Hospitals face two-sided Medicaid crunch

Even though they are amply paid, you have to feel a little empathy for the CEOs and CFOs of big hospital corporations. They are caught in a Medicaid pressure cooker, and it is going to get worse.

It is a consensus among hospital executives that they make no money on Medicaid reimbursements, a couple points of profit at best. And, come Jan. 1, they are facing a huge expansion of Medicaid patients as Obamacare kicks in for individuals. Some 17 million new people are projected to go onto Medicaid in the country.

That enlargement of the federal-state program may solve about one-third of the nation’s access issue, but not without a lot of financial pain.

Here’s the crunch: while hospital corporations make no money on that sector (a good number of doctors and dentists will not take any more unprofitable Medicaid patients), government payers are also financially stressed.

Take Wisconsin. The Medicaid bill is an astronomical $8 billion a year, with $2.2 billion coming from state taxpayers and the rest from the federal taxpayers. That total is s almost one-quarter of the state’s overall budget. The state’ share is about $1 of every $7 collected from Wisconsin sales and incomes taxes. Medicaid will chew up half of the new revenues coming into state coffers over the next two years. One in every five residents is on the program – 1.1 million people.

In short, the taxpayer well is running dry at the state level. State Medicaid spending is crowding out investments in education from K-12 to the university, environmental improvements, infrastructure, economic development and even public safety. At the federal level, the deficit is still huge. So, long and short, reimbursements to hospitals and doctors will not go up any time soon; they may even get cut, much like Obamacare is slated to do to Medicare.

But here’s the real crunch for our stressed CEOS and CFOs: they used to have a relief valve from the price controls set by the federal government. Their relief from the heavy federal hand was to raise fees to private sector payers, who pay roughly half of the nation’s bill for health care. If the hospital CFO needed a five percent overall price increase to cover rising expenses in a given year, she simply raised the bill 10% to the private payers. That worked well for a couple of decades. And it explains the double-digit inflation in premiums to many businesses.

But no more. As of late, private companies are saying “time out” to that cost shift, to that hidden tax. They are doing so in a grassroots revolt that rejects bloated prices.

The insistence on pricing tied to value is coming from corporate payers and from their employees, who have been turned into consumers under high deductible plans. There are now an estimated 70 million Americans in high deductible plans, meaning they are paying for a lot of care out of their own pockets. And the number of Americans with Health Savings Accounts — their own money – is growing at more than 20% a year. They have become acutely cost conscious.

The relief valve is being turned off. The marketplace train is coming down the tracks. The revenue fairy is dead. Use whatever metaphor you want, but it’s clear that hospital corporations need to meet the merging marketplace with better value propositions. That means better quality and lower prices. Lower prices can only come from lower costs.

The screaming reality is that the financial disaster on the economic side of medicine in this country isn’t incurable. Here are a couple of examples of the cures that have been proven at the grassroots level, where the real revolution in health care economics is taking place:

• Medicaid could graft incentives and disincentives grafted onto what is essentially a free and therefore out-of-control program.

• Medicaid executives could put caps on prices of procedures, like CalPERS has done. The California pension fund that buys health care for 1.3 million people, pays no more than $30,000 for a joint replacement, and there are plenty of providers who are meeting or bettering that price point. Safeway puts a cap on colonoscopies at $1500; ditto on shops that can make money at that level. Average prices are much higher.

• Hospitals can follow the lead of 60 peer hospitals that have followed manufacturing into lean disciplines that slash waste and drive out defects like infections.

• Public payers and hospitals could reorganize their models to lead with proactive primary care, instead of leading with care by specialists. Medical homes keep people out of costly hospitals.

Innovations and reforms are racing ahead in the private sector, and the cost curve is bending downwards. Government payers and hospital corporations really have no choice but to get aboard. We need our hospitals, doctors and clinics, but unbearable financial pressures mean they have to operate with a completely reengineered business model.

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  • Daniel Warner

    Thank you for cutting through the confusing fog of healthcare pricing! I work for a private health insurance company, and for years we’ve felt the pain of the “cost-shifting” of health costs from the public to private sector.

    This pain has been in the form of high trend (medical cost inflation) and the resulting high rate increases to our private sector clients. We’ve had to play along with the hospital systems and providers in our frequent contract negoatiations.

    About the best we have been able to do for our clients is recommend consumer-driven health plans (CDHPs) as a proven way to bend the cost curve their employees, like you did at Serigraph. It’s great to see that the marketplace cost curve is finally bending as well!

    As an aside, I’m thoroughly enjoying your book, “The Company That Solved Health Care.”

    • JohnTorinus

      It is exciting to see the private sector reforms racing ahead like a prairie fire.

  • Phil Hauck

    I’ve mentioned this before: the St. Charles Health System in Bend, OR, used some state incentive dollars to fund two “social workers/behavior interventionalists” to work with 68 local families on Medicaid who were utilizing the Emergency Room at least once a month. The social workers worked with each family to identify the reason for the usage, and devised behaviors/corrected behaviors that drove it. Savings after one year were a reduction of $3,000 per family. I suspect that spending dollars on case workers with many Medicaid families could result in gigantic savings.

    • JohnTorinus

      Hi, Phil,

      Totally agree. A good number of such pilots they all showed damatic results. It is similar top the medical home concept delivered on-site at workplaces. They really work to keep people out of hospitals. My new book has a chapter on omn-site clinics.