I've been troubled for some time that Medicare margins for teaching hospitals are overstated, because disproportionate-share hospital (DSH) revenues are factored in without an offset for uncompensated-care costs and because teaching hospitals receive two-thirds of all DSH payments.
When DSH revenues ostensibly paid for Medicare beneficiary costs that were higher because of a hospital's high indigent patient load, no one challenged the Medicare Payment Advisory Commission's margin analysis. Now, however, MedPAC has explicitly recognized DSH payments as Medicare's contribution to uncompensated-care costs. It has revised the DSH adjustment to serve the broader purpose of protecting access to care for Medicare beneficiaries and low-income patients by assisting the hospitals they use. According to a MedPAC report, these hospitals have not only large uncompensated-care burdens but difficulty in attracting privately insured patients.
MedPAC recommended basing the adjustment on inpatient and outpatient costs associated with these patients, patients in other indigent-care programs and uninsured and underinsured patients as represented by uncompensated care.
Because MedPAC changed its characterization of DSH payments, the commission should change the way it computes Medicare margins. The need for change is urgent, because the current method is obscuring the damage the Balanced Budget Act of 1997 has done to the nation's teaching hospitals. In fact, some policymakers have said that the positive inpatient operating PPS margins for teaching hospitals reported by MedPAC under the budget law show that the law is not contributing to the industry's financial troubles.
Because uncompensated-care costs are not included on the Medicare cost report, an equally valid way to match Medicare payments and costs is to remove the DSH payments from Medicare revenues for the margin analysis. That way, the impact of the budget law on Medicare margins for teaching hospitals is revealed to be much worse than otherwise thought.
An analysis by the Greater New York Hospital Association shows that if post-budget law payment policy had been in effect in 1996, the Medicare inpatient operating PPS margins for teaching hospitals would have been -3.9%, and the total Medicare acute-care margin would have been a distressing -8.6%.
Productivity improvements are unlikely to mitigate this margin; preliminary 1998 and 1999 audited financial statements from GNYHA member hospitals have shown costs are increasing. That is why teaching hospitals have turned to Congress and the Clinton administration to provide budget relief.
Greater New York Hospital Association