Hospitals facing Medicare payment cuts totaling $440 million this fall have begun scouring budgets for cuts of their own. But they may not find enough there to satisfy one major ratings agency that says not-for-profit hospitals’ outlook remains bleak.
Medicare drop exacerbates not-for-profit outlook
Starting in October, the beginning of the federal fiscal year, Medicare will pay hospitals less for hospitalized patients than it did in 2010. The scheduled 0.4% reduction to inpatient payments, Moody’s Investors Service said in a report last week, is “an unambiguous credit negative for not-for-profit hospitals and a key driver to our maintaining a negative outlook for the industry.” It’s also the first time in more than a decade that Medicare similarly reduced hospital rates, said Moody’s, citing the 1997 Balanced Budget Act, which strained hospital finances and weakened credit ratings.
Mark Pascaris, a vice president and senior analyst for Moody’s healthcare team, said the stress on revenue is expected to continue after 2011 and Medicare rates will grow more slowly than in prior years—or not at all. Medicare may make further rate cuts, he said.
“We’re not anticipating we’re going to see much in the way of increases,” from Medicare, said Steven Glass, chief financial officer for the Cleveland Clinic. Glass said that leaves the system’s 11 hospitals to grapple with stagnant Medicare payment rates as the economy continues to struggle and operating costs rise. “Certainly, we are experiencing inflation,” he said.
Hospitals and health systems say the October drop in Medicare rates has them looking to make up lost revenue with efforts to curb expenses or increase payments elsewhere.
To maintain its margin, Glass said the Cleveland Clinic regularly evaluates its costs and capital spending, and Medicare’s reductions will increase the pressure on operating performance.
Executives at the 610-bed Robert Wood Johnson University Hospital project that lower Medicare rates through 2014—when Medicaid expansion and newly created insurance exchanges are expected to increase coverage—will squeeze 0.5 percentage points annually from operating margins, said Paul Storiale, the New Brunswick, N.J., hospital’s chief financial officer. The hospital reported an operating margin in 2009 of 3.7%.
The hospital has not yet completed its 2011 budget, when Medicare’s rate cut will reduce revenue by $5 million, he said. However, executives have scaled back capital spending plans and will move more slowly to replace technology, he said.
Storiale, also the hospital’s senior vice president of finance, said ongoing efforts to reduce hospital expenses and increase revenue have already tackled the easiest options and results will grow more difficult to achieve.
SSM Health Care, which owns 14 hospitals in four states, expects to see Medicare revenue drop by $1.8 million its next fiscal year, Dixie Platt, senior vice president of mission and external affairs for the Catholic system, said in a written statement. The St. Louis-based system has not completed its 2011 budget, and “we expect to overcome the reduction through cost management and process improvement,” Platt said. The SSM fiscal year begins Jan. 1, three months after the start of the federal fiscal year.
The 0.4% reduction comes as a result of lower Medicare payments included in the Patient Protection and Affordable Care Act—which are expected to save the government $150 billion over a decade—and additional cuts from a 2007 law that calls for Medicare to offset payments deemed excessive after the CMS reworked its hospital billing in 2008. The 0.4% reduction is expected to save Medicare $440 million.
Medicare’s rate drop may be a key reason why analysts say the not-for-profit hospital sector’s outlook is negative, but it’s not the only one, the Moody’s report said. Other initiatives to prevent overuse of medical services, waste and fraud are expected to reduce Medicare spending to providers, including hospitals, by another $500 million, Moody’s said. The economy remains weak. The safety net insurer Medicaid is expected to reduce hospital payments. Rate negotiations with insurers will likely grow more difficult.
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