The hospital’s foggy future

As government and health insurance plans desperately seek to contain costs, hospital care has become a whipping boy.

Charges can run as high as $18,000 a day. In 2008, two million of the most expensive hospital stays cost nearly $200,000 per person. Days spent in the hospital declined in the 1980s and early 1990s and then stabilized after the federal government changed the way it paid hospitals. Hospitals’ portion of health-care costs declined from 43 percent in 1980 to 33 percent in 2009. However, it remains the largest category of health-care spending.

According to the late management guru Peter Drucker, the four hardest jobs in America, in no particular order, are president of the United States, university president, hospital CEO and pastor. Hospitals are under constant pressure to lower costs while improving quality.

The implications of hurried care are reflected in hospital metrics: dismal safety records and high re-admissions, which induce higher costs than if there had been proper initial care. Nonetheless, hospitals are tied with supermarkets as the most trustworthy industry, according to a Harris Interactive poll.

Drucker’s observation certainly rings true, given the current health-care climate. The recession has hit the nation’s hospitals hard. About 3 out of 4 hospitals treated fewer patients and performed fewer elective surgeries. Nearly all have had to treat more patients who cannot pay.

Hospitals, especially the nonprofits, rely on income from investments and community donations. According to an American Hospital Association (AHA) survey, 90 percent of U.S. hospitals say attracting charitable gifts is becoming more difficult. A similar percentage reported extreme difficulty in securing tax-exempt bonds. Two-thirds have had to delay projects because of difficulty accessing capital markets.

Most hospitals have cut administrative costs and reduced staff. About 1 in 4 has cut services. A financially struggling hospital creates economic ripples. It is often one of the largest employers in town. Hospitals employ more than 5 million U.S. workers, the second largest employer category, behind only restaurants. According to the AHA, they support nearly 1 in 10 U.S. jobs based on the goods and services they buy. Average hospital profit operating margins were 4 percent in 2006, with one-third of hospitals losing money on operations.

There are three kinds of hospitals: nonprofit, for-profit and public.

The primary goal of a nonprofit is to serve its community rather than maximize profits. However, nonprofit health-care organizations must be run like for-profit businesses to sustain themselves. The three main sources of capital are reinvestment of earnings from ongoing operations, philanthropic gifts and tax-exempt municipal bonds. They generally must spend a portion of their revenue on charity care and community benefit. Nonprofits are exempt from federal and state income taxes, as well as sales and property taxes.

Public hospitals are also nonprofit organizations, owned and operated by local governments. They have an additional revenue source, because they can levy taxes. That is critical because many of their patients are either uninsured or have government insurance that reimburses the hospital at less than the cost of care.

For-profit hospitals either distribute profits to their owners or reinvest them in the company. Unlike nonprofits, for-profit hospitals can raise capital in risk-based equity markets.

About 58 percent of hospitals are nonprofit, about 20 percent are for-profit and 22 percent are public hospitals.

The uncertain economics of ACOs

Hospitals are being asked to reinvent themselves.

Potentially, one of the best health-delivery reforms to emerge from health reform is the accountable care organization (ACO). An ACO is a network of health-care providers willing to be held accountable for achieving measurable quality improvements and reduced spending growth for up to 5,000 Medicare patients. In exchange, an ACO would share the savings with Medicare. The government hopes the model succeeds and spreads throughout the health-care system.

The goal is to improve coordination of patient care and provide an incentive to avoid wasteful services encouraged by fee-for-service medicine.

The most likely ACO configuration would include a hospital, primary-care physicians and specialists. The nation’s largest health systems already have these elements under common ownership and are best suited to meet the January 2012 deadline for the program’s inauguration. The Congressional Budget Office (CBO) estimates that there will initially be 75 to 150 ACOs and that the program will save Medicare about $5 billion by 2020.

However, many are concerned that ACO formation will give large health-care organizations even greater market power (see discussion below).

