payments that told me more than I had ever been able to find out about the subject.
    Art Appraisor– Like you, I had done research on this topic, but hit blank walls– thank you, for your comment. It also confirms my take that Pat S. actually has the story.
    He is a doctor and so understands the story from the inside.
    Brad F.–
    My guess it that the percentage of Medicare patients who lead to losses in a given hospital varies widely–and is tied to how many very poor patinets the hospital sees.
    At the same time, Pat’s reply (in the ocmments thrad above) on the number of ICU admisstions being a large factor–and the supply of ICU beds determining how likely patients are to land in ICU– makes sense.
    Gunther–
    I am very, very sorry about what happened to your wife.
    Would you be willing to tell this story to a very good reporter represnting a large news outlet? People need to know–but also, I recognize why you and your wife might not want to become a “news story”
    If you would be willing to talk to a reporter, or wish to know more about who, please e-mail me at Maha4@tcf.org.

  17. Pat, you are quite right about ICU beds driving demand. This also occurs with hospital beds in general. The high availability of VA beds drives admission to the barely ill. It is likely the explanation for the low readmission rates at VA hospitals. Many patients didn’t need to be in the hospital in the first place, so it is no great feat to not readmit a patient that didn’t need to be admitted in the first place.
    Health systems that cater to the employed, such as Kaiser, have the advantage of low disease prevealence and high payments. Hospitals where medicare dominates the payer mix have the opposite problem.
    You have made an excellent point regarding outliers. These rare events tend to dominate overall costs. Many of these outliers are hopeless cases which will require EOL reordering, significant costs paid by the patient to discourage futile care and tort reform to bend the curve.
    You make little mention of the irrational variation in the level of medicare payments geographically. If I move to NYC, my Social Security doesn’t go up. So why should my doctor’s medicare payment go up?
    Hospital featherbedding is a much larger problem that is never mentioned. Our hospitals have (literally dozens of ) vice presidents with secretaries who themselves have secretaries and assistants, but no actual responsibilities.

  18. Pat
    Thanks for the reference. My sense is the paper is correct, but would really like to see Medpac/CMS imprimatur: Ingenix based analysis, and hospital reported cost/charge ratios.
    ICU patients a likely source of pay disparity, but I would be willing to bet that hospital geography, case mix, type and size of hospital may change equation. The paper is more of a 30K feet looksie. Again, more than just hypothesis generating, but not quite the last word.
    Brad

  19. Brad —
    I don’t know of any other papers addressing this problem in this way. I specifically don’t know of any government sources. When Medicare writes about outliers they tend to focus on outlier payments, but their focus is budgetary and is on the payments as a percentage of all Medicare payments, not on numbers of patients.
    In general, Medicare believes their payments are adequate, and that overpayments for patients who are managed at a lower cost than the DRG payment cover underpayments for most outliers. They are charged with creating DRG payments that cover costs appropriately, and base their payments on empirical data. It is the hospitals and private insurers who argue that underpayment is a problem, and their organizations and academic studies by sympathetic researchers are responsible for most of the literature on the topic. Most of the literature from MedPAC and other government sources focuses on the idea that claims of losses are related to poor management and errors. Anecdotes like the stories from Gunther Steinberg on this thread and from HealthBeat reader/commentator Lisa Lindell focus on that issue. I would be very interested in seeing a breakout on outliers that included the frequency of outlier status being due to preventable management problems and errors.
    The only other thing I will add is that during 30 years of medical practice I must have sat through at least 100 meetings in which hospital executives have exhorted the assembled medical staff to make every possible effort to control the costs of outliers because they account for most losses on clinical services. In fact, they have generally made statements to the effect that “just 10% of our patients account for almost all of our losses on clinical care. Get out there and improve management of those patients and save the hospital bottom line.” I suspect that is true, since among the 20-25% of patients losing money there are some who don’t lose much money, leaving most losses to a minority of a minority. The administrators’ suggestion that doctors could do a lot to decrease outliers fits with the possibility that management problems and mistakes are a significant factor in hospital losses on Medicare patients.
    If you have access to Lexus/Nexus (I don’t) you could try a search on the topic, which may turn up other references.

