Three different communities, many reasons why Medicare payments are higher

How much the Medicare program pays hospitals for their services varies widely, driven by a host of factors.

Academic medical centers receive much higher payments because they provide graduate medical education. Safety-net hospitals receive higher payments for treating indigent patients. Patients’ acuity, the area wage index, outlier payments and patient migration patterns also play a role.
 
Modern Healthcare identified three Census Bureau statistical areas of interest based on Medicare data that indicate they receive some of the highest payments in the Eastern U.S.: Baltimore, Burlington, Vt., and Charlottesville, Va. They’re decidedly different communities treating very different patient populations with different socio-economic factors to consider, underscoring the reasons for their higher-than-usual Medicare rates.
 
Baltimore’s place on the list is likely explained by the fact that Maryland hospitals operate under a unique, global budgeting system in which the rates they receive from all payers are established by a state commission. Unlike in other states, Medicare payments to Maryland hospitals are more on par with those of commercial insurers.

Burlington and Charlottesville are similar to each other in that large academic medical centers dominate their inpatient care and draw patients from expansive rural areas that surround the cities. Medicare pays teaching hospitals more to cover expenses related to staffing residents and interns.

“The academic impact on rates from a Medicare perspective is pretty significant and likely one of the drivers pushing Vermont and Charlottesville to the top of the list,” said Jeff Leibach, a director with Navigant.

Baltimore-Columbia-
Towson, Md.
REIMBURSEMENT PER MEDICARE DAY: $3,266
POPULATION: 2.8 million
MEDIAN AGE: 38.5
MEDIAN HOUSEHOLD INCOME: $80,469
BELOW POVERTY LINE: 10.1% 

Sources: U.S. Census Bureau, 2018 core-based statistical area data; Modern Healthcare Metrics

It shouldn’t come as a surprise that any city in Maryland shows up as an outlier when it comes to Medicare payments to hospitals. Hospitals there have operated outside the typical payment paradigm for decades. 

Maryland hospitals participate in an aggressive global budgeting system in which their total revenue is fixed, a model that’s been shown to lower volumes and mortality rates, said Bob Atlas, CEO of the Maryland Hospital Association.

In exchange for shouldering the risk of fixed revenue, Medicare and Medicaid reimburse Maryland hospitals at higher rates than in other states. As of this year, those programs pay just 7.7% less than commercial payers—a much smaller differential than in other states, Atlas said.

“That’s the bargain that’s been struck: Hospitals can get more per-unit revenue from Medicare and Medicaid in return for taking on substantial risk,” Atlas said. “We’re seen as a model for the nation.”

Like in other states, the rates Medicare pays are adjusted based on a number of factors, perhaps the biggest one being extra money for training interns and residents. Baltimore has two prominent academic medical centers: Johns Hopkins Health System and the University of Maryland Medical System.

Johns Hopkins has a large teaching program with upward of 800 interns and residents, and the cost of that is embedded into its Medicare base rates, said Ed Beranek, Johns Hopkins’ vice president of revenue management and reimbursement.

“So essentially all payers or all patients coming to our hospital have a portion built into their charges that helps pay for the teaching of those interns and residents,” he said.

In states other than Maryland, Medicare is the only entity that reimburses for graduate medical education. In Maryland, commercial payers and Medicaid contribute their fair share of that cost, Beranek said.
 
The University of Maryland’s and Johns Hopkins’ hospitals also tend to draw higher-acuity patients with more complex conditions, which also drives up the cost. 

The University of Maryland Medical Center has a shock-trauma subhospital that treats people with serious injuries, Atlas said, and also has a helipad on its roof.

“So you get the idea of the level of capability that’s present there,” Atlas said.

Roughly 20% of Johns Hopkins’ patients come from outside of Maryland, Beranek said. That includes domestic and international patients, who often come specifically for specialty programs in pediatrics or organ transplantation, he said.

“They drive a very high case mix index and bring a high level of cost with them,” Beranek said.

Baltimore’s high socio-economic risk factors are another driver of hospitals’ higher per-patient Medicare revenue. About one-third of Baltimore households earn less than $25,000, according to a 2017 community health assessment performed by the city of Baltimore. The report also noted a high concentration of vacant buildings in certain areas, as well as lead paint exposure—conditions that have been connected to poor health outcomes. About one-quarter of the city’s residents lived in food deserts in 2015, the report found.

