Hospital CEOs said they have urged the treasurer to collaborate with them on a value-based reimbursement model, but their suggestions have fallen on deaf ears.
“Arbitrary cuts do nothing to address the root cause of healthcare costs,” said Terry Akin, CEO of Greensboro-based Cone Health. “We believe strongly that the root cause of healthcare costs has a lot do with management of chronic diseases, keeping people well and healthy and out of the hospital.”
Donald Gintzig, CEO of Raleigh-based WakeMed Health & Hospitals, similarly said the treasurer’s plan is out of sync with the broader movement of the U.S. healthcare system toward value-based reimbursement. The federal government, state-managed Medicaid programs and large employers have proven that with a “value-based approach focused on helping beneficiaries, state employees stay healthier through plan design, through early interventions—that’s how you really improve health and make healthcare more affordable,” Gintzig said.
Some health policy experts doubt the reference-pricing model will endanger North Carolina’s hospitals. Robert Berenson, a senior fellow at the Urban Institute and a former CMS official, said the treasurer’s plan is “very responsible and generous.” Medicare rates typically cover 92% to 93% of a provider’s cost to care for Medicare beneficiaries. Paying hospitals an average rate of 177% of Medicare should more than cover their costs, he said.
That’s not to say hospitals won’t lose revenue, requiring them to make changes to their businesses. Thanks to provider consolidation in the state creating massive healthcare companies, some hospitals have used their scale to secure much higher commercial rates.
“The hospitals are used to a gravy train,” Berenson said.
In general, North Carolina medical and surgical hospitals are profitable, with operating margins averaging 9.5% in 2017—above the national average of 1.9%, according to Chapin White, an adjunct senior policy researcher at RAND Corp. They also roughly break even on Medicare business, he said. RAND’s data includes critical-access hospitals. Modern Healthcare’s own analysis using Modern Healthcare Metrics found that total profit margins for short-term North Carolina hospitals in 2017 was 11.7%, up from 10.5% the year before. The analysis excludes critical-access hospitals.
But Berenson cautioned that there’s wide variation between hospitals; those already struggling financially and dependent on commercial coverage to subsidize other payers’ rates may be squeezed by the new payment model. However, many hospitals would see “windfall increases in their commercial reimbursements.”
Paul Hughes-Cromwick, co-director of sustainable health spending strategies at Altarum, agreed that hospitals with tight margins would be in trouble if North Carolina’s reference-based pricing model went into immediate effect. But longer term, it is “absolutely” possible for the hospitals to make it on the proposed rates if they become more efficient, he said.
Commercial reimbursement exceeds Medicare and Medicaid reimbursement not because government health program rates are lower, but because hospitals have long been good negotiators, and insurers haven’t been as aggressive as they could be on behalf of the employers they serve, Hughes-Cromwick said.
“I think this is going to change,” he said. “With more transparency and more of these all-payer claims databases and just more awareness (of the variation in payment rates), I think we could be on the cusp of employers—especially large employers—becoming far more aggressive, because it simply doesn’t make sense that they haven’t been.”
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