The Future for Hospitals and Physicians

Gregory J. Mertz, MBA


January 01, 2018

Uncertain Times May Lie Ahead

Currently, a cloud of concern envelops hospital C-suites, and it could well remain for some time. The Affordable Care Act (ACA), which was supposed to guide hospitals into a new era, is in shambles, and some hospitals are having financial problems.

"Uncertainty over federal health care policy…poses a strong headwind" for hospitals' financial performance, concluded Moody's Investors Service in a summary on the industry in May 2017.[1]

The stocks of for-profit hospitals, a good marker for the whole industry, have been shuddering all through 2017, as President Trump and Congressional Republicans proposed different ways to scale back the ACA. These efforts have failed so far, but they are not letting up.

ACA Was a Historic Deal for Hospitals

Much of the hospital industry endorsed the ACA, fully realizing that it would be a difficult transition for the sector. In exchange for giving up massive amounts of federal aid to help pay for the cost of uninsured patients, hospitals would gain tens of millions of newly insured customers through federal subsidies and an expansion of Medicaid.

Boom of Paying Patients

Hospital stocks surged after the law's passage in 2010, on expectations that the industry would get millions more insured customers, and initially hospitals saw huge increases in paying patients.

Hospital stocks surged after the ACA's passage in 2010.

An estimated 21 million to 22 million Americans gained coverage through the ACA, raising the rate of US per capita healthcare spending from 2% in 2014 to 4.5% in 2014, according to an American Hospital Association report.[2] Hospitals used some of this windfall to employ more physicians, acquire other hospitals, and improve infrastructure.

This expansion was financed by massive increases in federal spending. The ACA set up health insurance marketplaces in which 90% of individuals buying policies were getting federal subsidies that averaged 75% of their premiums.[3]

For Medicaid, the ACA raised the income level to qualify for Medicaid to 133% of the poverty level, and the federal government has been waiving states' contributions for this new Medicaid population.

New Era of Weaker Growth

By this point, whatever increases in covered patients there were have played out, and hospitals seem to have entered a period of weaker growth. Growth in hospital admissions has fallen to 1%-2% in 2017, and observers predicted that this level would become "the new normal."[4]

The ACA anticipated virtually no uninsured patients at this point in time, but millions of people still show up at hospitals without coverage. Several factors led to smaller increases in health insurance coverage under the ACA than expected.

Weak mandate to buy insurance. For commercial insurance, many healthy patients didn't buy insurance because the initial penalties were set quite low, so the number of insured patients did not match initial projections.

Incomplete Medicaid expansion. Hospitals in 19 states are losing more than $100 billion in expected Medicaid payments, owing to a Supreme Court decision in June 2012 that let states decide whether to carry out the Medicaid expansion. Nineteen states at this point have not carried out the expansion. An analysis conducted when 24 states had not carried out the expansion found that hospitals in those states would lose $167.8 billion in Medicaid funds through 2022.[5]

Hospitals' Losses Under the ACA

Hospitals have also been sustaining some losses under the ACA—some expected and some not.

Readmission penalties. The ACA imposed fees for readmission of patients within 30 days of discharge for certain diagnoses. Hospitals have made progress, but they are still paying large penalties. More than one half of hospitals paid penalties in fiscal year (FY) 2017, and in October 2017, the start of FY 2018, the maximum penalty rose to 3% of payments.[6]

Cuts in payments for indigent care. Hospitals are just beginning to feel the effect of trading away billions of dollars in federal disproportionate share hospital (DSH) payments, which cover care of indigent patients, in exchange for bringing in more covered patients under the ACA.

The DSH cuts, which were supposed to start going into effect in 2014, were postponed until October 1, 2017, and hospitals are expected to lose $2 billion in FY 2018. The amount will rise in ensuing years, taking away $43 billion in DSH revenue from hospitals through 2025.[7]

Losses due to higher deductibles. Insurance policies purchased on the exchanges and a growing number of employer-sponsored policies often have large deductibles, forcing policyholders to pay out of pocket before insurance kicks in. In 2016, for the first time, more than one half of all workers with single coverage had a deductible of at least $1000.[8]

Hospitals and the practices they own have to devote resources to collecting out-of-pocket deductible money from patients.

