“Medicare for All” would destroy America’s great hospitals

(Fourth in a seven-part series: Medicare for All – Quality and Accessible Care for None)

First of all, it must be stated: Everyone in the United States has access to quality medical care regardless of ability to pay in America’s great hospitals.

It is a misconception, and a common cry with the “Medicare for All” crowd that that because many in America don’t have health insurance, they aren’t able to receive medical care. As virtually any Emergency Room physician or nurse will convey, that isn’t true. In most cases, hospitals would treat these uninsured patients anyway, but they must do so because of federal law.

The Emergency Medical Treatment and Active Labor Act (EMTALA) was passed in 1986 as part of the Consolidated Omnibus Budget Reconciliation Act (COBRA). It states that all hospitals under the CMS (Centers for Medicare and Medicaid Services) system, must examine and treat essentially anyone who walks into the waiting room.

As we as a nation seriously consider whether or not we want a socialized system for our medical care, many would be surprised to learn that our hospitals are not in very good financial shape. Yes, of course they see the expansions and exorbitant hospital bills and immediately assume our medical centers are overcharging for care and loaded with money. For some elite centers this may be true, but overall, hospitals are not in good financial condition and would be irreparably damaged by a single-payer, socialist, “Medicare for All” type system.

Though the current proposal in D.C. is a socialist’s dream, today’s hospitals do not even remotely exist in a free market, as we saw in Part 3: Health care in America: Great Medical Care, Poor Payment System. High-cost, inefficient hospitals still enjoy considerable patient volume and revenue protection. If they had to compete in a true “free” market, one that weeded out high cost providers and rewarded the low-cost ones which in turn rewarded the consumer, these hospitals would have been long gone. With hospital systems, size matters much more than cost control or productivity. The greater the size, the higher the price a system can extract from health insurers (i.e., the insured who pay the tab).

[Deep in the WEEDS ALERT: Over the decades, hospitals and insurers have negotiated payments based on a percentage of charges. Immediately after Medicare’s inception in 1965, it paid hospitals like private insurers did on a “‘retrospective cost-based reimbursement” method. This proved to be way too costly to the federal government as hospitals were almost incentivized to add costly (often times unneeded) services to the patient’s Medicare tab. So in 1982 Medicare went to a DRG (diagnosis-related group) system in which it paid a flat-rate for inpatient medical care regardless of the cost to the hospital or the patient’s length of stay. This began the change from Medicare overpaying for care to now significantly underpaying or coming close to covering cost of treatment.
[Now hospitals were faced with finding creative methods to make up for this new revenue shortfall. One of the primary ways was for hospitals to raise their charges (prices) significantly as this maximized their revenue with insurance companies since they were paid as a percentage of charges and not on the cost of services.
[There was little opposition from insurance companies who could raise their prices to mostly employers without much outcry. Nor did insured patients complain as they were already paying little or nothing out-of-pocket. So-called “charity” care patients didn’t care either nor did those who were considered “bad debts.” It was only the uninsured paying patients who bore the brunt of this pricing strategy and often times these true victims amounted to less than 10% of a hospital’s patient pool. To be sure, many of these patients had their bills significantly discounted from their original bills.]

* * *

Total hospital revenue in the United States from all sources in 2016 was $1,082.5 billion. Hospital “profit” margins peaked in 2014 as many former “no-pay” patients joined the Medicaid rolls. Hospitals benefited as Medicaid paid most (not nearly all, but most) of the cost of these former “charity” care patients. [The American Hospital Association (AHA) says the amount of bad debts and uncompensated care in 2016 was $38.3 billion in costs, representing 3.5% of total hospital revenue.]

Combine this recovered shortfall with the financial windfall of more having been forced to buy private insurance and hospitals were doing reasonably well in the early years of the ACA. However, these benefits were offset somewhat by reductions in Medicare reimbursements (the ACA cut about $500 billion over 10 years out of Medicare to help “pay” for itself) along with individually-negotiated hospital discounts to patients who struggled with new, crushing out-of-pocket deductibles and co-pays.

Even if Medicare for All never becomes law, hospitals are already in poor shape. If the politically inspired but inaccurately named “Patient Protection and Affordable Care Act” or Obamacare (ACA) continues as is into the 2020s, the Congressional Budget Office (CBO) says that hospitals better show major “productivity growth” if they are to survive by 2025, just 7 years from now.