Tradition of price-setting
Maryland’s all-payer rate-setting system for hospitals has been in place in various forms for about 40 years, and the program has grown increasingly ambitious. A state commission sets the prices that commercial health insurers and government programs pay hospitals for services. Beginning in 2019, hospitals entered a new agreement where they will take on partial risk for the total cost of care for all Medicare fee-for-service beneficiaries statewide.

In other states, hospitals often raise their rates on commercial payers and self-pay patients to make up for lower government reimbursement. That doesn’t happen in Maryland, Beranek said.

Maryland’s system makes it so that independent hospitals can thrive, too. In Boston, Partners HealthCare gets higher rates from commercial payers than community hospitals because of its strong market power, said Dr. John Chessare, CEO of the Greater Baltimore Medical Center. In Maryland, by comparison, market share doesn’t matter as much because hospitals don’t negotiate prices with payers.

“In other states, if you’re a single hospital or a safety-net provider, you don’t have any clout with the payers,” Chessare said. “In Maryland, Greater Baltimore Medical Center is a single-hospital true system of care through the eyes of the patient. We don’t have to negotiate rates. The rate commission tells Blue Cross and Cigna and Aetna what to pay us.”
 
He added that the rate-setting system also contributes to Maryland hospitals’ generally strong financial positions and balance sheets. Indeed, most of the few dozen hospitals in the Baltimore area have posted strong operating results in recent years.
 
Modern Healthcare Metrics data show both Anne Arundel Medical Center in Annapolis and MedStar Harbor Hospital in Baltimore reported about 8% operating margins in 2018. Nationally, not-for-profit hospitals’ median operating margins were 1.7% in 2018, according to Moody’s Investors Service. Another MedStar hospital, Good Samaritan Hospital in Baltimore, posted a 6.2% operating margin in 2018.

But Atlas and others say it’s also working well for patients. Readmissions in the state dropped nearly 22% from 2013 to 2017, compared with 5.7% nationwide in that time, according to the hospital association. The percentage of Maryland Medicare beneficiaries who died within 30 days of admission dropped 12.2% from 2013 to 2017, compared with a drop of 6.4% nationwide, the report found.

Maryland had the nation’s second-lowest healthcare spending in the country in 2017, according to a Health Care Cost Institute analysis based on 40 million insurance claims. “What might look like high Medicare costs per discharge ought to be considered in light of the fact that we have much lower hospital costs for private payers and the people they insure,” Atlas said. 

Charlottesville, Va., metro area
REIMBURSEMENT PER MEDICARE DAY: $3,512
POPULATION: 232,000
MEDIAN AGE: 38.4 
MEDIAN HOUSEHOLD INCOME: $71,052
BELOW POVERTY LINE: 13.9%

Sources: U.S. Census Bureau, 2018 core-based statistical area data; Modern Healthcare Metrics

Albemarle County, Va., which includes Charlottesville, is a bustling, growing region of about 109,000 people. But neighboring Nelson County has just 15,000 residents. Buckingham County to the south has a mere 17,000 residents, and Greene County to the north has about 20,000.

“You can quickly, within a few minutes, drive out and are in sparsely populated areas,” said Dr. Denise Bonds, health director for the Thomas Jefferson Health District, a unit of the Virginia Health Department that serves five counties, including Albemarle.

The Charlottesville area’s position as a population center in the middle of a rural region is one reason its Medicare payment rates are higher than in other areas.

The census area includes just two hospitals, both in Charlottesville: the University of Virginia Medical Center, a prominent academic medical center with $1.6 billion in revenue in 2018, and Sentara Martha Jefferson Hospital, a relatively small hospital with about $314 million in revenue in 2018. Sentara Martha Jefferson accounts for one-quarter of the area’s total Medicare inpatient days, and just 14% of the total revenue, Sentara Healthcare spokeswoman Kelsea Smith wrote in an email.
 
UVA’s higher Medicare payments are in part because it’s the only safety-net hospital in a large area, said Doug Lischke, chief financial officer for UVA Health. Its payer mix is more than 60% government programs. “We accept all regardless of ability to pay,” he said. “So, as you can imagine, we receive a lot of transfers from hospitals that don’t accept all.”