Historically, deductibles have mainly affected physicians' practices because they have relatively small bills, but as deductibles get into the six figures and continue to grow, they are starting to affect hospitals. Hospitals and the practices they own have to devote resources to collecting this money from patients.

Attempts to Repeal the ACA

President Trump and Congressional Republicans continue to try to repeal large parts of the ACA, which worries hospital executives. In a December 2016 letter to Congressional leaders, the two major hospital trade groups warned that repeal of the ACA would "decimate hospitals' and health systems' ability to provide services."[9] They referred to a study commissioned by the two groups finding that hospitals would lose $165 million between 2018 and 2026 if the ACA were repealed.[10]

Hospital shares fell in October 2017, after President Trump announced that the administration would immediately stop making subsidy payments to insurers for exchange plans.[11] Without subsides, millions of people would stop buying insurance, erasing much of the enrollment gains of the ACA.

The Movement to Value-Based Care

In addition to covering millions more Americans, the ACA launched the healthcare system in the direction of value-based care, which would replace payments based on volume with payments based on outcomes.

Value-based payments force hospitals to control the whole process of care, on both the inpatient and outpatient levels, so that they can improve outcomes and, more important, reduce the cost of care.

Physicians are the key players in this strategy. They decide which extra services patients would get, such as referrals to specialists, imaging, and other tests.

A Difficult Transition

The transition from volume-based to value-based care promises to be bumpy even in the best of times, because the goals of the two payment systems contradict each other. Whereas volume-based care calls for more services, value-based care calls for fewer.

Many a hospital executive has said that the transition is like having "one foot on the boat and the other foot on the dock."

The transition is like having "one foot on the boat and the other foot on the dock."

If value-based care becomes widespread, hospitals will have less downstream revenue from physicians owing to tests and referrals. This would mean that hospitals could no longer use downstream revenue to justify their losses from employed physicians.

Hospitals have already been moving away from paying physicians on the basis of volume. As already noted, many employed physicians are paid on the basis of relative value units, which measure productivity and not the amount of charges. Productivity pay will shield employed physicians from the switch to value-based care.

How Much Care Is Value-Based?

In early 2015, the Obama-era Centers for Medicare & Medicaid Service (CMS) set a goal. By the end of 2016, 30% of Medicare payments to hospitals and doctors would come through alternative payment models (APMs), which include accountable care organizations (ACOs), bundled payment initiatives, and other models that deliver value-based care.

CMS subsequently declared that it reached that goal almost 1 year early. As of January 2016, about $117 billion of an estimated $380 billion in Medicare fee-for-service payments went to participants in value-based models, the agency said.[12]

However, the impact of APMs on hospital and other providers seems to be less than that number suggests. CMS counted every Medicare beneficiary that would be touched by some form of APM, including ACOs.[13] Although ACOs cover many beneficiaries, they often don't save any money on their care, and covered beneficiaries aren't even aware they are in an ACO.

Underwhelming ACOs

Some hospitals and health systems have been enthusiastic sponsors of ACOs, which organize doctors and other providers to produce shared savings in the care of Medicare beneficiaries. In 2015, 20% of hospitals were part of an ACO.[14] Put another way, 66% of ACOs in 2015 included other entities besides physicians, and of those, 75% included hospitals.[15]

However, savings from ACOs have been underwhelming. An analysis of 2015 results for ACOs in the Medicare Shared Savings Program (MSSP), the most common type of Medicare ACO, found that only about one half "saved" money, and even that term has to be defined: It means they performed better than their benchmarks. Also, ACOs that saved money spent more money to do so than ACOs that lost money.[13]

ACOs that saved money spent more money to do so than ACOs that lost money.

Moreover, MSSP ACOs are not saving money for the Medicare program, the analysis found. These ACOs are paid extra funding if they save money but do not pay back funding if they lose money. For this reason, Medicare took a net loss of $216 million on MSSP ACOs in 2015, the study found.

