Marketbasket. Sounds innocent enough, like something you need in a grocery store. It actually has nothing to do with food, although some in the hospital industry may argue that the marketbasket is their bread and butter. In fact, it's a powerful but simple number representing the cost of goods and services purchased by hospitals every year. Medicare uses it to measure inflation and update the reimbursement rate hospitals receive to care for its beneficiaries. The marketbasket update has dropped steadily this decade and now hovers just under 3%.
Until this year, Medicare has undergone few changes in its more than 30-year existence. One exception, a consequence of healthcare costs outpacing inflation in the early 1980s, was a fundamental rewrite of the rule book on how hospitals are reimbursed for their Medicare inpatient costs. Instead of getting paid after the fact for virtually any and all services provided, hospitals now receive a fixed payment, set in advance and based on a patient's diagnosis.
Hospitals that are more efficient and provide services at a lower cost than this prospectively determined amount can keep the difference. The projected increase in the hospital marketbasket index is a key element used to decide what the prospective payment system rate will be.
This year-for the first time since the PPS was established-the Prospective Payment Assessment Commission, which advises Congress on Medicare payment policies, recommended that hospitals receive no marketbasket update to the rates. Congress and the White House quickly piled on without examining the existing market circumstances. Coming on top of the cost squeeze from managed care and other private payers, it's easy to see why the freeze plan has hospitals screaming, "Foul!"
ProPAC's argument that hospitals are making big profits from Medicare inpatient care misses the mark. While hospitals, viewed collectively, do have positive operating Medicare margins, one-third of all hospitals are losing money on Medicare. That is a fact. And it's entirely possible your local hospital could be one of them. The financial impact of a freeze would be devastating to these hospitals that are financially on the bubble. Rural hospitals, which have some of the lowest margins, would be hit harder than most.
While policymakers inside the Beltway find it acceptable to declare that inflation doesn't affect hospitals, the cold economic reality is that the price of goods and services-i.e., wages, medical supplies, food and technology-will rise this year by about 3%.
In comparing the marketbasket increase with the actual PPS update since the inception of DRGs, hospitals have been shortchanged, receiving on average only two-thirds of the inflation costs they experienced in the marketplace. Imagine Congress telling senior citizens that it recognizes their cost of living is going up but that it is only allocating enough for two-thirds of the increase. It wouldn't happen. But in effect that is what Congress is telling hospitals and, indirectly, seniors.
Hospitals as a group are the federal government's biggest contractors. Our margins, even in good years, don't approach those of defense contractors or highway construction contractors.
The government is, in fact, an unreliable partner. While the healthcare system is being squeezed hard by private-sector forces as well as Medicare, at least in the private sector we can negotiate fair rates in a market setting. In Medicare, however, Congress very unpredictably pops up every two to three years and says, "We need $115 billion, so let's cut hospitals." The move isn't driven by health policy. It isn't driven by excessive margins. It is simply driven by the motivation to balance the budget and reduce taxes. Obviously, these are worthy goals, but not when undertaken with a policy blindfold.
If Medicare won't pay its fair share, that puts added pressure on hospitals to look elsewhere to find the money they need to run their day-to-day operations and maintain high-quality care. But with the pressures of managed care, there is no where to go-a fact that seems to be lost on federal policymakers. A freeze attacks the very premise of prospective payment, which is to bring predictability to the system and reward providers who hold up their end of the bargain by keeping costs down.
A freeze is not only unfair policy, it is unnecessary. Congressional leaders and the White House can achieve the same level of savings using a better approach. One way is to delay the update and permanently put it on a calendar year schedule. Following the calendar year is common sense: It would save money in the first year, savings that would compound in succeeding years; it would prove far less Draconian than other cuts and would obviate the need for a freeze; further, it would put hospital updates on the same schedule as physician updates.
Another approach would be to reduce the inflation update on a more gradual path over five years. Under the current freeze proposal, the update would be three percentage points below marketbasket in 1998, but only one percentage point below marketbasket in the years following the freeze. Obtaining budget savings without such a harsh one-year policy seems exceedingly logical.
Because of the continuous cuts hospitals have had to endure over the past decade, many are doing all they can to keep costs down while remaining viable and competitive in an increasingly market-driven environment. For this, they are now being punished with a proposed freeze.
The fact is, the hospital industry can absorb only so many cuts before services will be reduced and quality of care is threatened. You would be hard-pressed to identify a hospital that is expanding staff or increasing occupancy. This is a shrinking system that will shrink faster and more painfully under this policy.
There are far better, less painful ways to achieve the savings needed. A diet is one thing. In fact, hospitals have been on a strict one for years now and with terrific results. Hospital growth rates are way down, facilities are leaner, and quality is up. You could say we have kept the muscle and lost the fat.
A fast-in the form of a freeze-would be far different and far more dangerous. Cutting this deeply into hospitals is begging for big problems down the road in hundreds of communities.
Scully is president and chief executive officer of the Federation of American Health Systems.