Recent St. Mary's layoffs in Evansville only the start of healthcare evolution

The 141-year-old health system’s action was a response to a long-simmering and transformative shift in hospital economics.

Hospitals are facing a murderers’ row of ominous, tall waves — some of which, President Tim Flesch admitted, have gathered force faster than St. Mary’s would have predicted a few years ago.

“The health care industry has had the luxury in the past of essentially saying, ‘This is the cost to produce. Please pay it,’” Flesch said when layoffs were forecast in May. “The economics are now changing in a way that purchasers and others are saying, ‘This is as much as I can afford. Get your costs in line with what I can afford.’”

The roll call of complications includes some stemming from the shift in American political power that occurred in 2008. Others were years in the making. They include shrinking reimbursements from government and commercial payers, significant growth in a Medicare population whose coverage reimburses at below-market rates — and fewer people with private insurance to make up for it.

These challenges have created an imperative in hospitals to reduce costs. But even that comes with a complication. Efficiency measures are getting credit for a slowdown in projected overall health care spending. But they are also hurting revenue by reducing hospital use.

“We understand that, but we know that that is the right thing to do for our patients, for our community and for our businesses,” Flesch said.

It is also the right thing to do to avoid new government penalties for too many readmissions of certain Medicare patients within 30 days after an inpatient stay.

Deaconess Health System is responding to the same economic pressures.

“We do not have plans for any imminent layoffs,” said Deaconess President Linda White. “Now, you notice how I selected those words: Because you never know. What if we had no patients coming into our hospital for the next two weeks?

“All of the information we have doesn’t point to that scenario, so we really are staying on top of this. We’ve made a lot of cost reductions in our cost management cycle. We’ll continue to do that. We need to get several millions of dollars’ worth of costs out of our system.”

White noted that many Deaconess employees are nearing retirement age. Others are re-evaluating their careers, while still others consider earlier retirement.

Deaconess hired more than 70 graduate nurses during the annual post-graduation hiring period last month, White said. About the same number were hired last May.

“I’m not going to predict (hiring) is going to be less, I’m not going to predict that it’s going to be more, but we will continue to have those kinds of changes,” White said.

Hospitals aren’t about to go extinct, said Harvard University economist David Cutler — but the reduced need for inpatient care is going to reduce the scale of the industry and slow hiring and growth.

“If you’re caring for people better out of the hospital and you don’t need as many beds in the hospital, then you don’t need as many nurses in the hospital. You don’t need as many other health care workers in the hospital,” Cutler said.

“In this case it’s clearly going to be painful for the workers, but for the economy as a whole, it’s good news. You’re not spending money on health care, and the things you’re not spending on are things that nobody really wants to buy. Do you want to buy more readmissions because you didn’t manage the person right the first time?”

Hospitals will see big changes in January, thanks to the Patient Protection and Affordable Care Act of 2010 — the health care reform bill passed at the impetus of President Barack Obama.

Medicaid, the joint federal-state program that insures nearly 60 million poor and disabled people, will expand to cover millions of primarily uninsured people with incomes under $15,856 annually for an individual and $32,499 for a family of four. But the Medicaid coverage expansion may not happen in Indiana if the state and the federal government cannot agree on a coverage vehicle. Statewide, more than 406,000 people would come on the Medicaid rolls.

The problem for hospitals is that they are already seeing reductions in government payments — mostly Medicare reimbursements — that are intended to free up money for the Medicaid coverage expansion. Deaconess pegs its Medicare reimbursement losses since 2010 at more than $3.8 million. A St. Mary’s spokeswoman said information wasn’t available.

The payment reductions dramatically escalate next year and continue through fiscal year 2020 — with or without the Medicaid coverage expansion.

Local hospital officials say the path forward in the next few years is simple: minimize costs, maximize efficiency and strap in for the ride.

“There’s going to be a whole lot less money in the reimbursement system, and we already knew it, so let’s get prepared,” White said.

The margins

Medicare is the largest health insurance plan in the nation. It covers nearly 51 million people.

But for most hospitals, Medicare simply doesn’t pay.

Deaconess and St. Mary’s reported Medicare reimburses them, on average, 80 cents on every dollar they spend delivering care. The Indiana Hospital Association reports Medicaid pays about 85 cents, on average, statewide, although that is bolstered by a fee that hospitals pay annually to the state. The amount hospitals actually realize from Medicaid reimbursement is lower.

The federal government’s payments to health care providers are so low that hospitals say they actually lose money caring for Medicare and Medicaid patients. That’s no small matter, considering that Medicare is each local hospital system’s single biggest payer.

So hospitals have for years compensated for below-market government payments and uncompensated care by shifting costs to other patients.

“Every hospital functions by trying to break even on Medicare and Medicaid patients and trying to make enough profit on commercial patients that it makes up for the folks who can’t or don’t pay. Now that’s always been the economics of hospital work,” said St. Mary’s Dr. Tricia L. Baird.

The problem for hospitals is that their ability to shift costs to private payers will diminish because there will be fewer of them after January. That’s when newly created state health insurance exchanges begin subsidized coverage provided for in the Affordable Care Act.

The act provides federal tax credits and subsidies for individuals without employer-sponsored insurance and whose household incomes are less than 400 percent of the federal poverty level. The money will allow them to purchase health insurance plans in the state health insurance marketplace, an exchange. Exchanges will begin enrolling individuals Oct. 1.

Here’s the rub: The subsidized exchange policies are expected to reimburse hospitals and other providers at rates below current commercial levels. In fact, health care analysts and policymakers believe insurers selling through the exchanges will offer reimbursement at the Medicare level or below.

For Baird, there can be little doubt about what all of this means.