Proponents, however, argue that many more ACOs will start saving money in a few years as they adapt to the program. They point to higher performance metrics for ACOs that started early. Also, MSSP ACOs are expected to graduate into more advanced ACO models, where they are penalized for losing money. Taking on financial risk in this way is central to the concept of value-based payments.

The Promise of Bundled Payments

Bundled payment programs pay providers for keeping costs below a certain dollar amount for the entire episode of a certain type of care. In April 2016, the Obama-era CMS launched a mandatory program, Comprehensive Care for Joint Replacement (CJR) model, which covers orthopedic joint replacements at 799 hospitals in 67 geographic areas across the country. There were also plans to launch three mandatory cardiovascular programs after that.

Unlike ACOs, bundled payments actually save a substantial amount of money for Medicare. A study of the early, voluntary phase of the CJR model found that hospitals reduced spending by 20.8%, mainly from savings on implants and greater use of post-acute care.[16]

Program Is Virtually Stopped

Other APM models, such as ACOs, are voluntary, and physician groups objected to the mandatory nature of the bundled payment programs. In a proposed rule that will probably be adopted, the incoming Trump administration plans to cancel the cardiovascular programs and switch about one half of the CJR hospitals to voluntary status.

Many hospitals may opt to stay in the voluntary CJR program because it provides a means of limiting doctors' choice of expensive orthopedic implants, which has been an issue for many years. But a voluntary program stands to provide less Medicare savings than a mandatory program.

The Trump administration has said it wants to encourage smaller, voluntary bundled payment programs and has asked doctors to help design these programs.[17] These programs might then become advanced APMs, which help doctors qualify for extra payments under the Medicare Access and CHIP Reauthorization Act.

Readmissions Program Continues

Other value-based programs are relatively small, but another large program has had a similar effect on hospitals. The Medicare readmissions program, discussed earlier, has forced hospitals to pay attention to the whole spectrum of care, both inside and outside of the hospital, which is what they must do with value-based care.

What Will Happen to Value-Based Care?

Hospital leaders are anxious that the Trump administration will cancel movement to value-based care and undo everything hospitals have done to get there since the ACA was passed.

"We have spent the last six years gearing up towards everything that we were responsible for doing in the ACA," the CEO of a small hospital in Illinois told Kaiser Health News. "[To] totally go a different direction, how will we do that? It's going to take a lot of work."[18]

Hospital leaders are anxious that the Trump administration will cancel movement to value-based care.

However, Republicans have embraced value-based care. In 2015, Congressional Republicans joined with Democrats to pass the Medicare Access and CHIP Reauthorization Act, which upheld value-based principles in Medicare payments to doctors.

Moreover, the Republicans' major ACO repeal bill in 2017, which passed the House in May but was then defeated in the Senate, did not seek to change any of the payment and delivery reforms for Medicare and Medicaid, and it would have continued the Center for Medicare & Medicaid Innovation, which is charged with creating new value-based initiatives.[19]

A New Direction for CMS?

In a request for information (RFI) issued in September 2017, CMS outlined a new direction that seemed very different from the path taken by the Obama Administration. Rather than control healthcare policy from the top down, it called for a system driven by patients and their doctors.

"Give beneficiaries and healthcare providers the tools and information they need to make decisions that work best for them," the RFI stated. It suggested that savings might be shared with Medicare beneficiaries, rather than providers, when they choose a lower-cost option or preventive healthcare.[20]

However, hospital executives who are trying to envision long-term federal policy may be skeptical of this voluntary approach, because it makes it harder to save money for the Medicare program. For example, the voluntary arm of the CJR program would save Medicare $90 million less than the mandatory arm, according to CMS' own estimate.[21]

Difficult Choices for Hospitals

If the current government administration manages to slow down or even stop the movement to value-based payments, hospital executives will have to reexamine their strategy. If they don't have to worry about managing the continuum of care, they might start laying off their armies of employed physicians, which have been losing money for them anyway, and get back to inpatient care.

This may not come to pass, but in any case, the road ahead promises to be bumpy for hospitals.

Review Questions