Having taken off the gloves in bargaining with commercial payers in the last two years, hospitals are shifting their hardball negotiating tactics to a more elusive target: government. The latest example is Michigan's largest safety net provider, the Detroit Medical Center, which last week threw down the gauntlet by announcing significant cuts at its downtown campus and threatening more cutbacks unless city, county and state governments pledge to boost their funding by year-end.
DMC officials said the current restructuring-including closing all services except for emergency and trauma care at its Detroit Receiving Hospital, eliminating all births except high-risk cases at Hutzel Women's Hospital and cutting 1,000 jobs-is expected to save $40 million this year. DMC leaders did not specify the amount of relief they're requesting, saying only that it should amount to a long-term solution.
Another ailing organization, the Barbara Ann Karmanos Cancer Institute, said late last week that it is considering splitting from the DMC as soon as June, which would allow it to receive higher Medicare reimbursements.
President and Chief Executive Officer Arthur Porter said the DMC, which provided $130 million in uncompensated care last year, also carries 25% of the state's load for Medicaid, a notoriously low payer. The DMC has lost nearly $400 million in the last five years.
"We've cut all the fat from our end," said Porter, who has asked government bodies to consider new taxes, changes in public reimbursement and creation of a public healthcare authority as ways to generate money to support uncompensated care. "At the end of the day there needs to be some public support of this public mission."
Similar brinksmanship occurred earlier this year in Florida, where 1,331-bed Orlando Regional Medical Center notified the state it intended to close its Level 1 trauma center, the only such facility within 50 miles, unless surrounding counties ponied up nearly $6 million to compensate on-call neurosurgeons there.
Officials at both institutions deny making idle threats.
"I get the impression that some people think this is a game, a big bluff," DMC Chairman Dick Gabrys said. "We're telling the world what the realities are. . . . What we've threatened to do is only risky if you're not serious, and we are."
Keith Crain, chairman of Crain Communications Inc., Modern Healthcare's parent company, was named a member of the DMC board of trustees in April.
It's iffy whether tough tactics will work the same magic with state and local governments as they have with health plans, which coughed up big rate increases to hospitals while themselves enjoying three straight years of double-digit premium growth.
For one thing, public coffers are strained because of growing healthcare costs and flagging revenue. And unlike health plans, which respond only to the whims of their clients, governments have numerous constituencies, including taxpayers who might not want to foot the bill for higher healthcare costs.
Historically hospitals were lightweights in the bruising world of negotiations. But fresh off a consolidation binge in the late 1990s and stinging financially from Medicare cutbacks, hospitals honed their moves with commercial health plans. In 2000, California systems such as Sacramento-based Sutter Health set an example by using their market leverage to negotiate systemwide deals with managed-care companies. The same tactics were adopted by hospitals in other markets, many of which have enjoyed double-digit rate hikes that have boosted industry profitability.
Providers learned to turn public sentiment to their advantage by threatening to reduce access. "The initial negotiating round starts with publicly aired conflicts and confrontations with payers and contract termination threats," said Martin Arrick, an analyst with Standard & Poor's.
The tactics used by hospitals around the country to extract rate increases from health plans have been so similar that some insurers believe providers have received advice from a single source. Blue Cross of California spokesman Michael Chee asserted that the tactics may be traced to a "providers' game book" produced by the Health Care Advisory Board, a Washington-based consulting and research company that contracts with 2,100 healthcare organizations.
Chee said the document is a step-by-step plan for negotiating managed-care contracts to obtain higher reimbursements. "What we saw was all these hospital systems repeated the same model. There was a `take it or leave it' strategy throughout these tactics," Chee said. He said the same language, advertising and public relations strategies and negotiating tactics were followed, although no hospital or health system has ever admitted knowing about the playbook.
Some hospital officials interviewed for this story, including Sutter spokesman Bill Gleeson, denied knowledge of any such "game book." Gleeson said health plan consolidations in its Northern California market-which now has five plans down from 20 in the early 1990s-as well as shrinking reimbursements from Medicare, MediCal and managed-care companies "took us to the brink."
"We absolutely need a 5% margin every year if we are going to keep pace," Gleeson said. "We began to take a fairly straightforward approach with health plans and communicate candidly our reimbursement needs and contract terms. That has been our approach."
Health Care Advisory Board Managing Director Chas Roades said the playbook came from a 1995 study, "Emerging From Shadow," which explored the evolution of the managed-care market and how hospitals could compete more effectively.
He said the key finding was that with the broadening of consumer choice, hospitals should market directly to consumers because they seldom had to worry about being excluded from health plans. Roades said one reason the study remains popular is that hospitals and health systems have greater negotiating leverage now.
But although health plans including those in the Blues are enjoying higher profits (See related story, p. 10), some industry observers said double-digit rate increases from commercial payers can't last much longer. The DMC's plea for public assistance could represent the wave of the future, as safety net institutions seek to protect their charitable missions.
"We're now at the point that the traditional cross subsidies (from private insurers) are no longer willing to support the public mission of DMC," Arrick said. "On the one hand, you can say it's brinksmanship, a negotiating tactic. But it's not something they're doing lightly. . . . There is legitimate concern that the safety net is broken."
Gabrys, a vice chairman at Deloitte & Touche, Detroit, said last week's announced measures are a stopgap and not, as he called it, "the fix." He said the $130 million DMC spends on uncompensated care "untenable."
"Quite honestly all this does is slow the bleeding and buy us and the government a little time," Gabrys said. While dialogue with public officials has gone on for years, Gabrys said, "We made a very conscious decision to go in the open with this because if we didn't come up with a fix, we would go out of business."
DMC's lobbying has garnered at least the attention of government officials, if not a firm commitment. On a visit to Detroit earlier this month, HHS Secretary Tommy Thompson named a deputy, Andrew Knapp, to help find solutions to the city's health-funding problems.
But extracting commitments from public organizations could be trickier than garnering price hikes from commercial payers. For one thing, the indigent patients served by safety net providers can't vote with their pocketbooks as members of private health plans do.
Meanwhile, profitable services that padded the incomes of safety net facilities are being shifting to new competitors, such as physician-owned specialty hospitals and surgery centers.
"We're leaving exposed certain core missions that community hospitals have historically covered. The question now is: Who's going to pay? I don't see state and local governments stepping up," Arrick said, noting only a few exceptions like Chicago and Denver, where local governments have assumed a greater share of financing public health infrastructure.
But Noah Rosenberg, a Beverly Hills, Calif., healthcare lawyer specializing in managed-care contracting with the firm Rosenberg & Kaplan, doubts there's a trend of urban hospitals hitting up governments for financial relief.
"Hospitals realize they aren't going to get help from the federal or state government because they're facing budget deficits and have significantly less money available for trauma and indigent care," Rosenberg said. "These entities have no money and hospitals can't rely on them. So shouldn't the insurance community, which has seen record profits in recent years of increased premiums, be partly responsible for keeping our doors open? Insurance is one of the strongest sectors in the economy."
One place where government has stepped up is Florida, where escalating medical malpractice insurance premiums drove all but eight neurosurgeons out of the Orlando market, leaving Orlando Regional understaffed, said John Bozard, senior vice president of Orlando Regional Healthcare. Bozard said Orlando Regional hopes to maintain the Level 1 trauma center. "But we've been in the trauma business for 20 years without asking for a dime," he said.
Bozard said the hospital will fund one-third of the nearly $6 million needed to compensate the physicians on call, but five area counties must produce the rest. Orlando Regional's home county, Orange County, has voted to fund its one-third portion, and Bozard said at least two other counties have made verbal commitments.
"We're pretty confident everyone will come to the table," he said.