02 July 2009

Blog fight!

Oh, man, I picked a fight with Ezra and he got all wonky on me, even with a chart.  Oh Noes!  Not a chart!  And ... it's actually a pretty interesting chart.  Here it is:

First of all, just for the record, let it be noted that my previous post was entirely about Medicare's under-reimbursement of physicians, and Ezra's clearly going all Willie Sutton and going where the real dollars are: facility reimbursement.  Fair enough, though I'll disclaim that I'm not nearly as well-versed in hospital reimbursement as I am in the professional side of the Medicare fee schedule. 

The above graph would seem to disprove Ezra's original thesis, that hospitals continue to participate in Medicare because it is profitable for them to continue to do so.  As you can see, there's rampant cost shifting, as Medicare pays only 92% of the actual costs of inpatient care whereas the commercial payers are in the high 120s%.  Right? 

Well, yes and no.  The lifeline in this case is some very interesting testimony by the head of MedPac regarding a small subset of hospitals (about 12% of all hospitals) who were actually able to eke out a positive margin (0.5%) on Medicare payments in 2004-2006.  The contention is that since these hospitals were able to do so, and with higher quality than the other 88% of hospitals, that the hospital industry in general is inefficient and if they were only able to get their act together Medicare payments would be sufficient to support a viable hospital industry.

The key factor which Ezra elides over is that these hospitals are in the "financially pressured" category.  There doesn't seem to be a definition or cross-tabs on what exactly "financially pressured" means, but these hospitals actually have a worse operating margin on their non-medicare business (-2.4%).  Given that, it's fairly safe to conclude that this means hospitals with crummy payer mixes -- high medicaid and uninsured, low numbers of commercially insured patients.  This occurs most commonly in rural and inner-city markets -- underserved areas in which there is usually one hospital at best.  These undesirable markets do not encourage other providers to enter and compete for customers and so the hospitals there tend to undercapitalize, willfully or no, and offer bare-bones services.  That some fraction of "financially pressured" over-perform on outcomes is not explained in the testimony.   It could be a statistical aberration, or cherry-picked data; giving credit to the integrity of MedPac, it might be due to the exceptional leadership that some of these financially stressed hospitals have developed.  The testimony does not reveal what fraction of "financially pressured" hospitals outperform on quality measures -- if less than 50% of "financially pressured" hospitals outperform on quality, it would imply that the under-funding of these facilities harms quality of care more than it helps.  Note that those that outperform have substantially worse margins (0.5% vs 4.2) on Medicare payments, implying that there is some linkage between higher expenditures and better outcomes.

I am gallant, however, and I will concede the key point here: hospitals which are well-funded do tend to be inefficient.  Specifically, areas with enviable payer mixes are generally served by multiple hospitals and those hospitals compete for patients and revenue by over-capitalizing and improving amenties and customer service.  This is just another example of the perversion of the market in which patients do not directly bear the costs of their health care decisions. 

Coming back to the original point: if Medicare were such a lousy payer, hospitals would opt out, yet this never occurs.  Interestingly, the well-heeled suburban hospitals who lose the most money on Medicare patients are the least likely to opt out of Medicare.  They have such high margins on their commercial patients that they can view Medicare as their charity contribution to the community.  On the other hand, the financially pressured hospitals do better on Medicare than the rest of their payers, so Medicare is their economic lifeline.  Or, more formally, the value of Medicare patients to a hospital varies inversely with the number of commercial patients in their payer mix.

Ezra's conclusion here is that we need to cut costs, hospitals are in many cases inefficient, and so we should just reduce payments to them until they feel the pain and dial it way back.  As my old medical director used to say, "We're building a Buick, not a Cadillac." But there are many problems with such a strategy.  For one, the hospitals most dependent on Medicare would be harmed most by reductions in payments.  While workarounds could be crafted for financially stressed hospitals, it's unclear what effect reductions in payments would have in quality, but it would be hard to imagine that quality in general would improve.  And it's not clear to me that this really addresses the key drivers of cost: wasteful and redundant care, as opposed to more-expensive-than-it-needs-to-be inefficient care.  Given the volume incentive of the fee-for-service game, reductions in compensation usually just drive increases in utilization, not the other way around.

Ultimately on this point, I have to concede ignorance.  I know that the Medicare Professional Fee Schedule for phyicians is woefully inadequate and needs to be increased.  I do not know if the same applies to the hospital fee schedule -- I'm just not well-enough versed in the economics of that game.  I should point out that while medicare payments to physicians have been essentially frozen since 2001, the facility fees, unconstrained by the SGR, have risen year over year to keep pace with inflation.  I never did see any disagreement with my original points, by the way, that for professional services, the underfunding of Medicare is leading to decreased access as physicians close their practices to new Medicare patients, and that hospital-based physicians are unable to opt out due to the nature of their realtionships with the hospitals who employ them,


  1. I probably work at one of those "financially pressured" hospitals. We are in a small town -- the only thing for about an hour in all directions with only smaller hospitals to the north and east. The Big City is 90 minutes from us.

    Cutting reimbursements would KILL our hospital. Right now, people with means (i.e. good insurance and transportation) out migrate to the big city taking their 120% profit margin with them. We have the medicare (frequently without supplement), medicaid and indigent (without a hospital district to help). Yes, some of the insured towns-people stay....but a lot DO leave. The hospital is in the black but barely and has frequently been in the red. Our hospital is perceived as "dirty" because it hasn't been remodeled. Our infection rates are no different than the Big City hospitals (and better compared to some), but if someone develops an infection in the Big City, "those things happen." Here in Rural America, it's because of the bad quality of the hospital. Working here sometimes feels like swimming up a river....don't turn that process into swimming up a water fall, please. (However, if reform really does come, it may help even with cuts....all those indigent who can't travel to the Big City or are effectively turned away would then have insurance if we have universal coverage. Who knows?)

  2. aren't they building non medicare emergency rooms? we are exploring building non medicare surgicenters to free ourselves from their onerous regulations. the insurance companies seem very interested in supporting this nonmedicare surgicenter (in early negotiation stages) as they view themselves as providing the charity care for medicare patients and want 'true' pricing for their members


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  4. Reading you and Klein discussing hospital finance is like watching a couple of monkeys trying to have sex with a football. You haven’t done your homework and Klein is … well … an idiot.

    Here’s the bottom line: Since CMS imposed its first set of hospital price controls in 1982, about 20% of U.S. hospitals have gone out of business. If hospital reimbursement is cut by as little as 3%, about 40% of the remaining 4,900 institutions will go belly up.

    Presumably, even in the reality-challenged world of the contemporary “progressive,” this will be understood as bad news. It’ll be a lot tougher getting a cushy job dispensing Vicodin to the frequent flyers if half of America’s ERs go away.

  5. Oh Catron, I'm so happy you still come around. Of course we disagree on absolutely everything, but beautiful insults like "Reading you and Klein discussing hospital finance is like watching a couple of monkeys trying to have sex with a football" just makes it all worthwhile.

    I'm not sure why you're harassing *me* on this point, since I think we're on the same side of the argument for once. I'm not sure I'd agree with the cause-effect you imply, since there has been a lot of mergers, acquisitions and consolidations in the interim. But whatever.


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