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The estimated impact to Banner as a result of cuts to Arizona's Medicare program is about $140 million annually.
The estimated impact to Banner as a result of cuts to Arizona's Medicare program is about $140 million annually.

Healthcare Market Profile: Phoenix-Mesa-Glendale

Being proactive: Banner tightens belt as Medicaid cuts loom

By Maureen McKinney
Posted: July 25, 2011 - 12:01 am ET

As providers across Arizona brace for deep cuts to the state's Medicaid program, 21-hospital Banner Health has been busy searching out opportunities for cost reduction and savings. The not-for-profit health system is Arizona's second-largest private employer, with 12 hospitals in the Phoenix market, where Banner is based.

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“Because this legislation still provides a fair degree of latitude to adjust the program on an ad hoc basis, there is still some uncertainty and our crystal ball is a bit fuzzy,” says Dennis Dahlen, Banner's senior vice president and chief financial officer. “But the estimated impact to Banner is around $140 million annually. That's a significant amount, and like everyone, we're trying to be proactive and offset that where we can.”

The state's budget includes a Medicaid enrollment freeze for childless adults, scheduled to take effect July 1, and a 5% cut to Medicaid provider payments, effective Oct. 1. That payment cut comes on the heels of another 5% cut that took effect in April, says Laurie Liles, president and CEO of the Arizona Hospital and Healthcare Association.

“Our members are deeply concerned that the cuts could result in up to 140,000 people losing their coverage,” Liles says, calling the looming belt-tightening the biggest issues facing hospitals in Arizona. “It's a huge concern, and we believe that some hospitals will have the capacity to weather the storm better than others.”

Banner Health was able to trim $80 million from next year's budget by eliminating merit increases and by using benchmarking to identify opportunities for increased productivity.

“That got us a head start,” Dahlen says.

The system will try to recoup the rest of the $140 million in annual losses through meaningful-use incentive payments for health information technology and supply-chain utilization improvements. Also, Banner is looking closely at consolidating services such as trauma coverage, particularly in the Phoenix area.

“It's important to offer everything, but we don't have to have everything at every site,” Dahlen says.

Finally, although Banner Health is known for its centralized, standardized approach, several areas—including radiology, pharmacy, dietary and medical staff services—still run independently at each hospital. That represents another opportunity for savings, he adds.

One area the health system is not eagerly pursuing: accountable care organizations.

“The cuts make cost containment models that rely on care coordination more appealing, but not with CMS regulations,” Dahlen says. He called the list of required clinical quality measures “an overwhelming burden” and said the agency's all-or-nothing approach was not feasible.

“That's not the kind of business arrangement we'd accept from anyone else.”

Banner Health is exploring care coordination projects with commercial insurers, he says.

For now, the future of the state's Medicaid enrollment freeze is uncertain. The Arizona Center for Law in the Public Interest has filed a request in the state Supreme Court, seeking to stop the freeze from taking effect. But like Banner Health, the Arizona Hospital and Healthcare Association's other members are looking for ways to rein in spending and bolster efficiency, Liles says.

“My sense is that the cuts provided an added incentive to be more efficient,” Liles says. “They know change is coming, and in an era of shrinking budgets, the need to be more innovative has never been greater.”

For Phoenix hospitals that treat a greater percentage of Medicaid patients, the cuts could have even more critical ramifications, particularly because many of them are already financially distressed, Dahlen says.

“We're concerned about those hospitals because, for them, the reductions will be much more significant,” he says. “The smaller systems that are less exposed to the Medicaid population will probably have to cut back on strategic initiatives because there's just not that much fat left to cut in the Phoenix market.”

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