  20. Pat:
    I don’t doubt that what you say is true.
    You seem to have a wealth of knoiwledge on this subject.
    Are the private insurers paying over the Medicare rates to appear to be “hospital friendly” and/or “politically correct”?
    Don Levit

  21. Christopher George: “You make little mention of the irrational variation in the level of medicare payments geographically. If I move to NYC, my Social Security doesn’t go up. So why should my doctor’s medicare payment go up?”
    I thought I did write about the issue of regional variation of payment, but maybe I should revisit it here.
    Regional variations of Medicare payments are an issue that causes a lot of controversy among politicians and health care professionals.
    The variation for hospital payments is due to the calculation of the weighting factor for wages, the weighting factor for academic training centers, and the weighting factor for high populations of Medicaid and non-paying patients. In some areas of the country these variation factors are partly mitigated by other weighting factors for critical access and regional referral status for hospitals in low population areas.
    Medicare believes that their weighting system is fair, and reflects real costs of hospital operation as well as protecting the financial position of hospitals providing critical services in low income areas, in rural areas, and of training institutions. Congressional representatives from areas who are on the “up” side of these calculations tend to think the concept is fair, except to the extent that they need to intervene to make the payments even better for their constituents. Representatives from areas on the “down” side think it is not. Vows by politicians to refuse to vote for needed programs unless their regions get more money are common features of political discourse on health care.
    It is absolutely true that every single health care administrator in the US believes their hospital is being cheated by the system, and should get more money.
    The issue that is valid in examining this question is whether calculations of wage costs and of service to low income patients are correct. The corollary question of the extent to which both factors are padded due to excessive utilization requiring increased staff and the occurrence of questionable admissions both to hospitals and to ICU’s is an important one that could only be answered by detailed and expensive research.
    I suspect that you are more interested in regional variations in doctors’ payments under Medicare, which I did not discuss since my topic was Medicare and hospitals. Those variations, which are based on cost of living calculations which in turn are largely based on wage and real estate costs with a contribution from politics, cause a lot of dissatisfaction. I spent my entire career in areas that were on the low end of the payment scale, and often felt that the calculations were unfair. However, I also benefitted from the flip side of this issue, which is that living and working in places that are remote, small, and cold results in increased volume of work due to decreased numbers of doctors, and caused my income to be substantially higher than my fellow specialists located in large cities and “garden spots.” People I knew from New York City, San Francisco, Miami and other “high payment” places loved to point to data showing that doctors in the semi-rural Midwest made twice what they did and to ignore the fact that they did one third as much work.
    Your other points are largely true. I would, however, amend your comments on Kaiser to note that because of Medicare Advantage and because of retiree coverage for companies and public entities that have Kaiser contracts, Kaiser is seeing a lot of older, sicker patients compared with what they did in the salad days of closed panel HMO’s in the late 70’s and early 80’s. Also, although the VA does do a certain amount of admission of patients who are less sick because of available beds, some of the “unnecessary” admissions are due to patients lacking adequate support systems to allow for care at home, with the VA essentially acting as a nursing home for people who poverty and disrupted family lives make very vulnerable. The VA also sees a lot of very sick older vets with complex underlying health problems that have been neglected for years. I would be willing to bet that COPD, congestive failure, type 2 diabetes, and liver disease are much more prevalent among VA patients than the general population. These patients result in a level of acuity in VA admissions that rivals or exceeds that of suburban hospitals that send some patients home that the VA might admit.

  22. Don Levit –
    “Are the private insurers paying over the Medicare rates to appear to be “hospital friendly” and/or “politically correct”?”
    I have to admit I don’t know the answer to that for sure. The answer is probably unknowable because it involves looking into the hearts of insurance executives, impossible not because, as many people seem to believe, they have no hearts, but because that can’t really be done with anyone.
    My best guess is that the reason private insurers pay more is for competitive reasons having to do with offering coverage that allows them to secure clients. Private insurers have to deal with the possibility that health systems will refuse to accept their insurance. That creates all sorts of potential problems with sales. Medicare, of course, has its famous partial monopsony status.
    One piece of evidence that this is true is the large variation in payments by private insurers. The calculations of average private insurance payments of 115-130% of Medicare conceal a tremendous range of payments. A smaller hospital might get payment that is only 105% of Medicare, while a hospital that is part of a system that because of either large market penetration or high prestige can negotiate for payment more aggressively might get a payment that is over 200% of Medicare.

