10 Key Trends for Hospitals in 2011

Two hospital CEOs, three association executives and two consultants discuss 10 trends for hospitals in 2011.  

1. Lower reimbursements. In addition to lower Medicare reimbursements in the fiscal year starting Oct. 1, hospitals may face yet more cuts as the federal government redoubles efforts to reduce spending. "The problem is this country has a huge deficit," says Steven I. Goldstein, an AHA board member and president and CEO of University of Rochester (N.Y.) Strong Memorial Hospital & Highland Hospital. For the fiscal year that started in October, CMS implemented a 2.9 percent reduction in the market basket update for hospitals, says Carolyn Scanlon, president & CEO of the Hospital & Healthsystem Association of Pennsylvania. CMS said hospitals were overpaid in 2008 and 2009 due to changes in hospital coding practices that do not reflect increases in patients' severity of illness, but Ms. Scanlon says CMS did not account for the historical trend in case mix growth.

Meanwhile, Congress may consider more cuts for hospitals, recommended by the president's bipartisan deficit commission, the National Commission on Fiscal Responsibility and Reform. Recent recommendations by the co-chairmen of the commission included many proposals affecting hospitals, such as accelerating cuts in disproportionate share payments, immediately putting hospitals under the purview of the Independent Payment Advisory Board, reducing teaching payments for hospitals and cutting bad debt payments to hospitals.

Craig A. Becker, president of the Tennessee Hospital Association and an AHA board member, says the proposed cuts would be unfair. "We already gave at the office," he says, referring to $155 billion in cuts over 10 years that hospitals agreed to in the healthcare reform law. But the chairmen's proposals would still have to be approved by at least 14 of the commission's 18 members, says Charles "Chip" Kahn III, president of the Federation of American Hospitals. He doubts that will happen. However, even if the commission dumps the proposed cuts, Ms. Scanlon says the commission has legitimized them, and they will be fodder for numerous other cost-cutting bodies in the future. "The commission has created a laundry list of areas to look for savings that other people can cherry-pick later," she says.

2. RACs gather momentum.
Hospitals can expect lower revenues and increased administrative costs in 2011, as Medicare recovery audit contractors gather momentum and Medicaid RACs start. In the first half of 2010, all four Medicare RACs denied $19.2 million in Medicare claims and about half of reporting hospitals reported increased administrative costs due to the RAC program, according to the AHA's RACTrac survey. Medicare RACs are just gearing up in some states, such as Pennsylvania, Ms. Scanlon reports. Medicaid RACs, which start in each state by the middle of 2011, aim to recover $9 billion a year by 2012 — a bonanza for states low on funding. Each state is supposed to have contracted with a RAC by Dec. 31 with a start date of April 1, but some predict implementation may be postponed until July.

3. More uncompensated care.
"Hospitals are still required to take care of any patient who comes through their doors," Mr. Goldstein observes. Even as the economy recovers, already high numbers of uninsured are expected to climb further next year, because unemployment is a lagging indicator in the recovery. Mr. Kahn says numbers of uninsured, a lagging indicator in a recovery, are not about to fall and may even increase in 2011. "This is not going to get any better until 2014," he says. The CDC estimated 59.1 million Americans were uninsured at some point in the 12 months that ended April 1, 2010 – 9 million more than were estimated in a previous Census Bureau study.

Because the reform law waits until 2014 to expand coverage to 32 million more Americans, "the next few years will be difficult for hospitals, with a downward pressure on utilization," says Allan Baumgarten, a Minneapolis-based research consultant who reports on healthcare markets. "To be competitive, hospitals will have to balance the challenges before them." For example, they will need to build relationships with physicians and make investments in healthcare IT.

4. Political gridlock. Republicans took over the U.S. House while the Democrats hung on to the Senate in the November elections, making it difficult for Congress to pass much of anything, Mr. Becker says. "We will have two years of gridlock in Washington," he predicts. Historically, a divided Congress means lower federal spending. This could dampen efforts to ensure adequate Medicare reimbursements, such as passing a permanent Medicare physician fee fix at a cost of more than $300 billion. Rather than answering healthcare groups' plea to pass a 13-month fee fix, Congress may pass a series of short-term fee fixes into next year, as demonstrated by its plans to pass a one-month fee fix to end Dec. 31.

Perhaps even more striking than its victory on the U.S. House, the GOP picked up at least 11 governorships and many state legislatures in the November elections. Though this change probably won’t create gridlock, it could slow the wheels of government as the new regimes get started. It also presents new opportunities for hospitals, Ms. Scanlon says. As Pennsylvania shifts from Democratic to Republican leadership, she thinks there will be a chance to pass tort reform, traditionally a GOP issue. Pennsylvania voters have replaced their Democratic governor and House with Republicans, who also retained the state's Senate.

5. Uncertain fate of healthcare reform. Senate Minority Leader Mitch McConnell (R-Ky.) has called the healthcare reform law "the single worst piece of legislation that’s passed since I’ve been in the Senate" and he and Rep. John Boehner (R-Ohio), the presumptive Speaker of the House next year, have vowed to repeal it. President Obama's veto pen will probably make sure they don’t, but hospitals face the possibility that some parts of the reform law may be discarded, says Ron J. Anderson, MD, president and CEO of Parkland Health and Hospital System in Dallas and an AHA board member. "There are so many ways to hold it up through hearings and not fund parts of it," he says. Healthcare organizations may even help start the dismantling process. The AHA recently backed the repeal of the Independent Payment Advisory Board, which the AMA has long opposed. Under the law, the board will direct HHS to carry out specific physician payment cuts starting in 2015, and hospitals would come under its purview in 2020.

