Straight Talk on Medicare: A Go-To Guide for Hospital Executives

With less than a week to go before the 2012 elections go into the history books, those in the hospital and healthcare industry can probably agree on one thing — it has been an exhaustive process.

Relentless advertisements and political grandstanding have created a mass influx of information, and in some cases disinformation. One of the biggest issues during this information-heavy election season has been a topic that is, and will continue to be, near and dear to many hospital executives — Medicare.

Hospitals face billions of dollars in Medicare cuts in the next decade.In a recent webinar, Ken Perez, senior vice president of marketing and director of healthcare policy for MedeAnalytics, broke down the current state of Medicare, discussing everything from the politicization of Medicare to detailed breakdowns of presidential Medicare plans.

Why Medicare matters

It's no secret that the U.S. healthcare system is spending a lot. In fact, the United States spends more than every other industrialized country, but the healthcare quality results are not any better.

Medicare has grown in size over the past five decades as a percentage of national health expenditures. When Medicare was formed in the 1970s, it represented roughly 10.3 percent of NHE, and by 2010, that figure had almost doubled to 20.2 percent.

Currently, there are 49.4 million Medicare beneficiaries, according to the Kaiser Family Foundation, and that number is increasing as the baby boomer generation is adding thousands more to the rolls every day. Total gross Medicare spending in fiscal year 2012 reached $550 billion, which is 12 percent of the federal budget.

Medicare is particularly important for hospitals and health systems, as it finances roughly four out of every 10 hospitals stays — making it the leading payor for most hospitals. Medicare also accounts for roughly 35 to 55 percent of most any hospital's revenue.

Medicare continues to be one of the most important issues for hospitals and health systems of all shapes and sizes because of its major impact on hospital bottom lines. For many, Medicare margins are the difference between a good year and a bad year, and the country's largest payor has been placed in the election spotlight because of its enormous national ramifications both now and in the future. Standard & Poor's even recognized this when it downgraded the U.S. long-term debt last summer, saying the containment of Medicare expenditures is "key to long-term fiscal sustainability," according to S&P's rating report.

Medicare under the presidential candidates

The two primary presidential candidates, President Barack Obama and former Massachusetts Gov. Mitt Romney, have both touted potential Medicare reforms, but in completely different ways.

For President Obama, the Patient Protection and Affordable Care Act — the most significant healthcare legislation to come out of Washington, D.C., in years — serves as his blueprint for Medicare and the future of the U.S. healthcare system. There has been a lot of political rhetoric surrounding the PPACA, and most of it has centered on one figure: $716 billion.

President Obama has said the PPACA saves $716 billion over the next decade from the Medicare program "by no longer overpaying insurance companies [and] by making sure we weren't overpaying providers." Mr. Romney, on the other hand, argues the healthcare law cuts $716 billion from the program by reducing rates "across the board."

Mr. Perez broke down the infamous $716 billion figure in the following way: As it stands, the PPACA would enact $517 billion in decreases to Medicare Part A (hospitals), $247 billion in decreases to Medicare Part B (medical insurance) and $48 billion in decreases to Medicare Part D (prescription drugs).

Going a step further, hospitals and health systems will absorb $260 billion of the $716 billion in Medicare reductions, and there will be $56 billion in reductions to disproportionate share hospital payments from both Medicare and Medicaid. Other major reductions include $156 billion to Medicare Advantage insurers, which have been overpaid $282.6 billion since 1985, according to a recent study by Physicians for a National Health Program.

For hospital and health system executives, the cuts within the PPACA will have major impacts, perhaps detrimental in some cases, Mr. Perez said. Although the promise of more Medicaid and commercially insured patients by 2014 is supposed to offset those reductions, the proposal has still been viewed has potentially damaging to hospital bottom lines in the near future. MedeAnalytics projected that these cuts will ramp up from $15 billion to $20 billion in 2013 to $30 billion to $35 billion in 2022. The result for hospitals? Almost a 9 percent across-the-board cut to Medicare reimbursement over the next decade.

"These cuts will obviously lower profit margins for hospitals, and CMS' chief actuary has concluded that up to 20 percent of hospitals could become unprofitable as a result," Mr. Perez said, noting that hospitals' Medicare margins have been negative on average since 2003.

Furthermore, hospitals and health systems must wait to see whether the Budget Control Act of 2011's sequestration will take effect Jan. 1. Hospitals and other providers will see a 2 percent Medicare payment reduction totaling $11.1 billion this upcoming year, due to the BCA, unless Congress passes new measures to prevent the cuts. Tripp Umbach, an economic consulting firm, released a report earlier this year showing that sequestration could result in 766,000 lost jobs within the hospital and healthcare industry by 2021.

Mr. Perez said the already-negative margins for Medicare and the prospect of future Medicare cuts per the PPACA have already prompted several large providers to lay off employees or cut jobs through attrition.

"If hospitals go out of business or continue to operate but under financial duress, it stands to reason that the availability and quality of care for Medicare beneficiaries could be impaired," Mr. Perez said.

Mr. Romney's Medicare plan hinges on turning Medicare into a premium support system. Essentially, seniors will receive a fixed amount (also known as a defined contribution) to buy an insurance plan, and all insurance plans must offer coverage comparable to what Medicare provides today. However, Mr. Romney's plan does not provide specifics on how this Medicare reform will impact payments to hospitals and health systems, nor does it cover other issues, such as:

•    Will premium support payment adjustments be capped?
•    Will Medicare benefits within the PPACA, such as closing the doughnut hole and expanding coverage of preventive care with no co-pays, be reinstated?
•    Will traditional Medicare be subject to cuts after 2023?

The future of Medicare

Politicians and candidates who are heavily involved with the 2012 election season have all promised to keep Medicare intact for the future of America's senior citizens. Getting from point A to point B has been a completely different subject — polarizing in some regards — but many believe the future of Medicare relies on better preventive care.

Mr. Perez noted, however, that accountable care organizations and other capitation-driven initiatives may not be a panacea for all of Medicare's ills. Capitation and managed payment systems have been tried before, and hospital and health system executives must be aware of Medicare ACOs and understand their potential impacts.

"In spite of the emerging consensus that accountable care is at least directionally correct — where healthcare needs to go in the future — we need to be realistic about ACOs' possible impact on Medicare outlays," Mr. Perez said. "Even if we were to double the most optimistic federal savings projection, the total savings from Medicare ACOs would amount to less than 0.2 percent of total Medicare spending over the next decade."

Hospital and health system executives worried about Medicare and how it will impact their organizations can only worry about the details they can control — ensuring that Medicare beneficiaries are treated with care and compassion in the proper continuum of care.

"In the final analysis, voters will be the ultimate arbiters as to which presidential candidate has done a better job of articulating the more plausible and effective plan to reform Medicare," Mr. Perez said. "Regardless of the election outcome, the call for healthcare providers remains the same — to help our society by providing higher-quality care as efficiently as possible."

More Articles on Medicare:

6 Scariest Issues in Healthcare Right Now

PPACA Saved $4.8B on Prescription Drugs

Medicare Stalemate: 4 Ways This Year's SGR Payment Cut Would Hurt Healthcare

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