Hospital losses on Medicare outpatient services may be overstated because many hospitals may be re-allocating inpatient costs to their outpatient ledgers, according to a memorandum to lawmakers from HHS' inspector general's office.
The memorandum, dated July 13, surfaced in Washington healthcare circles last week. The memo, which Modern Healthcare obtained last week, may become fodder in the battle against giving hospitals and other healthcare providers a third consecutive year of financial relief from the Medicare and Medicaid spending limits imposed by the Balanced Budget Act of 1997.
The memo also cautioned lawmakers to consider hospital profits on other lines of Medicare business before they grant increases in Medicare payments to hospitals for outpatient services.
Citing figures from the Medicare Payment Advisory Commission, the memo pegged the overall hospital profit margin on all lines of Medicare business at 5.6% in 1999. Hospitals' inpatient Medicare profit margin was 12% that year, while hospitals' outpatient Medicare profit margin was a negative 15.4%.
"In preparing their Medicare cost reports, providers have had a strong incentive to allocate overhead and ancillary costs disproportionately to outpatient services for which payments were made on a cost basis rather than by prospective payment," the memo stated.
That tendency could have artificially widened the gap between inpatient and outpatient profits, according to the inspector general.
Hospital groups were quick to criticize the memo.
"Unfortunately, the IG has oversimplified this to the point of being misleading," said Carmela Coyle, senior vice president for policy at the American Hospital Association. "The real story behind all of this is that we have 34% of hospitals losing money on their Medicare inpatient payment, and 100% of hospitals, every single one, losing money on Medicare outpatient services."
Her comments were made against a backdrop of at least two investor-owned hospital chains reporting strong overall profit growth. Those chains, which combined represent 175 acute-care and psychiatric hospitals, were Tenet Healthcare Corp. (July 16, p. 6) and Universal Health Services (See story, p. 17).
Coyle dismissed the chains' results as not representative of the bulk of the industry, which is not-for-profit.
In a related development, both the Federation of American Hospitals and the AHA signed on to a letter to Centers for Medicare and Medicaid Services Administrator Thomas Scully, who formerly headed the federation, to lobby against a cut in a specific type of Medicare payment for hospital outpatient services.
CMS has yet to implement a cap on "pass-through" payments for new and expensive drugs and medical devices, as was intended when Medicare's prospective payment system for outpatient care began last year. Capping these payments at 2.5% of total Medicare payments for hospital outpatient services, as was the original plan, could reduce the payments by as much as 75% because of the unexpectedly high number of items that would be affected by the cap.
The letter, signed by seven different hospital advocacy groups, asks that CMS provide them with data on the payments so they can better formulate a position on the policy options.
CMS is expected to issue proposed regulations on the pass-through payments later this month or early next month.
"The letter hospitals sent up was real concern over the possibility of cuts," said Herb Kuhn, vice president for advocacy at Premier hospital alliance who signed the letter. "It really does show the real difficulty the Medicare program is having right now in recognizing technology and how to pay for technology."