On the margins of Medicare

In 2009, not-for-profit community hospitals say the federal government underpaid them by a collective $8.2 billion.

That result—drawn from an exclusive Modern Healthcare analysis of about 1,800 not-for-profit hospital tax forms for 2009—may not surprise hospital executives who have dealt with Medicare reimbursement rates that dipped below average costs in 1997 and have never come up for air.

Increasingly, executives are seeing that $8 billion gap not as a federal lobbying failure, but a personal challenge—a benchmark of sorts to test hospitals' efficiency in the face of dwindling reimbursement increases, an expanding Medicare patient population and the growing reluctance of private payers to absorb cost-shifted Medicare losses.

Brian Walton, vice president and chief financial officer at Baptist St. Anthony's Health System, Amarillo, Texas, says his system has made a strategic initiative out of turning around its Medicare losses—a 9.65% negative operating margin for Medicare patients in 2009.

“No one knows what's going to happen. But one thing that is for sure is, we have to figure out how to provide equal or better quality with less reimbursement,” Walton says. “If we can get to a point where we can break even or make a small margin on Medicare reimbursement, it just sets us up to a better position to transition to whatever that new model will be in the future.”

Baptist St. Anthony's will have to make up about twice as much ground in Medicare profitability as the median U.S. hospital just to break even, although it is by no means alone in posting sizable Medicare losses.

Not-for-profit U.S. hospitals received an aggregate $81.3 billion in Medicare revenue in 2009, according to a Modern Healthcare analysis of new information required to be reported on the Schedule H of the IRS Form 990. The information—based on data on 1,739 not-for-profit, nonfederal healthcare organizations that reported Medicare reimbursements and expenses in 2009—was provided by charity watchdog GuideStar.

The magazine's linear regression analysis of the data plotting each hospital organization's Medicare margin shows that higher proportions of Medicare revenue tend to correlate with lower overall hospital profits.

That result reflects the industry's long-standing position that hospitals are underpaid for Medicare. The American Hospital Association has calculated that hospitals received about 90 cents on the dollar to provide Medicare beneficiaries care in 2009.

Financial ratings agencies regularly cite hospitals' mix of public and private insurance payments as evidence of a hospital's current and future credit-worthiness—even though Martin Arrick, a managing director in the corporate and government ratings division of Standard & Poor's, notes that it's impossible to conclude from payment data that Medicare alone causes the lower profitability.

Correlating lower profits and higher proportions of Medicare revenue doesn't mean Medicare is directly causing profitability problems, he says.

However, the Modern Healthcare analysis of not-for-profit hospital data also found that at least one-third of the 1,739 not-for-profit Medicare healthcare providers that filed a Schedule H in 2009 managed to turn a profit providing care at Medicare rates.

Among the 603 organizations that reported a profit on Medicare patients in 2009, the median Medicare profit margin was 5.54%.

The information comes from line-by-line analyses of hundreds of public tax disclosures included in a new section of the Form 990 called the Schedule H, which was mandated by Congress as a way to enable the public to gauge how charitable not-for-profit hospitals are. Because 2009 was the first year that hospitals had to fill out the schedule, it remains the only complete tax year available to date for analysis by the public.

The data were compiled by GuideStar, which receives its information directly from the Internal Revenue Service and double-checks it internally before posting. The data include only the nation's not-for-profit hospitals, which are considered charities for the purposes of tax law.

Although the number of nongovernment tax-exempt community hospitals was around 2,900 in 2009, the IRS received fewer forms than that because many include information from integrated health systems that often include multiple hospitals on a single tax return.

The Medicare-profitable hospitals on the list include many familiar names, including 466-bed University Hospital in Cincinnati

($18.7 million in profit), 918-bed Johns Hopkins Hospital in Baltimore ($19.6 million) and 1,039-bed Mount Sinai Hospital in New York ($35 million), along with scores of smaller regional hospitals with varying levels of profitability.

North Shore University Hospital is one of the hundreds of healthcare providers that managed to beat the Medicare game in 2009.

The Manhasset, N.Y., tertiary-care hospital, an 812-bed facility owned by North Shore-Long Island Jewish Health System, recorded $378 million in Medicare allowable costs in 2009. (All figures on the Schedule H are listed as estimated actual costs, not the marked-up chargemaster rate).

But North Shore University Hospital also recorded $380.5 million in Medicare revenue, leaving it with a Medicare margin of 0.54%.

Mark Solazzo, executive vice president and chief operating officer for North Shore-LIJ Health System, says having hospitals such as North Shore University focus on Medicare margins is a good exercise because it brings attention to the cost side of operations. For the most part, hospitals can't expect to become Medicare-profitable through changes in revenue, he says.

“When we look out 10 years from now, we know we need to become more efficient. So we are concentrating on improving our efficiency at each hospital and across our system,” Solazzo says.

The task takes on a new urgency when executives take a wider view of the healthcare landscape and see that while Medicare is a primary payer today, its shares of hospital costs and reimbursements are only expected to grow given changes in the demographic and regulatory changes at work.

Hospital groups negotiated roughly $155 billion in cuts to scheduled Medicare rate increases through 2019, and observers across the industry are warily watching to see whether the federal government will make another $123 billion in Medicare cuts between 2013 and 2021 based on the congressional supercommittee's failure to negotiate a package of spending cuts in November (Nov. 28, 2011).

Executives also note that efficiency improvements designed to bring overall costs in line with Medicare reimbursement rates could benefit patients and quality-care goals.

For example, decreasing hospital lengths of stay—a near-universal goal of hospital cost-cutting efforts—can benefit patients by shortening the amount of time they are exposed to medical errors and hospital-acquired infections.

Still, Solazzo recoils at the idea of “managing to Medicare” because it implies that publicly insured patients could receive less-costly treatments while higher-paying commercially insured patients are getting more.

“I ban the phrase ‘manage to Medicare' around here,” Solazzo says. “I hate that phrase. I really do. It sort of leads one to believe that you're trying to provide two levels of care, and that is completely opposite of who we are and how we provide care.”

Walton, the CFO at Baptist St. Anthony's, says his system has adopted an extensive new cost-accounting system to pinpoint which service lines are least efficient while bringing Lean and Six Sigma variability-reduction techniques to bear on hospital process-improvement.

Healthcare officials around the country are increasingly using the techniques to remove variability and errors in clinical and business processes. Walton says it's a strategy that has worked for his departments in the past.

He says that under his watch, Memorial Hermann Healthcare System's Southeast Hospital campus in Houston was able to climb out of Medicare losses to become the system's first facility to post a modest profit on Medicare through Lean and Six Sigma techniques.

After he started at Baptist St. Anthony's, he got his former Lean and Six Sigma expert at Memorial Hermann to help train his new staff. Even with expertise, he knows the path to Medicare profitability won't be easy, as is the case for any healthcare provider.

“It's a pretty big job,” he says. “It could take you multiple years just to get close to it. In this day and age, with Medicare continuing to hold the line or even make cuts, it might almost be impossible. But we are going to strive to do it.”