Feeling the pressure

Many hospitals that expect to see less from Medicare starting next month will spend less themselves under efforts to slash costs. Executives say they'll have no choice as pressure to curb healthcare spending grows.

Medicare, the nation's single largest insurer, will reduce reimbursement by 2% in April as part of sweeping cuts known as the sequester adopted under a 2011 deal to reduce the nation's deficits. That Medicare hit adds to others under the Patient Protection and Affordable Care Act and January's hasty agreement to avert a collision of tax hikes and federal spending cuts. January's deal delayed a steep cut to Medicare physician reimbursement and helped cover the cost of that temporary fix with further cuts to hospital spending.

“It was not welcome and it's not going to be easy to live with,” said Sister Carol Keehan, president and CEO of the Catholic Health Association, which represents U.S. hospitals affiliated with the Roman Catholic Church.

Hospital executives in Chicago last week for the American College of Healthcare Executives' 2013 Congress on Healthcare Leadership said they would seek to wring costs to offset the lost revenue and prepare for further pressure on revenue from public and private payers.

Iowa Health System budgeted for the upcoming Medicare pay cut, William Leaver, president and CEO of the system, said in an interview with Modern Healthcare.

The two-state system began more than a year ago to target costs, he said, an effort that analyzed clinical productivity and variation for waste. The West Des Moines-based system will also review employee benefits and sees growth as an opportunity to reduce overhead costs, he said. The system owns or manages 23 hospitals. Leaver said the system will seek to reduce its expenses by 20% in the next three to five years. The system reported $2.3 billion in total expenses in 2011.

Many other hospitals also factored the deficit deal's 2% reduction into budgets. Congress agreed to the Medicare reduction under the 2011 Budget Control Act, which included $1.2 trillion in federal spending cuts if lawmakers failed to draft an alternative plan by November of that year. Lawmakers did fail, and hospital executives said last year they would prepare for millions in dollars of lost revenue.

Catholic Health Partners estimated the annual toll at $23 million. Baylor Health Care System, Dallas, estimated the cuts would cost the organization $12.5 million a year. Scripps Health, San Diego, projected $10 million a year in lost revenue.

Chris Van Gorder, Scripps' president and CEO, said in a Modern Healthcare interview that the system's ongoing efforts to improve its processes would be adjusted to offset the lost revenue, a move that will force the four-hospital system to “dig in a little harder, faster than we had planned.” Scripps will seek to spare workers, he said. “We can't guarantee everybody their exact job in our system, but there is probably a job for everybody. So if their job gets eliminated as a result of no fault of their own, we'll find another job for them in the system.”

For Yale New Haven (Conn.) Health System, April's drop in Medicare pay and proposed state cuts to Medicaid come as the system is pursuing a costly strategy to prepare to shift more care toward managing chronically ill patients and promoting health. The system's investments—including more primary-care doctors, new information technology, capacity for actuarial and clinical forecasting—will cost $650 million, Nancy Levitt-Rosenthal, senior vice president at Yale New Haven's Greenwich (Conn.) Hospital, told attendees of the ACHE meeting. Officials have simultaneously launched a five-year effort to wring $500 million from expenses, she said.

Aggressive efforts to slash spending began with the recession and have continued as executives prepare for lower reimbursement rates and adjust to healthcare reform.

Michael Rowan, executive vice president and chief operating officer of Catholic Health Initiatives, said during an ACHE conference session that the system would reduce its operations by $2 billion over five years, or roughly 5% of its annual budget. He said savings would come as the system seeks to standardize, centralize and reduce variability. Bob Strickland, senior vice president of performance management for CHI, said the system found strategies at member hospitals that could be deployed across the system to improve performance.

But healthcare cannot succeed on cuts alone, said Joseph Swedish, the outgoing head of Trinity Health who will become CEO of insurer WellPoint. Consumers increasingly look for greater value from providers and insurers, he said. “You're going to have to reinvent yourself.”

—with Merrill Goozner and Maureen McKinney