The St. Mary’s doctor pointed to a February 2011 survey of 1,300 private sector employers suggesting a coming purge of workers from what are likely commercial insurance plans. The survey by global management consulting firm McKinsey & Co., found that 45 to 50 percent of employers said they would “definitely or probably pursue alternatives to (employer-sponsored health insurance) in the years after 2014.”

That would make employees eligible to buy subsidized exchange policies — the same subsidized exchange policies that analysts believe will reimburse health care providers at below-market rates.

“So (a significant number) of the people today who are funding the margin for the health system being in profit, are going to become the patients that are quote-unquote, stealing from the system,” Baird said, adding later that it would be more accurate to say subsidized exchange policies will reimburse providers at lower rates.

“So if we don’t figure out how to do this different, I don’t know of any budget that, that works in.”

Baird said any hospital that tried to limit who it treated to commercially insured patients would find too few patients and too little business to survive.

“You can’t just go after the people you’d rather take care of and have enough work to do. You would have half a hospital at the end of the day,” she said. “That’s why (major costs-savings and care coordination initiatives) have become a necessity for hospitals, not like a sunny, happy thought. Now everybody has to or they won’t have funding.”

Other worrisome developments

As the national pool of commercially insured patients contracts, the rolls of unprofitable Medicare patients expand. The federal government estimates 10,000 baby boomers turn 65 every day.

The Social Security and Medicare Board of Trustees projected last month that the trust fund supporting Medicare will be exhausted in 2026. The report was widely perceived as good news because 2026 is two years later than 2012’s estimate.

But 2026 is still just 13 years away.

In addition to all this, Flesch acknowledged that St. Mary’s is seeing less revenue from insurance companies. He cited “pressure from commercial payers and others to flatten out and lower reimbursement in response to the demand from business to lower their health insurance costs.”

The pricing pressure may be a case of the chickens coming home to roost.

White suggested hospitals are seeing a backlash from private insurers who have long resented having to make up for hospitals’ losses on Medicare and Medicaid patients. Buffeted by high health care costs and the downturn in the economy, insurance companies are drawing a line in the sand.

“The commercial payers are saying, with their arms up in the air, ‘This isn’t fair. We can’t do this any longer,’” White said. “So that is really a strong, strong emphasis to every single person in health care: What can we do to contribute to the reduction of costs?”

The backlash cannot have failed to make an impression on Deaconess executives. The hospital system reports that “managed care and commercial business” — insurance companies with which Deaconess has contracts or that pay Deaconess when it provides care for patients they cover — represents the largest segment of its net revenue at 57 percent.

‘Not easy politically’

Hospitals lost billions of dollars a few months ago, thanks to a 1997 deficit reduction law and action by Congress.

The 16-year-old statute links Medicare physician payment rates to changes in the gross domestic product. Physicians were scheduled for a nearly 27 percent reduction on Jan. 1.

Knowing that doctors would have howled in protest, Congress “fixed” the problem with a one-year, $25 billion infusion of cash that came, in large part, out of the hospital industry’s hide.

Hospitals ponied up $15 billion in further reductions to Medicare reimbursement — reductions the Indiana Hospital Association says will cost Hoosier hospitals $250 million over 10 years. That loss is in addition to the $3.8 billion in government payments that Indiana hospitals will give up over 10 years to help fund the Medicaid coverage expansion in the Affordable Care Act.

“Here’s what the government was afraid of, and I can understand their position,” said Deaconess president White. “If they cut the payments to physicians taking care of Medicare patients by 27 percent, a large number, there would be physicians — I think even in our own community — that would put signs up in their office: ‘No longer accepting Medicare patients.’”

But Brian Tabor is not so understanding.

Tabor, vice president of government relations for the Indiana Hospital Association, said Congress needs the guts to do something about Medicare coverage if the elected officials want to control spending in the long term. Someone other than health care providers must ante up, he said.

“We have to get to the point where we can have that broader discussion, which is not always easy politically,” Tabor said.

White chuckled knowingly when asked about reducing Medicare benefits as an alternative to provider cuts. She joined Deaconess in 1974 and has held many titles there. She has been around politicians for a long time. She knows the breed.

“Don’t you think that will be popular with the lawmakers?” White said, pausing for a moment. “And the constituents who vote them in? Yeah, that’ll be a real easy sell.”

In other ways, too, hospitals and their employees dangle on the decisions of politicians.

St. Mary’s and Deaconess will lose millions because of the 2 percent Medicare reimbursement cuts suffered by every hospital and health system across the country as part of this year’s federal “sequestration” budget cuts. The cuts, which the Indiana Hospital Association’s president later called “a meat ax,” did nothing to reduce physician practice costs.

White spoke slowly and deliberately, as if to keep her temper in check, when asked about the sequestration payment reductions.

“We, Deaconess, are facing a $5 million a year shortfall delivering the same quality of care but automatically $5 million less in reimbursement because of sequestration,” she said.

St. Mary’s has pegged its sequestration payment losses at $3 million per year.

Indiana hospitals got some good news this month that might make the sequestration cuts taste better when they go down. The state said it would increase the amount it pays health care providers who treat Medicaid recipients by an additional $37 million per year.

The move reverses cuts that former Gov. Mitch Daniels put in place in 2010, when the economic downturn had left the state’s tax collection totals far short of what lawmakers expected when they wrote the budget.

Tabor said the restored funding helps, but it does not allay hospitals’ concern that elected officials will turn to them again and again in a political climate that demands they show voters they are reducing the federal deficit. The growth in Medicare beneficiaries still exceeds revenue growth, as evidence by the projection that the federal Medicare trust fund will be exhausted in 13 years.

If health care providers continue to bear the brunt of Medicare spending cuts, Tabor warned, “the only real option that becomes left then is to reduce services.”