  23. Christopher, Don, Everyone
    Christopher–
    Your assertion that the large number of available beds drives VA hospital admission for patients who are barely ill is simply not true.
    As a result of the Gulf War, and now the War in Iraq–not to mention aging Vietnam Vets–we have a huge number of Vets needing all types of care.
    In most areas, capaciy is strained.
    In particular, we have many Vets from the IRaq war suffering from serious psychological problems and post-stress trauma. Many need to be hopsitalized.
    If you just Google, you’ll find articles about the problem.
    Don:
    Pat writes: “It is the hospitals and private insurers who argue that underpayment is a problem, and their organizations and academic studies by sympathetic researchers are responsible for most of the literature on the topic.”
    It’s intersting how hospitals and private insurers are on the same side of this argument. One would think that since private insurers are payors, they would be arguign that hospitals are over-charging and could care for patients for less if they were more efficient.
    But as is often the case, for-profit companies from different sectors fo the economy make deals, “you scratch my back, I’ll scratch yours” and back each other up. They can always pass excessive costs on to the cutomer.
    Medicare, like other government plans, can’t just “pass the cost on.” Taxpayers become upset if you raise taxes.
    This is why we need a public plan to look out for the public good. (Higher quality care at a lower cost.)
    Everyone: Pat makes very good points about Kaiser and the VA in his Aug 26, 11 32 a.m. comment:
    Kaiser now has many Medicare Advantage patients.
    And the VA is serving a population that is disproportionately low-income because our “volunteer army” is disproportionately low-income.
    And we know that low-income people are far less healthy than the rest of the population.
    Also, while many Vietnam Vets were drafted into the army the effects of being in Vietnam (trauma, stress, psychological problems drug addiction thanks to the wide availability of drugs) made many of them unemployable or only barely employable when they came home.
    Many became homeless.
    So today, at age 60, they are poor and have little in the way of a support system.
    Thus the VA does become a nursing home for Vets who otherwise might be living on the street.

  24. Christopher, Don, Everyone
    Christopher–
    Your assertion that the large number of available beds drives VA hospital admission for patients who are barely ill is simply not true.
    As a result of the Gulf War, and now the War in Iraq–not to mention aging Vietnam Vets–we have a huge number of Vets needing all types of care.
    In most areas, capaciy is strained.
    In particular, we have many Vets from the IRaq war suffering from serious psychological problems and post-stress trauma. Many need to be hopsitalized.
    If you just Google, you’ll find articles about the problem.
    Don:
    Pat writes: “It is the hospitals and private insurers who argue that underpayment is a problem, and their organizations and academic studies by sympathetic researchers are responsible for most of the literature on the topic.”
    It’s intersting how hospitals and private insurers are on the same side of this argument. One would think that since private insurers are payors, they would be arguign that hospitals are over-charging and could care for patients for less if they were more efficient.
    But as is often the case, for-profit companies from different sectors fo the economy make deals, “you scratch my back, I’ll scratch yours” and back each other up. They can always pass excessive costs on to the cutomer.
    Medicare, like other government plans, can’t just “pass the cost on.” Taxpayers become upset if you raise taxes.
    This is why we need a public plan to look out for the public good. (Higher quality care at a lower cost.)
    Everyone: Pat makes very good points about Kaiser and the VA in his Aug 26, 11 32 a.m. comment:
    Kaiser now has many Medicare Advantage patients.
    And the VA is serving a population that is disproportionately low-income because our “volunteer army” is disproportionately low-income.
    And we know that low-income people are far less healthy than the rest of the population.
    Also, while many Vietnam Vets were drafted into the army the effects of being in Vietnam (trauma, stress, psychological problems drug addiction thanks to the wide availability of drugs) made many of them unemployable or only barely employable when they came home.
    Many became homeless.
    So today, at age 60, they are poor and have little in the way of a support system.
    Thus the VA does become a nursing home for Vets who otherwise might be living on the street.

  25. Maggie:
    I disagree with you that Medicare cannot just pass the costs on, for it would have to raise taxes.
    They have very creative ways to handle deficits, such as borrowing from the Treasury, and not paying back principal or interest, or simply taking from general revenues and increasing the debt.
    It’s sort of like borrowing from your 401(k), or withdraweing it, except the 401(k) is private property.
    Don Levit

  26. Don Levit –
    “They have very creative ways to handle deficits, such as borrowing from the Treasury, and not paying back principal or interest, or simply taking from general revenues and increasing the debt.”
    As you know, at this point Medicare Part A (the topic of this discussion) is a creditor of the government, not a debtor. Far from borrowing from the treasury, the treasury is borrowing from it.
    Granted, Part B, Medicare Advantage, and Part D are large users of government subsidies, partly, in the cases of Part D and Advantage, to give largess to various private companies that are major beneficiaries of the programs.
    It is also true that Part A is going to go into the red sometime within ten years unless something is done.
    This is what makes the assertions that reform will hurt Medicare so ludicrous, since far from hurting Medicare, the reforms are necessary to save it, the only other choice being to increase costs and cut services to the beneficiaries to the extent that the program would be destroyed.

