Episode #8 – Let’s Find Out About the Hospital, Part I

Talking about hospitals doesn’t have the pizzazz of cutting-edge concepts like blockchain or artificial intelligence. But we have to talk more about hospitals because they spend a lot of money. About one out of every three dollars in health care is spent by hospitals. The issue is so important that Powers has dedicated two episodes to the subject. This first podcast, Part I, covers her experience with hospitals and the challenges they face related to reductions in reimbursement and the evolution of care delivery. In Part II, Powers will talk about how hospitals have responded to these changes and offers up suggestions about how they should position themselves in the coming decade.

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Welcome to The Powers Report Podcast. I am your host, Janis Powers. The show brings you candid, unique and data-driven perspectives on the health care industry. I believe that any solution that is going to positively impact the American health care system has to satisfy two major criteria: financial viability and behavioral incentive alignment. In other words, access to high quality care can only be achieved if we can afford it, and if we behave in ways that optimize our health. Please subscribe to our show on iTunes or on your preferred podcasting platform and connect with us on social media. Again, this is Janis Powers, and welcome to The Powers Report Podcast.

This show is the first of a two-part series about a critical aspect of the health care system that seems to fly under the radar: hospitals. It’s an aspect of the industry that needs significant change but is probably the most resistant to it. I know the subject of hospitals isn’t the “sexiest” topic in health care. It doesn’t have the zing that blockchain or AI or IOT has, that is for sure.

But we have to talk about hospitals because they spend a lot of money. In 2017, the US spent $3.5 trillion on health care (1). A third of those dollars, over 1.1 trillion of them, was spent by hospitals. In comparison, only about 10% of the spend went towards drugs. We hear a lot more in the news about drugs because most Americans take at least one prescription medication a day. But big money is spent by hospitals and given the cost pressures in the industry, we need to focus on making sure the big spenders are operating as efficiently as possible.

The issue is so important, that I am dedicating two shows to on the topic. In this podcast, I’ll outline my experience with hospitals, and talk about some of the reimbursement and operational challenges they’re facing. In the second half of the series, I’ll talk about how hospitals are reacting to these changes and then offer up some suggestions about what I think they should be doing.

I like talking about hospitals because I’ve spent my career consulting to hospitals and other providers, particularly ambulatory surgery centers (ASCs). I started as a strategy and operations consultant with Deloitte in 1995. I have worked all around the country and have served pretty much every type of hospital and hospital system, including integrated delivery systems, for-profit systems, not-for-profit systems, academic medical centers, rural hospitals, etc.

My work related to delivery system optimization. That’s consultant-speak for making sure that money is spent as efficiently as possible to ensure that patients flowed through the system in a way that provided them with access to the best possible service. As a result of this work, I have familiarity with the entire continuum of care – from the moment a patient accesses the system to make an appointment, all the way through their discharge to skilled nursing, or rehab, and back to their home.

I’ve analyzed every department in a hospital, including the emergency room, inpatient units, surgery, pharmacy, lab and radiology. I know how these departments best work together from a facilities perspective because I worked for an architectural design firm that specialized in health care while I was in college. I majored in architecture at Yale and went on to get an MBA and a Master of Architecture from the University of Michigan. I was able to combine the architecture and business education at Deloitte in the mid-1990s because lots of hospitals were merging. We helped bring the systems together.

So that’s the long-winded way of saying that I have a strong interest in helping hospitals evolve because I know about all the fantastic work that they can do.

But things have changed over the years and unfortunately, hospitals really haven’t. They are dealing with two major issues. The first is reductions in reimbursement and the second is the evolution of care delivery. I’ll talk about both, how hospitals have reacted, and what I think they should be doing.

On the reimbursement side, it should come as no surprise that the rates that hospitals are being paid have been decreasing. About 45% of hospital revenue comes from Medicare and 15% comes from Medicaid. These two government programs account for 60% of hospital payments (2). The Centers for Medicare & Medicaid (CMS) has been under pressure to control health care spending and they’ve come up with some interesting ways to do it.

These tactics, which have the goal of lowering costs and increasing patient outcomes, have been a real challenge for hospitals to handle. There are a lot of programs, they continuously change and some of them just don’t work. So hospitals have been sort of running at a standstill because they have to comply with all of these new rules and regs in a heads-down way. It’s made it hard for them to pull up and make the strategic changes they need so they can evolve as health care evolves.

