When the healthcare provider community rings in the new year, it has every reason to break open the champagne. The Medicare reform bill signed into law this month came in a holiday gift basket brimming with a host of goodies for hospitals, doctors and other caregivers, not to mention a landmark prescription drug benefit for seniors.
Health industry lobbyists say it was their coordinated effort to get behind President Bush that ensured the measure's success as well as its rewards for providers. Bush cites the leadership of key members of Congress and the support of groups like the AARP, which stunned Democrats and some of its members when it endorsed the bill last month. Many members of Congress who voted for the bill cite the Bush administration's engagement on the issue as the reason for its passage.
Whoever was responsible for the success of the $395 billion Medicare Prescription Drug, Improvement and Modernization Act of 2003, and whatever debate continues to swirl around it, it's now the law.
"This is it, so let's get on with the work," says Joseph Antos, health policy expert at the American Enterprise Institute. And there's no shortage of work to do.
The CMS, providers and industry analysts continue to pore over the details of the reforms, some of which are still only products of policymakers' imaginations. Those visions must be turned into reality through the development of regulations and their implementation by healthcare players, some entering a wholly remade business terrain.
For example, how effectively Medicare can compete with private health plans, and whether that competition will reduce costs and improve care, won't truly be known until the rules are drawn up, the beneficiaries are enrolled and results can be studied. Between now and then, there are a lot of unknowns.
For providers, the immediate prognosis looks rosy, but if the history of reimbursement is any guide, the basket that now appears loaded with gifts eventually may turn out to be full of lumps of coal. Congress has a way of reneging on promises as year-to-year fiscal needs take precedence. Similarly, not all of Congress' past tinkering with Medicare's basic structure has come to fruition. In 1988, lawmakers passed a plan to give seniors a prescription drug benefit and catastrophic coverage for extended hospital stays, but they were forced to repeal it the next year as seniors vented their anger over high premiums.
Health plans' new role
If the marketplace behaves as policymakers expect and hope, large numbers of seniors will move into private plans for the drug benefit and other perks, including better preventive care.
Under that scenario, hospitals will see more of their revenue come from private plans and less from the federal government. Opinions are mixed on whether that will tilt the bargaining power toward insurers or hospitals, and even if it will happen at all.
Health plans' interest in picking up large numbers of Medicare beneficiaries will depend in large part on the rates they're likely to receive in 2006, and it's difficult to get guidance on that even as roughly $1.3 billion is spent over the next two years pumping up payments to private plans. The insurance community maintains that many Medicare managed-care plans continue to receive rates from the government that are less than 100% of traditional fee-for-service Medicare.
"Are managed-care companies going to be willing to deploy new capital to serve Medicare patients until they see the regulation for 2006 rates?" asks Alec Vachon, president of Hamilton PPB, a health policy consulting firm. "If I'm a health plan, I'm not sending in my plan before 2006 without knowing what I'm going to be paid."
Health plans that do decide to play will play to win, and as they accumulate market share, they also will accumulate bargaining power, Antos and others say. Managed-care plans, in turn, could have a greater ability to set a price when hospitals can't afford to turn away the companies covering more and more of their patients.
Representing health plans in Washington, AAHP-HIAA President Karen Ignagni says it's premature to speculate about rates and negotiations in 2006 and beyond but says the bill includes "significant opportunities for new partnerships between hospitals and insurers. Our membership looks forward to that."
Some experts predict hospitals might end up in better shape vis-a-vis the plans. "Hospitals may have more leverage over (the plans) than they do over the federal government," says Stuart Altman, professor of national health policy at Brandeis University and former chairman of the Prospective Payment Assessment Commission, now known as the Medicare Payment Advisory Commission.
An environment in which plans compete in earnest for Medicare patients "may actually improve hospitals' financial position," Altman says.
Tom Scully, who left his post as CMS administrator last week, says that while the reform bill is kind to the hospital industry and other providers, such generosity may not last in a fiscal climate of rising deficits and growing spending.
"Nothing in the bill is bad for hospitals. ... The next two years will be the happiest time hospitals have had in a while," Scully said in an interview with Modern Healthcare. But if the economy doesn't grow and borrowing continues to multiply, Scully and others say, Congress will pass a deficit reduction bill that could sting providers down the road.