  27. Pat:
    When you say that Medicare is a creditor of the government, not a debtor, you are spoeaking from the “Trust Fund Perspective.”
    The Treasury has a second perspective, known as the “Budget Perspective” which is a more holistic approach.
    The Budget Perspective considers the government’s ability to meet its obligations, all of them, not just Social Security and Medicare.
    The Trust Fund Perspective is nothing other than accounting, as if you were putting debits and credits in your calculator.
    It is not dealing with actual cash.
    Why is that?
    According to the Medicare from a paper entitled Medicare financial status, budget impact and sustaianability “Cash income from earmarked sources (payroll taxes) goes into the Treasury’s general fund. The income is then CREDITED (a mathematical number only) to the trust fund.
    The ACTUAL CASH RECEIPTS are expended from the GENERAL FUND FOR WHATEVER PURPOSE ARISES.”
    How can the actual cash receipts be in two places at the same time – the Treasury’s general fund and the trust fund?
    Don Levit

  28. Don —
    You are right. The obligation to find the money to fund Medicare and Social Security is an obligation of the general fund, and the taxes, mostly income taxes, it uses. The government has spent every penny of the Medicare and Social Security trust funds on tax cuts for high bracket payers and on misadventures in the Islamic world. But they still owe that money to the programs. The idea that the government obligation to the taxpayers of FICA and Medicare tax has somehow magically gone up in smoke is just plain not true, any more than the idea that the money you spent on your trip to Maui is no longer owed to your credit card company because you spent it on plane fare, condo rental, and Mai Tai’s. I know that is popular idea among people of some political orientations, mostly because they would like to explain away the taxes that the general fund will have to raise to pay those obligations.
    Just watch what happens to the ability to sell other government obligations and to any politicians who try to sell the idea that the trust funds have vanished with a poof. You can follow any theory of voodoo accounting you choose, but the government is stuck with the obligation because it is politically and economically impossible for them not to honor the obligation. The people who saved billions in taxes at the expense of the trust funds better get used to the idea that the taxman is coming back, and start saving up now, because the government is going to have to put that actual cash they borrowed back.
    Meanwhile, we should return to our regularly scheduled programming, a discussion of the relationship between hospitals and Medicare, and the facts governing that relationship.

  29. BLUE CROSS INS IS SUPPOSED IG TO BE A NON=PROFIT ENTITY…
    BUT THEY ARE NOT….THEY HAVE SO MUCH MONEY THEY BUY OTHER INSURANCE COMPANIES AND ALSO WANT TO GO ON THE BIG BOARD. I REMEMBER YEARS AGO WHEN MI. BXBS WAS GOING “BROKE” BECAUSE OF THE CONDOS THEY HAD IN FLA AND THE VERY EXPENSIVE LARGE CARS THEY LEASED….

  30. An excellent informative post. Makes me want to read your book. I’ll be sure to watch Moyers tomorrow evening.
    My overall impression from reading your blog is the huge intricacy and complexity of the payment system. DRG payments are based on individual patients, and it seems inevitable that providers will game that kind of system to increase reimbursements.
    Wouldn’t it make more sense to base payments on aggregate data? Reimbursements could be calculated for large numbers of patients grouped into broad categories. The stability and predictability of aggregate-based payments would be greater. And because the variance of the group decreases with size, it should be more difficult to game the system–outlier billing would be detected quickly and could be audited.
    To discourage cherry-picking, payments based on broad categories could be adjusted by statistics on the overall health of the population served.

  31. Mark Pine –
    The DRG’s are already based on aggregate data, and are based on patients grouped in broad categories, with modification of those categories into sub-categories based on the presence of factors that change the intensity and cost of necessary management. That is essentially what the DRG system is. I am sorry if that was not clear in the original post.
    The problem being encountered is that like all collections of statistical data, there are some patients – outliers – who do not fit well in the general data. For hospitalized patients those tend to be either people with underlying health problems that complicate their stay and lead to longer admissions with more intense treatment, or people who suffer misadventures while in the hospital, either unavoidable or avoidable, that lead to them requiring longer stays with more intensive management. The data from hospital management organizations themselves indicates that this is about 20-25% of patients, and my personal experience suggests that the largest share of losses are due to 10% of patients or less. This outlier status is pretty close to what would be expected in any statistical analysis of data based on humans, with outliers fairly near the first and second standard deviations, although the curve is slightly shifted from an absolutely standard distribution.
    Some fine tuning of DRG categories might be helpful, in order to try to account for the outliers with modifications to DRG’s. However, the big news is that better management techniques by hospitals can decrease outliers, especially programs designed to provide effective care and avoid marginally effective or ineffective care, efforts to improve the baseline health of patients who are regular repeat users of hospital services, and programs to decrease occurrence of untoward events that complicate patient care. There are programs on the shelf to begin accomplishing all these things, and certainly new ideas should be developed based on good research. However, compliance with these things is not uniform or even widespread, for a variety of reasons mostly due to culture in health care and to the reluctance to recognize that up to this point a hospital may not have been doing the best possible job for some of its patients. The point of the IMAC reform, as well as Obama’s whole program to reduce cost of Medicare and Medicaid, is based on the adoption of these types of programs. The models available in places like Mayo, Cleveland Clinic, Kaiser, and others that have had success with these approaches show that it can be done.
    Meanwhile, I am not Maggie Mahar, but rather a guest commentator who is a whole different person. Maggie invited me to submit this entry after reading a comment I made on another thread. I have not written a book, but I do recommend Maggie’s book and DVD.