ACOs may be suffocated at birth because of overbearing regulation. The 429-page document governing ACO creation attempts to thread the needle by encouraging hospitals and physicians to form ACOs without sticking the government with the tab if the effort fails. The results, many experts say, are meek incentives that do not justify the steep startup costs. Other hurdles include requirements to document 65 quality measures and submit marketing materials for federal editing.

ACOs have two alternatives for a three-year arrangement. Those willing to bear greater risk can earn up to 60 percent of the savings they achieve. However, they will have to repay Medicare for cost overruns. The maximum risk would be 10 percent of what Medicare would have spent on patients if they were not in ACOs.

This so-called two-sided risk may appeal most to established integrated-delivery systems that already operate much like ACOs.

The one-sided risk model allows ACOs to avoid financial risk in the first two years, but they would be eligible to keep only 50 percent of the savings. They would face penalties of up to 7.5 percent in the third year.

Consultant Steven Lieberman, a 30-year CBO veteran, wrote in a Health Affairs blog, “The proposed regulation imposes unfavorable economics, unrealistic requirements, high uncertainty and significant risks for ACOs.”

The Medicare Physician Group Practice (PGP) demonstration, the model upon which the ACOs were built, was not financially promising. Only half of the 10 participating practices produced savings by the fourth year.

Researchers crunched the numbers from the PGP demonstration and concluded that an ACO with an average of $1.7 million startup costs would have to have an unlikely 20 percent profit margin for the three-year period to recoup costs.

Readmissions: Why always blame the hospital?

Hospitals release patients as early as possible to minimize care expenses. Health plans and the government determine in advance how much they will pay the hospital based on the patient’s condition. There is one price for the entire hospital stay, rather than a charge for every service and supply used. Medicare has a list of about 750 diagnostically related groups of similar medical episodes.

This is a cost-containment strategy. The incentive is to release the patient on or before the reimbursement period runs out. Unfortunately, too many come back for additional care within a month. This may be a penny-wise, pound-foolish situation. Initial costs were minimized but overall costs likely increased. Hospitals are able to bill the government or health plans for another hospitalization.

Hip replacement illustrates the point. In the early 1990s, according to a study in the Journal of the American Medical Association, patients spent more than nine days, on average, for surgery and recuperation in the hospital. By 2008, that period was less than four days. The percentage of patients sent directly home decreased from about two-thirds to less than half. The proportion sent instead to rehabilitation facilities doubled. Furthermore, there was a 44 percent increase in the number of patients returning to the hospital within 30 days for further care.

Dr. Peter Cram, the study’s lead author, said, “You’re really just squeezing a balloon here. If we reduce the length of stay in the hospital, we can save money … But when we squeeze the balloon on one end to reduce length of stay, other costs pop up on the other end. This is why it’s so hard to reduce or contain health-care costs.”

A key provision of the health-reform law attempts to reduce 30-day hospital readmission rates by penalizing the worst offenders. As of October 2012, Centers for Medicare and Medicaid Services can decrease payments by 1 percent to hospitals with excessive rates for patients with heart failure, acute myocardial infarction or pneumonia.

One in 5 Medicare beneficiaries was readmitted to the hospital within 30 days, and 1 in 3 within 90 days in 2003-2004. The cost of these unplanned readmissions was more than $17 billion in 2004. Blacks are 43 percent more likely to have unplanned readmissions. The risk is up to 33 percent more likely for those on high-risk medications.

The Joint Commission, which accredits hospitals, studied miscommunication from one caregiver to the next in 10 hospitals. These so-called transitions of care often are the culprit in readmissions. The commission found that handoffs were defective 37 percent of the time. There are 4,000 handoffs a day at a typical hospital, which means nearly 1,500 are mishandled. Those fumbled handoffs are associated with 80 percent of serious medical errors.

However, a recent study found that Medicare regions that have the highest readmission rates also have the highest hospital admission rates. In other words, doctors in some areas are quicker to stick – and re-stick – patients into the hospital than those elsewhere.

There are simply too many confounding factors to blame hospitals for readmission rates.