UVA also draws a number of more complex, high-acuity patients from western and southwestern Virginia and beyond who come for specialized care, another factor that drives up costs. The hospital is a Level 1 trauma center and has extensive organ transplant and stem cell transplant programs.

“We see the sickest of the sick,” Lischke said.

And, of course, UVA is a teaching hospital with more than 800 residents and fellows. Medicare pays higher rates to support graduate medical education.

In recent years, Charlottesville has become a popular retirement destination. From 2013 to 2017, the number of people between the ages of 70 and 79 grew by 46% within the Thomas Jefferson Health District, faster than any other age group. By comparison, the number of 20- to 29-year-olds grew by just 4.5% in that time.

Elderly patients tend to be more complex cases. UVA is working to adapt to caring for an aging population by upping its focus on hips and knees, as well as cancer care, he said. It’s a delicate balance between focusing on providing those services and ensuring UVA is still meeting the unique pediatric needs of its children’s hospital, Lischke said.

The growing Medicare population also poses a challenge for UVA because Medicare payments don’t cover the cost of delivering care, which forces UVA to make it up elsewhere, Lischke said.

“It strains our operating margins, which then puts a strain on investing in our research and our education back into programs to grow the community care that we’re trying to provide,” he said.

Like other areas, Charlottesville is also dealing with a number of social factors that are negatively affecting people’s health. The urban area keeps growing and affordable housing is becoming increasingly strained, Bonds said. There’s also a severe shortage of mental health providers who treat low-income patients, especially in the rural areas, she said.
 
Access to transportation is another big issue.

“The issues this community is grappling with are more the social determinants of health,” Bonds said.

Burlington-South Burlington, Vt.
REIMBURSEMENT PER MEDICARE DAY: $2,440
POPULATION: 221,000
MEDIAN AGE: 37.7
MEDIAN HOUSEHOLD INCOME: $71,452
BELOW POVERTY LINE: 12%

Sources: U.S. Census Bureau, 2018 core-based statistical area data; Modern Healthcare Metrics

Burlington, Vt., is effectively a one-hospital town.

The University of Vermont Medical Center is a massive, 450-bed operation that drew $1.4 billion in revenue in 2018 and posted a healthy 4% operating margin.

The census area that includes Burlington has one other hospital, Northwestern Medical Center, a small facility that collected $111 million in operating revenue in 2018. It’s located in St. Albans, about 30 miles north of Burlington. Jonathan Billings, the hospital’s vice president of community relations, said Burlington is served almost exclusively by UVM.

“Our folks are up here in the Northwest corner, in the rural area, and we wouldn’t go that far south into Burlington,” he said.
 
UVM’s status as a teaching hospital is the biggest factor driving up its Medicare payments, said Lynne Winter, the hospital’s manager of reimbursement. The additional money helps compensate for the time spent teaching residents and for additional tests residents might run because they’re learning, she said.
 
“We need to teach our future doctors,” she said, “so it’s an aspect of the cost structure that people have recognized as being a community good.”

UVM also gets a lot of patient referrals from outside the area, which in turn drives up the hospital’s case mix, Winter said. The hospital runs transplant and dialysis programs, which drives up the acuity of the patients it sees.
 
Winter said the hospital also receives Medicare disproportionate-share hospital payments for treating low-income residents. Those patients often delay care until conditions become more severe, she said.

“You have people that fall through the cracks and don’t get insurance and have been delaying getting care,” Winter said.
 
UVM is also seeing its patient population get relatively older. From fiscal 2016 to fiscal 2018, the number of patients age 65 and older grew nearly 8% to about 61,000, according to a UVM presentation from August. At the same time, patients ages 19 to 25 dropped 5.3% to about 21,000. The proportion of patients covered under Medicare grew 5.7% in that time, while commercially insured patients remained flat.

The health system also noted that the age and complexity of its patients are growing. Other pressing issues include low unemployment and increasing wage inflation, increasing pharmaceutical costs, commercial rate increases that don’t cover the cost of inflation and a lack of mental health services.

Mental health was the No. 1 priority area identified in UVM’s 2019 community health needs assessment. Community members interviewed for the study cited funding gaps, availability of services and provider burnout as the biggest barriers to mental health delivery in the area.