So let’s talk about some of these programs.

First are rate reductions. CMS typically increases payments to providers every year, based on a complex formula that takes myriad factors into account including local market wages, market composition and the type of care that a provider delivers. But there’s also inflation. If Medicare’s increases are lower than the rate of inflation, then Medicare is de facto cutting payments to providers. That alone, over time, can be problematic (3).

More cuts come in the form of penalties. If hospitals don’t hit certain targets, CMS cuts payments. As noted, CMS has taken the reporting requirements to epic levels, which adds a lot of stress to hospital operations. The American Hospital Association, which is the main lobbying arm for US hospitals, calculated that it costs a hospital $1,200 per admitted patient to comply with regulatory requirements (4).

The Hospital Value-Based Purchasing Program measures metrics like mortality, complications and infection rates (5). Some of these requirements are essential, especially those related to patient safety. But some of the measurements, like patient experience, are very subjective and can unfairly penalize hospitals for reasons that are out of their control.

One value-based care program worth discussing is the Hospital Readmissions Reduction Program (HRRP) (6). In this program, hospitals take a cut to reimbursement if they readmit certain types of patients, like those with Chronic Obstructive Pulmonary Disease (COPD) or those who experienced heart failure, within 30 days. The intent is to make sure that hospitals don’t discharge patients too quickly. Hospitals get paid a designated amount to treat a patient, depending on the condition. If a patient has open heart surgery, the hospital will get paid a certain amount. If the patient is discharged too early and then comes back, the hospital will get paid again, albeit at a different rate. There are certainly cases where this happens, and offending hospitals are double-dipping and driving up the cost of care. And of course, they are also sacrificing the health and well-being of their patients.

The problem with the law is that it is hard to determine who is at fault for the readmission. If the hospital aggressively discharges patients before they are completely well, the hospital is at fault and should be penalized. If the patient goes home and then doesn’t follow prescribed orders – like eating well, resting, not smoking and/or not properly cleaning wound sites, the readmission may be largely their fault. But the hospital gets dinged.

Then there’s the fact that some patients return to environments where a healthy recovery is incredibly challenging – like if they live in unsanitary conditions, have mobility problems or don’t have family or friends to help at home. That, in a way, is society’s fault. But the hospital gets dinged. Not surprisingly, the hospitals that consistently get reimbursement cuts under the HRRP program are those located in the urban core that provide charity care or serve a low-income population.

The HRRP program is considered a “value-based care” program, and there are other types of programs that have been developed as a means to improve outcomes and reduce spending. The current fee for service (FFS) model pays providers for each episode or encounter. That creates incentives to drive up utilization by ordering tests and doing surgeries that may not be needed but for which providers receive payment.

In value-based care, providers create a bundle of services that are typically required to address a certain health condition. Starting with the Obama administration, CMS made a major push to roll out value-based care programs for a variety of conditions. The Trump administration has been less enthusiastic about value-based care and has pulled back on programs, most notably for Coronary Artery Bypass Grafting (CABG), or open-heart surgery. Nonetheless, some bundled payments, which do cut down on utilization, are being used in the industry – just not at the scale that was expected.

The upshot of all of this is that there’s been a lot of churn and a lot of expense put forth to prepare for a value-based payment world. It just hasn’t happened and it’s not going to happen at an institutionalized federal level. There are great ideas about standardization that value-based care models can encourage. But health care is hyper-local and it’s hard to administer patient care models for each of the 5,262 community hospitals out there.

On top of that, it’s a real challenge to figure out what good outcomes are supposed to be, and that needs to get nailed down so providers can get paid fairly. Yet maybe the biggest problem is that the current IT systems in hospitals – the electronic medical records – weren’t built to support value-based care, bundled payment models. They were built for FFS payments, so the actual processing of reimbursement for value-based care is an operational nightmare. I think we’ll see mutations and small programs for value-based care, but other payment models are going to take over.

Like Medicare Advantage.

The federal government outsources administration of the Medicare program for about a third of Medicare enrollees to private insurers as another way to control costs. Through Medicare Part C, also known as Medicare Advantage, the government pays private insurers a flat fee per enrollee. The insurer then “manages” the care of the patient. Any costs that are not incurred on behalf of the patient go to the insurance company. It is a shame that the feds can’t implement such cost controls on their own, thereby saving Medicare and taxpayers money. Instead those savings go to insurance companies.

