If hospitals are feeling financial pain, it is more the fault of private payers negotiating tougher contracts than Medicare's stingy payments, a congressional advisory panel reported last week.
Hospitals, however, responded that Medicare still isn't covering as much of its costs as the private sector and that Medicare payments need to be increased.
The Medicare Payment Advisory Commission attributed dropping hospital margins in 1998 and 1999 to reduced payment updates from Medicare and tighter reimbursement from private health plans. MedPAC said overall hospital margins have fallen to 2.7% in 1999 from 6% in 1997.
Though hospitals continue to point the finger at Medicare as the chief culprit for their slump, MedPAC's analysis showed that private payers reduced the percentage of inpatient costs that they cover for their enrollees by 4 percentage points from 1997 to 1998. Medicare reduced its proportion of costs by only 1 percentage point during the same period.
That decline resulted from the Balanced Budget Act of 1997, which sought savings of $112 billion over five years by restraining the growth in provider payments.
Private payers and Medicare each represent about 40% of hospital revenue.
Jack Ashby, a MedPAC research director, said private payers are responsible for four times the drop in hospitals margins than Medicare.
In 1998, private payers still covered more of their patients' costs than Medicare (See chart). Medicare's share had grown, however, to as high as 103.6% in 1997 before dipping to 102.6% in 1998. It was 89.4% in 1993.
Private payers, in contrast, were in steady decline during the same period. In 1993, private payers covered 129.3% of their patients' costs. Ashby referred to this time as the "great era of cost-shifting."
By 1998, that percentage had fallen to 113.6%. During a "great era of managed care," Ashby said aggressive managed-care negotiations squeezed lower prices out of hospitals.
Before enactment of the Balanced Budget Act of 1997, private insurers tended to pay more when Medicare was less-generous, and Medicare payments picked up when commercial health plans squeezed payments, Ashby said. But when the budget law took effect, both the private and public sectors were squeezing providers.
"It's the first time in the history of the program we have substantial pressure from the private sector at the same time as we have substantial pressure from Medicare," Ashby said.
That sentiment was echoed by Carmela Coyle, the American Hospital Association's senior vice president for policy.
"Historically, Medicare had been the safety valve," Coyle said. "Now we've got the private sector, Medicare and Medicaid all declining."
Hospitals reiterated their call for better Medicare payments. "The government is shifting costs to the private sector, and (MedPAC) is saying the private sector's to blame," said Thomas Scully, head of the Federation of American Health Systems.
Despite the pressures on providers, they are only raising prices by about 3% in 2000, while health insurers are charging employers more than triple that amount, according to a survey released earlier this month by Watson Wyatt Worldwide, the Washington Business Group on Health and the Healthcare Financial Management Association.