Commercial insurance margins offset rising Medicare losses

Geisinger Health System loses money on Medicare patients who receive care on a fee-for-service basis. Conversely, the 12-hospital system posts a positive margin on the 86,000 seniors enrolled in its Medicare Advantage managed-care plan.

It's not that the care a patient receives from a Geisinger physician, nurse or technician changes based on the reimbursement scheme. Rather, in Medicare Advantage, not-for-profit Geisinger can use the capitated monthly payments that it receives for a large panel of patients to improve overall care.

It can aggressively manage chronic illnesses, follow up with seniors who haven't filled prescriptions, and require primary-care authorization for tests and specialty care that ensures care is delivered in the right setting, said Kevin Brennan, chief financial officer of the Danville, Pa.-based system. Those steps enable Geisinger to lower the total amount of care delivered to its Medicare Advantage patient panel.

As a result, the group generates a profit for the integrated delivery system's insurance arm. “We can deploy more tactics and tools,” Brennan said of the Medicare Advantage population. But for seniors who get less coordinated care of their own accord, Medicare fee-for-service payments typically fall far short of costs, Brennan said.

Hospitals across the country that are moving from fee-for-service to fee-for-value reimbursement schemes are facing similar situations.

Hospitals in aggregate are expected to post a negative 9% margin on their Medicare business this year, according to a little-publicized report in March from the Medicare Payment Advisory Commission, a group that advises Congress on Medicare rates. In 2014, hospitals posted a negative 5.8% margin on their Medicare business.

But for most, they have succeeded in making that up by posting higher margins on their nongovernment reimbursed patients.

“Hospitals are making a killing on commercial insurance,” said Paul Hughes-Cromwick, co-director of the Center for Sustainable Health Spending at the Altarum Institute in Ann Arbor, Mich.

Indeed, as Medicare reimbursement tightened and penalties for readmissions and poor quality kicked into high gear, this cost-shifting grew worse. Margins from commercial payments for the nation's nearly 4,500 hospitals rose to 7.3% in 2014, the highest level in 30 years.

Whether that was due to greater efficiency or higher prices varies from market to market. But as a group, hospitals have been successful enough in “managing to Medicare margins,” a mantra heard across the industry, that those cost-cutting moves have allowed them to significantly improve their margins on their commercial business.

Rates that hospitals receive from commercial payers are 50% above their costs and can be 75% or more higher than Medicare rates, according to the MedPAC report.

Indeed, even though MedPAC found overall margins on Medicare business plunging deeper into the red, it found 302 highly efficient hospitals that made a 1% margin on their Medicare book of business without sacrificing quality.

Investor-owned hospitals, which focus on efficient care to provide a profit to shareholders, also posted a 1% margin on their Medicare business, the report noted. The largest investor-owned hospital chains are HCA Holdings, Community Health Systems, Tenet Healthcare Corp. and LifePoint Health.

For systems overly dependent on government payments, cost-cutting is the only way to survive on Medicare and Medicaid rates.

If six-hospital Mission Health in Asheville, N.C., was running a Medicare margin of negative 9%, “we'd be dead,” Chief Financial Officer Paul McDowell said.

Mission Health's 760-bed flagship hospital derives 70% of its $1 billion annual volume from Medicare, Medicaid and charitable care. It receives only 25% from commercial payers, McDowell said.

Mission Health, which pulls in $1.5 billion annually overall, has worked hard to reduce costs and operate more efficiently while improving patient quality and satisfaction, McDowell said.

Over the past two years, the system has done a much better job of using software to align clinical staffing to shift with patient volumes, and it has standardized medical supplies such as orthopedic implants, resulting in big savings.

The result is a Medicare margin of “only” negative 3.5%, McDowell said. “There's no one silver bullet,” he explained. “It takes a focus on everything.”