Faced with a choice between raising taxes, cutting benefits to seniors or reducing provider payments, lawmakers will go with the last option before they even consider the other two, many observers agree.
"With a continually rising deficit, we're definitely going to be revisiting the spirit of BBA 1997," Antos says, referring to the Balanced Budget Act that imposed cuts on providers that they called devastating. "Hospitals should be concerned."
Antos and others, including some congressional aides who worked on the bill, say deficit issues could begin to wipe out some of the bill's help to providers as soon as 2005. Specifically, as Democrats work to fill in benefit gaps and both parties make other needed corrections to the bill, costs will grow, as will the need to stem them.
Some expansions of Medicare have grown far faster than initially expected. In 1973, the first year Medicare covered renal dialysis, the program spent less than $300 million on the benefit. Spending for that service now hovers around $16 billion annually.
In addition, the Congressional Budget Office recently estimated that in its second decade, the prescription drug benefit alone could cost the federal government as much as $2 trillion, especially if lawmakers fill the "doughnut hole" in the coverage (See story, p. 30).
More immediately, "hospitals may well end up bearing a substantial part of the costs that might occur in 2006 and 2007" when benefit improvements and deficit remedies require offsetting cuts elsewhere in the program, Antos says.
Under the new law, through 2007 an annual payment increase that keeps full pace with inflation is available to those hospitals that publicly report data on the quality they provide (See story, p. 28). Only once in the past 15 years have hospitals received pay raises that match their cost growth. With more stability in sight, profit margins are likely to get a bump. Later, however, that could come back to haunt providers when Congress hunts for places to cut spending.
"If margins go up, hospitals will end up getting creamed in a big budget bill in the next few years," Scully says.
Reform, not wholesale change
A chorus of policy experts and academics say the bill is neither the beginning of the end of Medicare, as many Democrats and consumer groups argue, nor the holy grail of reform and modernization.
Still, the measure, which congressional negotiators painstakingly debated after their failed attempt to pass similar legislation last year, represents the biggest expansion of the program in its history.
For seniors that means a lot. Even with the "doughnut hole," the oft-told stories of elderly people choosing between drugs and food may begin to subside, especially because most of the assistance is geared toward the lowest-income beneficiaries.
For many healthcare providers, the legislation may not be nearly as groundbreaking. Compared with cost containment in the 1970s, the advent of prospective payment in the '80s and the cuts imposed by the Balanced Budget Act in the '90s, the latest round of Medicare reform is significant but not as likely to transform how hospitals do business, several analysts say. The bill that became law on Dec. 8 "is a beneficiary bill where the others were provider bills," Altman says.
Echoing that sentiment, Steve Findlay, director of research at the National Institute for Health Care Management, a not-for-profit research group affiliated with the national Blue Cross and Blue Shield Association, says that besides pharmacy benefit managers and insurers, the effect the bill has on healthcare "is potentially not as large as" the introduction of DRGs and the physician payment formula known as the resource-based relative value scale.
One provision that eventually could spell trouble for hospitals kicks in when Medicare spending accounts for 45% of general revenue. Analysts estimate the reform bill will bring Medicare spending to 41% of revenue by 2006.
Under the law, once the 45% trigger is reached two years in a row, the president is expected to make recommendations to improve Medicare solvency, which could include revisiting parts of the recent bill that boost payments to hospitals and physicians.
"It's my belief the 45% rule will be triggered," says James Mongan, president of 875-bed Massachusetts General Hospital in Boston. "That will result in further proposals to cut reimbursement."
Scully and others disagree that the provision is something for hospitals to worry about. The 45% trigger could be reached by 2013, Scully says, but the deficit will probably "require action a hell of a lot sooner than that."
As the industry awaits the answers to questions that can't really be addressed until the legislation becomes reality, the CMS that Scully leaves behind faces a monumental set of tasks. The agency will have to create rules and a new infrastructure to accommodate the Medicare Advantage plans that will replace Medicare+Choice. It will have to administer the drug card that takes effect next spring and handle the changes connected with linking quality reporting to payment updates.
Congressional aides predict that Democrats will attempt to fill benefit gaps in the bill starting next year, but most analysts believe there won't be an appetite for revisiting the legislation in the heat of an election year.