Dr. Anderson thinks partial repeal would be a big problem for hospitals. "Different pieces of the law are all tightly woven together," he says. "If you pull out one thread, you don’t know how much it's going to weaken the whole thing." For example, hospitals have put up with some unpleasant aspects of the reforms, such as lower Medicare reimbursements, with the understanding that there would be more patients to make up for those losses, but the chief target of opponents of reform is to repeal the individual mandate. Should that be repealed, "Hospitals are going to say, 'If you’re not covering these people you're not living up to the deal,' " Dr. Anderson says.

6. Anticipated ACO rules may open the floodgates. Right now, most hospitals are holding off on starting accountable care organizations, but the floodgates could open if hospitals like the proposed rules for ACOs, which CMS is expected to release before the end of the year. Hospitals "haven’t been sure just what an ACO is," Mr. Kahn says. "When the regulations are out, they will be able to determine whether they want to participate."

Without regulations defining these organizations, "the ACO is a unicorn, in the sense that no one has ever seen one," Dr. Anderson says. Mr. Becker reports very few hospitals in Tennessee have started ACOs, and Ms. Scanlon cannot think of any hospitals in Pennsylvania that have done so, though she notes that a few integrated systems like Geisinger Health System could easily form one. The proposed rules would have to address a number of anxieties hospitals have. For example, Mr. Becker doubts whether there will be enough money in "shared savings" payments to make it worthwhile to operate an ACO. Dr. Anderson says he is concerned that Medicare beneficiaries would have a chance each month to decide to leave ACOs, because that would make it difficult to maintain stability.

If the floodgates open and everyone decides to build an ACO, hospitals and group practices would have to decide who would run them, says Robert Betka, a hospital consultant at Catalyst Management Advisors in Grand Rapids, Mich. "Who will be leading the show, the hospital or the physician?" he says. "The physicians are the ones who generate the hospital revenues, but hospitals will want to have a say. I don’t think it’s going to be pretty."

7. Greater focus on experimentation. Ms. Scanlon says in order for hospitals to prosper next year and beyond, they will have to be creative. "It's about creating new forms of healthcare delivery," she says. "Payment for bundled package of services is going to be the future. Hospitals will take risk for finances and for outcomes. They will need to form new organizational alliances or new payment vehicles." In addition, they will need to align not just with physicians but with other providers such as rehabilitation and long-term care services.

Leading this new focus on experimentation will be CMS' new Center for Medicare and Medicaid Innovation. With $10 billion in funds to dole out in the next 10 years, the center will be testing aspects of ACOs and a variety of other models to reduce healthcare costs and improve quality. "These new models may or may not be scalable, but it does begin the process," Mr. Kahn says. Medicare Administrator Don Berwick, MD, is orchestrating all this experimentation, but his recess appointment expires at the end of 2011. To stay on, Dr. Berwick would have to be approved by the Senate, but "I don’t think he can be approved," Mr. Kahn says. Opponents of reform have targeted him as the poster child of all they see wrong with the reform law, citing his comments about rationing of care and the advantages of Great Britain's system of socialized medicine.  

8. States will further cut Medicaid spending. Cash-strapped states included big cuts in Medicaid in their 2011 budgets. "The next few years will be enormously challenging," says Mr. Goldstein at Strong Memorial. "There will be declining federal and state funding. Medicaid cuts in particular. Hospitals are still required to take care of any patient who comes to their door."

Medicaid funding could get worse next June, when extra federal funding for Medicaid ends. But Mr. Kahn says the degree of the problem varies by state and, in any case, the healthcare reform law requires states to maintain a minimum level of eligibility. Also, many states have been using the enhanced funding for non-healthcare activities, Mr. Becker says. He says his own state of Tennessee, for example, has been using part of the funds for schools.

9. Healthcare IT payments start. "Many hospitals do not have IT systems," Mr. Goldstein says. "The challenge for hospitals is to find the resources to build IT and work with the medical community to implement IT for physicians." Dr. Anderson says Parkland has a $100 million EHR system, but that level of investment may be overwhelming for some hospitals. "If I were a small rural hospital, I'd probably think differently about electronic health records," he says.

Federal funding for "meaningful use" of electronic medical records, which starts next May, may be a strong incentive for hospitals to take the plunge. Some $30-$40 billion will be distributed to hospitals, physicians and other providers, with each hospital receiving as much as $11 million and physicians' offices getting as much as $44,000 to $64,000 per physician.

10. More hospital consolidation likely. Hospitals are shifting to more integrated systems in expectation of ACOs and other bundled payment arrangements. For-profit companies are completing blockbuster takeovers of systems in Detroit and Boston, and there could be many more consolidations to come, carried out by for non-profits as well as for-profits. "This trend could continue," Mr. Kahn says. "There are more available options for hospitals, such as investments to grow IT, if they are part of growing systems."

Consolidations are also fueled by declining reimbursements, with small hospitals and physicians running into the arms of hospital systems. "A lot of people want to be part of a larger system, " Mr. Baumgarten says. "And yet the well managed independent hospital has very good potential for the future."

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