  32. Pat
    Medicare currently pays for outliers, the regs recently changed (lengthened i believe). Two sides to that coin, but nonetheless, hospitals dont always take a haircut (only a trim).
    Brad

  33. There is a system to give hospitals some relief for outliers. However, it provides only up to 80% of hospital losses on outliers and is limited to 5% of budget nationally ( that figure is allowed to vary slightly,) an amount which is then removed from other items in the Medicare budget.
    Hospitals feel that the limit on total outlier payments and the partial reimbursement allowed are both too low, and don’t affect their argument about payment rates.
    The outlier allowances are included in the total payments to hospitals by Medicare in the hospital orgnizations’ data about Medicare loss, so the number they are talking about is a loss after, not before, outlier payments.
    The situation remains the same: hospitals and private insurers claiming that Medicare underpays and is subsidized by private insurance, Medicare claiming that its estimates of costs in DRG reimbursement are realistic if the hospitals operate well and control costs.
    I did not discuss outlier payments because they don’t have much effect on the argument about Medicare and hospitals, the system of payment is quite technical, and I did not want to go into too much detail in a way that adds confusion about something that does not effect the argument.
    In the same vein as outlier payments is the fact that Medicare collects data and revisits their DRG payments on a regular basis, supposedly correcting when the payments are too small.
    Here is an article about outlier payments from MedPAC, if you want to read more.
    http://www.medpac.gov/publications/other_reports/outlier%20memo.pdf

  34. If you really want more on outlier payments, here is yet another, even more technical explanation, including discussion of the “cost to charge ration,” one of the qualifying factors for outlier payments. This is guaranteed to drive most of the fans out the door, screaming.
    http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp
    The argument remains that the outlier system is specifically designed to, as you say, give at least a trim if not a haircut to hospitals. As such, it does not help the complainers much, and does not fix the problems they are complaining about.
    Meanwhile, Medicare does not want to get into the business of doing detailed analyses of individual hospital costs, a return to the bad old days of cost based payments, and fraught with problems related to rewarding inefficient operation.
    For example, here is an article from a consulting firm discussing how to game the outlier reimbursement.
    http://www.jonesday.com/pubs/pubs_detail.aspx?pubID=S1072
    The key fact is that the outlier payment system is not having an effect on the issue. Outliers are still the main problem from the hospital point of view.

  35. Pat,
    That was a very good and comprehensive essay on Medicare payments. I also read with special interest your links to the articles about outlier payments.
    One of the more pernicious aspects of the Medicare payment system, especially as it relates to outlier payments, is that it creates an incentive for hospitals to significantly increase charges year in and year out. This, in turn, has adverse consequences for uninsured patients who receive stratospheric and completely unjustified bills. For hospitals coping with Medicare’s dictated prices, even if, as you contend, that hospitals only lose money on as few as 10% of their patients while they make at least modest profits on the other 90%, they can go just as broke losing a lot of money on 10% of their patients as losing a little money on 50% of their patients.
    I just have a problem with dictated prices as a long term sustainable payment model, especially given the influence of politics in setting payment rates as well. It doesn’t make any more sense to me than it would if the Treasury tried to dictate the interest rate that investors receive when it sells its bills, notes and bonds to finance its operations.
    I think it would make more sense if Medicare solicited bids from hospitals for the base rate each would accept for each DRG code. As with Treasury auctions, the highest bid acceptable to Medicare would be the rate that each hospital in that county or region received for a given DRG code. A reasonable percentage of outlier cases would have to be factored into each bid. Medicare could pay separate supplements to teaching hospitals for their education function and to safety net hospitals for treating disproportionate numbers of uninsured and underinsured patients. To the extent that it was able to differentiate among hospitals based on care quality and cost-effectiveness, it could vary patient copays in order to steer patients to the most cost-effective providers. For patients who are treated under emergency conditions by hospitals that don’t have a contract with Medicare, it could be paid the base rate for that region. There would probably have to be a legislated limit to how much beyond that rate the provider could bill the patient or his/her supplemental insurer.

