Challenges ahead

Health reform had hospital experts cribbing Winston Churchill last week, saying that passage of the final bill was the end of the beginning of the reform process, and not the beginning of the end.

While the politicians in Washington were backslapping and preparing to board jets for Easter recess, hospital leaders were left to ponder a 906-page federal law and the not-entirely convincing budget estimates that leave open many questions.

Among them: Who will provide all the primary and preventive care for 32 million newly insured patients? Will the revenue increase from insured patients make up for the loss of $155 billion in Medicaid reimbursement? Will provisions in the law that work to decrease reimbursement kick in before other newly enhanced income starts to roll in?

The law has more goals and pilots than the Airline Soccer League, including little-noticed changes to not-for-profit regulations; experimental programs to test accountable-care organizations and bundled payment systems; and an overall movement toward integration and away from episodic care.

“This will again challenge us to do more with less. Oh, and by the way, do it better,” said Chris Van Gorder, president and CEO of San Diego-based Scripps Health, lecturing in Chicago to thousands of conference-going hospital executives last week during his first public address as chairman of the American College of Healthcare Executives.

Despite the overwhelming sense that reform will spell more challenges than ever for hospitals, many executives said they were exhilarated to rise to the occasion. “It's a great opportunity. It's a very exciting time, a very challenging time. They're not kidding when they say it's the chance of a lifetime,” said Dave Fish, president and CEO of 102-bed St. Joseph's Hospital, Chippewa Falls, Wis.

Fish compared healthcare reform to other momentous federally driven projects like rural electrification and the construction of the interstate highway system. “You can see how those impacted the quality of life for all people in this country. That same potential is here. Yes, there will be a lot of steps, and potentially some missteps,” he said, “but this has the potential to deal with the access that people have to the healthcare system.”

Many hospital executives agreed that the most significant impact for them is probably the expansion of health insurance to 32 million more Americans than have it today.

Kyle DeFur, president of 772-bed St. Vincent Indianapolis Hospital, the largest acute-care facility owned by Catholic healthcare behemoth Ascension Health, said the law creates an immediate need for executives to think about how to provide the more cost-effective care they've long advocated for: primary and early-intervention care.

“There are not enough primary-care physicians to meet that need today. There needs to be some creative solutions with physician extenders, but also we need more primary-care physicians,” DeFur said. That will put even more pressure on hospitals to find ways to affiliate with physician groups or to hire doctors outright, two trends that have already been building for years.

But along with that comes a need to train patients on how to access the system through those lower-cost routes instead of going to the emergency room, as they've been doing.

Chip Kahn, president of the Federation of American Hospitals, said the law should “rebalance” hospital finances by significantly reducing uncompensated care and the need for cost-shifting charity care to commercial payers.

Managed-care companies have been forced to pay higher rates to keep hospitals open to serve their members, so reducing the cross-subsidies could tame the rate increases that they have been passing on to employers, Kahn said, noting, however, that government insurance programs will continue to underpay providers.

Roughly half of the 32 million newly insured are expected to be covered by the expanded Medicaid, which will now cover patients with incomes up to 133% of the federal poverty line. Medicaid paid 89 cents on average for every $1 of care provided to its patients in 2008, the most recent year for which data are available from the American Hospital Association. The other half of the newly insured will have private coverage, likely offered through the much ballyhooed state insurance exchanges.

Still, it's a wide-open question of how many people will get insurance, even with the subsidies and penalties spelled out in the law.

“The biggest question will be how many people end up with insurance,” said Gary Lieberman, a senior analyst covering healthcare services for Wells Fargo Securities. It's one thing to see Congressional Budget Office scoring, he said, “But how many people will be in these state exchanges? Will the subsidies be enough to get people to take the coverage? It raises as many questions perhaps as it answers, or it raises more.”

In theory, the $155 billion in cuts that were agreed to last summer by the AHA, FAH and the Catholic Health Association will be offset by the increase in insured patients. The reductions over 10 years include $36 billion from Medicare disproportionate-share hospital payments, and the remainder from lower annual increases to reimbursements under the marketbasket adjustment method.

But many hospital leaders are still wondering about the timing.

Gary Newsome, president and CEO of Health Management Associates, Naples, Fla., said having cuts kick in before benefits do would hurt many hospitals with thin operating margins. The industry's lobby groups have been promised that the cuts would be slowed if takeup of coverage fell short, Newsome added.

There are also questions about the tax penalties for individuals who don't purchase health insurance, Lieberman said. If the penalties aren't onerous enough or if enforcement is lax, it might leave more individuals choosing to remain uninsured.

Another theme in the law hospitals must contend with is the overarching drive away from episodic, fee-for-service care and toward integration and value-based purchasing. From the patient perspective, that means the ultimate goal is to have those receiving care having a single registration, a single medical card and a single bill for services, said Richard Pollack, AHA executive vice president of advocacy and public policy.

Pat Fry, CEO of 23-hospital Sutter Health in Sacramento, Calif., said that goal of integration will pose a challenge in places like California, which doesn't now have large multispecialty groups with close relationships to hospitals.

“There is a strong, strong message that Congress wants to see healthcare delivered in a much more integrated fashion, so silos are going to be a thing of the past,” Fry said.

The law does contain some important changes regarding tax-exempt hospitals. Not-for-profits will have to clearly and visibly advertise their financial assistance policies, and must guarantee that they've made every effort to ensure that charity-care patients do not qualify for financial assistance before resorting to means like collections. Not-for-profits must also begin making community needs assessments every three years to make sure their “community benefit” activities are actually justified by the needs of their surrounding communities.

Hospitals must also limit charges for emergency and “other medically necessary care” for patients receiving financial assistance to the lowest amount paid by any insured patient for the same service, excluding gross charges.

Michael Peregrine, a healthcare lawyer with McDermott Will & Emery, said that while it appeared unlikely not-for-profit hospitals could actually lose their tax-exempt status under the law, flouting the law could spell public relations headaches beyond the $50,000 penalty spelled out in the law.

Critically, the law does not contain a “bright line” test that would have defined tax exemption as a function of revenue devoted to charity care, as was publicly discussed during Senate negotiations on the bill. Hospital advocates argued that their worth ought not to be defined simply by free care, particularly at a time when the amount of charity care is expected to drop precipitously as 32 million Americans receive health insurance.

In the for-profit hospital world, investors have already cast a better outlook on investor-owned hospital stocks, said Lieberman of Wells Fargo Securities.

For the better part of a decade, investors have focused on uncompensated-care trends. The periodic negative surprises in this area, often in the form of large accounting charges related to bad debt, have kept long-term, value-oriented investors away from hospitals, he said. While the reform law won't eliminate all uncompensated care, he added, it could reduce it significantly and take away a lot of the volatility from the earnings results of these companies.

Newsome at Health Management Associates said he already has noticed a change in what investors are interested in. “The questions up until this reform became very real and alive in the last few weeks have been about bad debt,” Newsome said. “We're not getting those questions now, so that may be a sign that investors aren't as worried about it anymore."

What do you think?

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