But Medicare is just too big for the feds to manage on their own. This should be a real eye-opener for anyone who supports a Medicare-for-All program. If the government can’t manage the program now without the help of private insurance companies, how are they going to do it if the program expands?

Given all these mechanisms to reduce reimbursement to hospitals, the AHA has determined that American hospitals are getting significantly underpaid by the government. Their estimate indicates that in 2017, US hospitals were underpaid by $ 76.8 billion. And it’s going to get worse.

Moving now to some of the issues impacting hospital operations, we have to talk about the shift to outpatient care delivery. Outpatient care, in simple terms, is care that doesn’t require a 24-hour stay. In the past, a patient who underwent something like a hernia repair would stay in the hospital for a day or so. Now, most patients can have the surgery and go home the same day.

The growth in outpatient care has been a function of new technologies, new medications and clinical standardization that have made delivering care in the outpatient environment safe and effective. As a result, payers have been increasingly interested in reimbursing for this care because it’s cheaper and provides, in many cases, the same level of quality that an inpatient procedure can offer.

The shift to outpatient care is reflected in the dollars hospitals bring in for care (7). In 1994, 28% of hospitals’ gross patient revenue was attributable to outpatient cases. In 2014, it was 46%. Today, it is over half a hospitals’ revenue. That means that hospital campuses are providing a lot of care that requires less than 24 hours to deliver.

With the rise of outpatient care has come the rise in businesses that compete with hospitals to deliver outpatient care. These businesses don’t have to provide the major physical overhead that hospitals have to offer. They don’t have to provide all the emergency care – facilities, equipment and staffing – mandated by CMS that hospitals must offer. It’s just cheaper for many of these organizations to provide outpatient care.

Organizations that deliver dialysis services are a good example. A lot of this is done in outpatient sites sprinkled throughout the community. There are free standing radiology sites that offer an array of exams, from simple X-rays to MRIs. Some injections and therapies that used to require a short inpatient stay can now be done in a physician’s office. But the most consequential shift relates to outpatient surgery.

Many outpatient surgeries can be performed at ambulatory surgery centers, or ASCs. It’s important to note that there are important regulations in place to ensure that outpatient surgeries are safe. And not all patients can qualify, based on their relative health, as well as the complexity of the surgery. In any case, the shift has been significant and more and more cases are being approved to be done in an outpatient environment.

ASCs are free-standing, independent legal entities. A hospital can own all or part of an ASC, but the ASC is not a department of the hospital. ASCs have their own profit and loss statements. And the profits they generate go to its shareholders, which can be individual doctors or, as I mentioned, a hospital.

ASCs, when operating well, can typically deliver outpatient surgery at a much lower cost than what can be performed in a hospital. For one thing, ASCs don’t have the significant overhead that hospitals have because they are only performing outpatient surgeries. And since ASCs can be set up as profit generating entities, the parties that operate the ASCs focus on profitability – both increasing revenue and controlling costs. Physicians are incented to refer cases to the sites, respect the OR schedule, operate efficiently and encourage clinical and administrative staff to act in kind.

Payers are starting to look at the costs to perform, say, a knee replacement in an ambulatory surgery center and compare it to the costs to do the same thing in a hospital. As a result, rates that hospitals are being paid for outpatient care are being pushed down. CMS has been decreasing reimbursement for outpatient cases for years. Now they are considering “site-neutral” payments, which would mean that an outpatient case – whether it’s done in a free-standing, lower cost environment or at the hospital, with its higher overhead and expense structure, would get paid at the same rate. Hospitals are fighting this tooth and nail, and there’s some legitimacy to their claims.

So…how are hospitals reacting to these pressures? Not all that well. And I will talk about them in Part II of the Let’s Go to the Hospital podcast…In the meantime, please take stock of your personal health and do what you can to be as healthy as you an be.

This is The Powers Report Podcast. Please subscribe to our show and please follow me, Janis Powers, on social media. We will be featuring listener questions, comments and suggestions on future podcasts. Please see our website at powersreportpodcast.com to submit questions and ideas on the Contact page. I look forward to hearing from you. Thanks so much for listening!