  36. Barry —
    Superficially, the idea that hospitals could submit bids for Medicare services is a good one, however in practice I think it would be a poor solution.
    Unfortunately, as any health care economist can tell you, health care not only does not behave in the way classic market theory would suggest it should, but actually behaves totally perversely. Increase in supply actually increases cost. Competition fosters higher, not lower, prices. Innovations that make services more efficient drive prices up.
    There are two issues involved in the likely failure of a bid system. The first is the near monopoly or true monopoly status of some health care systems in many areas of the country, making bidding solutions a moot point. The second is the fact that in many areas of the country hospitals at least seem to collude with each other in setting rates. There have been successful anti-trust cases against health care systems in some places, but the practice continues. I am afraid that bidding for Medicare rates would quickly produce the situation that private insurers now face, with health systems forcing up payment rates to levels that in some cases are unreasonably high and in no way related to costs.
    Bidding would work if health care behaved rationally, but if health care behaved rationally we would not be in the mess we are in now.
    Second, the idea that Medicare imposes prices randomly is not true. Medicare makes a concerted effort using appropriate research techniques to calculate valid pricing that would pay hospital costs plus a small margin, and adjusts that rate to consider factors that increase hospital costs.
    The problem is that there are legitimate reasons that cause a number of patients – around 25% according to hospitals — to cost more than the Medicare rate, and a somewhat smaller number to cost a lot more.
    Medicare is resistant to the concept that the DRG should be adjusted to account for this. The reason is that they take that position is that they believe that hospitals can do things, both in their overall costs and in specific management steps for the outliers, to remedy that problem. For example, implementation of well known techniques to control infections acquired during treatment and hospitalization could probably save enough money, all by themselves, to cancel out the reported losses for almost all hospitals, but hospitals and their staffs are very resistant to the idea that they are responsible for infections by breeching good practice. The ghosts of the doctors who opposed Semmelweis are still with us today.
    The problem with health care and usual economic rules has been dealt with worldwide in almost the same way everywhere. National health care systems in all developed countries — regardless of whether they employ private insurance based systems like Germany, Switzerland, Netherlands, and Japan, or single payer systems like Canada, Taiwan, and South Korea, or socialized systems like Britain, Sweden, and Spain – all depend on setting rates at the level of national or regional regulatory boards. They do that because they have found that trying to work using the rules of classical economics fails miserably.
    As we have seen in the recent debacle in the finance industry, in some cases, no matter how dedicated you are to market economics, markets fail. Government regulation is necessary to protect the public from businesses, and indeed is necessary to protect businesses from themselves. Hospitals, and their relationship with Medicare, are an example of that.

  37. Barry —
    Also, the main incentive for hospitals to constantly raise prices is not the Medicare program and its outlier payment system. The outlier payment is so small as to not be worth the trouble.
    The main reason is private insurers. Medicare, of course, establishes prices as matter of policy based on collecting evidence of costs. Private insurance, however, often negotiates for prices based on “discounts” from the “usual and customary” charge. Because of that, it is a good idea to set the charges as high as possible to be able to deal some of the price back, a well known pricing tactic in many types of business.
    For example, a hospital department manager who I knew told me that he routinely set his U&C prices by muliplying the Medicare rate by three. He knew this wouldn’t change his Medicare payments significantly, but it gave him a semi-fictitious number to use to start his negotiations with Blue Cross and other insurers.

  38. Pat,
    While you probably have more expertise about this than I do, the large insurers tell me that negotiations, at least in the last few years, have evolved toward a percentage of Medicare as opposed to a discount from the chargemaster. Perhaps it’s different for the smaller insurers. The relatively few famous brand name medical centers and teaching hospitals can extract considerably higher rates from private insurers while they accept dictated prices from Medicare. Former Harvard Pilgrim CEO, Charlie Baker, once stated on his blog that insurers pay between 120% – 130% of Medicare overall. Sometimes it’s as much as 175% and occasionally it’s even below Medicare. At any rate, if the actual private insurer payment to hospitals is 120%-130% of Medicare, starting the negotiation with insurers at 300% of Medicare when the insurers know quite well what Medicare pays seems silly to me. It does certainly help maximize revenue from self-payers who can pay including wealthy foreigners who come to the famous medical centers for sophisticated treatment. At the margin, it also helps maximize outlier payments, especially if the hospital is inclined to follow the consultants’ advice on how to game the system.

