The extensive changes to federal reimbursement, the healthcare safety net and insurance regulation anticipated under health reform have left industry executives scrambling to project what will happen to revenue and expenses in the coming decade.
Some, rather than wait, have turned to models that rely on assumptions and estimates to try to answer questions that executives say are central to capital investments and strategic planning. The models attempt to answer questions such as: “What will Medicaid pay hospitals as an estimated 16 million gain coverage through the publicly financed insurer?” and “How significantly will reduced Medicare payments affect revenue, and when?”
The models, released or under development by trade groups, including the American Hospital Association, Greater New York Hospital Association, and Hospital & Healthsystem Association of Pennsylvania, don’t produce reliable projections, but rather a best guess—or many guesses—as healthcare executives themselves plug a number of scenarios into models.
“I wouldn’t hang my hat on the exact dollar amounts,” said Aaron Coley, vice president of decision support for MemorialCare Health System, a six-hospital system based in Fountain Valley, Calif. Nonetheless, the projections are useful for the more general information they offer about what will happen to operating margins, he said.
MemorialCare, using a calculator released by the AHA shortly after the sweeping health reform legislation became law, projects the system’s Medicare and Medicaid revenue will drop by $158 million through 2019, give or take $16 million to $24 million, he said.
Expanded insurance may offset the lost revenue by 25% to 30% during the same period, Coley said, though he said projected gains from fewer uninsured patients include “more crystal ball predictions” than those for revenue cuts under health reform.
Coley said MemorialCare also modeled the potential revenue loss should employers drop private coverage and leave employees to buy exchange plans, one potential market shift not included in the AHA models.
Without knowing how many employers may do so, MemorialCare estimated the revenue it would lose should half of its privately insured employers move workers into an exchange, which executives expect to pay hospitals rates that fall short of commercial plans and closer to Medicare.
The system would lose more revenue each year through 2019 than projected federal cuts for the entire decade. “There’s this huge sucking sound of revenue,” Coley said.
He acknowledged that projections include a number of unknowns but said they remain useful. Projections “help educate and create a rallying cry for why we need to restructure and be more efficient as an industry,” Coley said.
MemorialCare added the AHA projections to its long-term financial plan and has made plans to reduce expenses to offset reduced revenue, he said.
The Ohio Hospital Association, Columbus, also using the AHA calculator, calculates scheduled reductions of Medicare payment to hospitals will squeeze $31.4 million from Ohio hospital revenue in 2011, which begins Oct. 1.
Medicare revenue for the state’s hospitals will drop by $528 million through 2014 and total $4 billion during the first decade after the law passed.
Revenue cuts under the law’s reduction to the supplemental Medicaid payments for the uninsured, known as disproportionate share payments, total another $521 million through 2019.
Jonathan Archey, the director of federal relations for the Ohio association, said such projections are more data-driven and less subjective than estimates for other provisions, such as expansion of subsidized insurance through private market exchanges, which will depend on how consumers and the market respond.
Instructions for the AHA model caution hospitals repeatedly that its two calculators—one for Medicare and Medicaid payment reductions; the other for coverage expansion—include estimates and omit other factors that could affect projections.
“You have to know from the beginning they’re only estimates,” Archey said.
Medicare’s scheduled reductions tied to productivity hinges on estimates and the AHA did not include further potential cuts tied to quality, such as hospital-acquired conditions or patients who land back in the hospital unnecessarily. Projections for expanded insurance coverage rely on estimates by hospitals for what plans sold through insurance exchanges will pay, and the trade group encouraged hospitals to test a number of results.
Meanwhile, the Greater New York Hospital Association will release a model under development to its members for testing in September, which the trade group said will continue to be revised and updated.
Karen Heller, executive vice president of health economics and finance for the trade group, said the early estimates allow hospitals and health systems to make decisions about whether to pursue new payment models under reform, such as accountable care organizations, or other avenues, such as mergers.
The trade group’s model seeks to calculate how individual markets may be affected by health reform.
Among the projections are estimates for the percentage of newly insured Medicaid patients that may exceed hospitals’ existing capacity and estimates using Census Bureau data for the number of workers in small businesses, which may be more likely to drop private benefits, Heller said. Still, the model seeks to project how recurring and far-reaching changes under the law will affect hospitals. More limited changes may be added in the coming years, she said.
“I hit the big ones,” Heller said. “The things I left out did not have large implications for overall savings and financing of the bill.”