  39. I would also add another issue to Pat’s comments: the DRG scatter.
    The top 10 DRGs seen on a typical medical service comprise about 30% of cases. The next 10, maybe 15%, and so on. By the time you get to the top 50 DRGs, you are still far from nearing 100%.
    If you plotted the outliers, they would fit a “predictable” but far from clean pattern, and would not cling to the top decile exclusively. They would likely be encased in DRGs that scatter amidst the grid.
    It is far better to take a QI systems approach and avoid the complications that would lead to outlier #1–DRG 083.12 for example, or outlier #2–DRG 197.1, etc, than target these buggers indiviudally in a bidding process. If we could predict the outliers, we would not need outlier payments.
    Essentially, what I am saying, and I live in one: hospitals, get your house in order–which given reform status of late, wont be happening soon enough.
    brad

  40. Barry —
    The policy I was talking about was set at a time when the negotiations were based on U&C. The example is now five or six years old, so they may well have changed, since percentage of Medicare is now the norm in my state. I do not know if that is a uniform policy, or if some systems still work with U&C. Depending on that, you may be right that today raises in U&C are only of use in Medicare outlier calculations.
    The hospital was an anomaly of sorts, since as a rural hospital in a small town they got relatively low Medicare payments, but got relatively high private insurance payments because they were the only largish hospital and the only vendor of many services in an area about 120 miles across and about 150 miles up and down. That gave them a strong negotiation position with anyone who would negotiate, which of course Medicare did not.
    Demands for 250% of Medicare are not unusual in this state from health systems with strong negotiating positions, since hospitals and doctors are very firm in their belief that Medicare rates are unfair to them.

  41. Brad F —
    “It is far better to take a QI systems approach… hospitals, get your house in order”
    I agree entirely.
    In addition to QI, hospitals also need to look closely at patient management approaches to wring out unnecessary utilization, something that will benefit their cost structure on patients who are within DRG payment norms as well as outliers. In particular, they need to look at that before the payers beat them to the punch and start reducing payments.
    They also need to look at programs to try to improve health of “frequent flyers” in order to stop revolving door admissions for patients who cost the hospital money every time they show up. The SMDC project I love to cite was partly created to benefit the patients, but every one of their index cohort was costing the hospital money by exceeding DRG on every one of their numerous admissions. The data involved in addressing that problem is not based on examining DRG groupings, but rather on real individual patients who should be easily identifiable in a modern computerized record and billing system.

  42. Pat,
    Thanks for the detailed responses as always.
    I was also wondering if you have any insight into why it is that medical services which are generally not covered by insurance such as LASIK eye surgery and much cosmetic surgery offer much greater price transparency, episode pricing, and have generally not increased in cost faster than general inflation in the economy. LASIK surgery actually fell considerably in price as the technology advanced and doctors came down the learning curve. In the area of dental services, more people don’t have insurance than do and even for those that do, there are often sizeable out of pocket costs as a percentage of the total bill. Here again, price transparency is good including for relatively expensive procedures like root canal. Yet, for widely insured hospital and physician services, imaging, labs, etc., costs are increasing faster than general inflation for the most part while price and quality transparency are generally poor.
    Separately, regarding patient management, I was recently talking about this with a CEO of a small health plan in the Southwest who sits on the Board of a hospital there. He said that one of the most challenging aspects of managing cost in a hospital is surging nursing capacity in response to changes in occupancy and patient mix and scaling it back down when demand falls back. He also said that his hospital could make it if they received Medicare rates from all comers as their patient mix is currently 50% Medicare and Medicaid, 25% commercially insured and 25% uninsured.

  43. Pat, I appreciate your hard work blogging.
    We always thought that the hospitals were the real locus of waste in the medical system. During the eighties we saw them use their extensive excess cash to buy small hospitals, and lose their shirts. In the nineties we saw them buy up practices with excess cash, only to find that not only could they not run the practices better than the doctors, but often they gave the practice back to the doctors when they found they could not run them as well as were ex ante.
    Seems like a lot of waste within the hospital if they can afford these financial misadventures.
    On the other hand, we see hospitals go under, without first shedding the thousands of jobs which to the outside observer seem to be sinecures. Why wouldn’t they shed five or six levels of superfluious “management” rather than go belly up? All I can think of is that compliance is a lot more expensive than it appears.
    Elsewhere you have mentioned garden spot envy in desirable locations for midwest salaries. I think it is curiously supply and demand in action. Surgeons in big eastern cities often work for a fraction of their boondocks colleagues. As you point out, often doctors are working very very hard in the hinderlands. Their busy schedule in Fargo, to pick a town with a great medical reputation, may crowd out certain silly or marginal treatments and workups. Or not.
    It is difficult for me to imagine doctors working that hard paid like an academic (effectively a part time doctor, as regards clinical work). More people want to work in Manhatten, so the pay will logically be LOWER.
    I continue to see a specialist shortage. Increasing salaried postitions mean increased medical staff to cover nights and weekends. Demand is going to explode with the baby boom’s medicare eligibility.
    There is a flavor of reform that seeks to end private practice, and pay three times as many doctors half the salary, to “save money”. I think they would like to see the European model of “we pretend to work, and you pretend to pay me.” It will reduce utilization, among other things. I can tell you that if the money goes to the hospitals before it gets to the doctors, it is going to cost a lot more. They will find a lot of other things for the cash, if they have the chance.
    On an unrelated topic, I am curious why McAllen was not compared with BWH by Gawande. It would be easy for him to make a case controlled study. My guess is that as expensive as McAllen was, the Brigham is more pricy…for the same level of co-morbidity. That would hardly have made the desired point. As the atlas shows, high cost is very spotty geographically. Very sick, McAllen style patients are also very expensive in Boston, where the care also yields bad results.

  44. Barry —
    Many health care procedures and services have decreased substantially in price, usually because Medicare took the lead in reducing costs of services that began with a high price because they were new technology but had become routine, shorter in required time, and benefitted from decreases in costs of equipment. Private insurers usually followed along.
    People are much less aware of this than of procedures that are not paid by insurance because they do not usually see the costs. It is the payers who are driving down prices, and have extracted billions of dollars of savings, cutting prices by a half or even more.
    There are certainly some issues with overutilization of insured services that need to be addressed. The increases in costs for insured services is primarily due to that, not to raising prices. In my own practice, payments from Medicare constantly declined on a per case basis, and the private insurers followed that closely. However, our overall total charges increased year by year because of doing more procedures than before and because of adding new types of procedures all the time.
    If we manage to pass the IMAC reform, we will certainly see an uptick in cutting of costs for charges for procedures that are overpriced, and better yet will see some control of unnecessary overuse as Medicare and other public programs follow the reforms, and as private insurers follow along on that as well.

  45. Christopher George –
    Two important points about your comments. You are right and wrong about the market effect on salaries. Doctors in larger markets, including the coasts and even larger and more attractive Midwest cities, are paid more per service than people in the more rural areas of the Midwest and South, but make less overall because of doing many fewer services. In my specialty, average workloads are more than 50% higher out here, and workloads of two to three times as much are not unheard of in practices that try in vain to recruit to decrease their workloads, while payments per service are substantially lower.
    Second, it is funny that you mention Fargo, because Fargo is a good example of doctors working as salaried employees of medical systems working very hard – and very well in terms of both cost effectiveness and quality of results. The doctor employees of the MeritCare and Innovis, the systems that dominate Fargo, routinely do much more work than private practitioners in other parts of the country. They are paid pretty well, however, both because of recruiting and stop-loss efforts to get people to come to and stay in Fargo, which is not most doctors idea of heaven, and because of incentive payment systems that adjust incomes based on productivity. Mayo Clinic in Rochester also has a pretty good salary schedule, partly because of stop-loss issues there. Mayo, however, last I heard did not have an incentive system.
    Also, despite the Harvard affiliated hospitals record of very high total costs per patient, they fall well behind costs in some particularly egregious high cost regions, especially South Florida, some parts of Southern California, and McAllen. I think Gawande chose McAllen because its high costs seem so counterintuitive to many people, and perhaps because as right wing Texans so many people in health care there were more than glad to stick their feet in their mouths for the article. I will say that although Gawande did lead with the example of a problem in his own practice in the article “The Checklist,” he does seem to avoid directly criticizing BWH and MGH, probably not wanting to have to wear a disguise to work.

  46. Meanwhile, it is probably time to bring this thread to a close. So unless you have new comments specifically about Medicare and hospitals, best to move on to some of the threads above and other new ones. Thank you Maggie for the chance to do this post, and thanks to all of you in the comments for letting me walk my wits, sometimes in agreement and sometimes not, with you.