What is most frightening is that CBO says if hospitals don’t achieve these large cost reductions, or if they use any of the savings for expansion or even quality improvements and not 100% purely for cost reductions, the number of America’s hospitals in financial distress will rise to 60% by 2025! This is even before discussing the catastrophic financial impact of a “Medicare for All” bill.

CBO ominously found that if they just match the historical productivity growth of the nation as a whole and use 100% of these gains to just reduce costs, then those hospitals losing money will only rise to 41%.

Even matching the national productivity growth rate won’t be easy because the overwhelming majority of a hospital’s costs are personnel expenses. Achieving serious reductions in costs will be very challenging especially given the already high demand for nurses that will continue to grow as more baby boomers need care.

But even with this demand, many youths thinking about a career choice in a time of full employment are moving away from nursing given the high demand of other professional options, most of which don’t require weekend- or night-shift duty. Consider this headline from The Atlantic less than two years ago: “The U.S. Is Running Out of Nurses. The country has experienced nursing shortages for decades, but an aging population means the problem is about to get much worse.”

This isn’t what you want to hear if you’re a hospital CFO trying to lower personnel costs. Not only will nurses be harder to acquire, they’ll be more costly to just retain. [Productivity gains are achieved by increasing output with the same costs, maintaining output with reduced costs, or most likely a combination of the two.]

Lower staffing levels would ultimately mean fewer available beds as medical centers seek to maximize their in-patient occupancy. Most hospitals have large (mostly seasonal, often unpredictable) variations in their rates of occupancy. Part of America’s health care costs lie with fully staffed but unoccupied beds or excess idle capacity. These beds may be empty in July or August, but the staffing must be in place because the beds may be fully occupied in January or February say when a flu outbreak occurs. [These are “stand-by” or “idle-capacity” costs not so different from a city employing full-time firefighters who are (thankfully) not fighting fires the majority of the time. Such costs have historically been accepted by most communities that want beds available in the event of unforeseen mass injury or illness.]

If hospitals begin to experience real financial distress, they will then staff for average occupancy at best. This has the de facto impact of shutting down available beds during peak months.

Here’s the really bad news: The operating margin for hospitals in America is now less than minimal replacement cost (of building and equipment). Without sufficient surpluses, upgrade/replacement plans will either be postponed, reduced in scope or scrapped altogether. This doesn’t bode well for an expanding, aging American population.

Over time the deterioration of hospital facilities will be visible. Internal, non-visible technological degradation is harder to detect but will be present and harm medical advances as yesterday’s technology is, unfortunately, kept in use well past its state-of-the-art life.

What will eventually be a major productivity (and quality) enhancing change is medical providers’ significant and required investments into IT and electronic medical/health records (EMR or EHR). Digital capture and storage of medical records has been progressing for some decades now but the ACA mandated that all public and private health care providers invest in, and show, a “meaningful use” of EMR, i.e., not just lip service. But for many providers, especially older physicians, achieving real productivity gains using EMRs takes a lot of time (for users to acquire high-tech proficiency).

CBO’s warning that 100% of a hospital’s productivity gains better go to nothing other than cost reduction is simply unrealistic. It leaves no money even for replacement costs of “non-productive” assets like roofs and parking lots. Neither of these necessarily add to productivity but try operating a quality hospital with a badly leaking roof.

Four out of five hospitals in America are not-for-profit, meaning that every dollar of a hospital’s surplus is invested back into the community mostly in the form of higher compensation, upgraded facilities or new equipment. The operating margin for hospitals in America fell from 3.4% in 2015 to a paltry 2.7% in 2016. This is barely sufficient for survival let alone an adequate surplus (generally considered around 5%) necessary to replace deteriorating buildings or outdated equipment. The ratings agency Moody’s added to the bleak outlook by saying margins will likely go lower due to rapid increases in pension payments along with increased drug and labor costs.

One of the guaranteed outcomes of diminished reimbursements for hospitals will be the demise of the locally owned and governed community hospital. Many of the rural hospitals will likely close and the financial pressures will ultimately force others to merge with a larger, less locally-governed hospital system. In another decade, unaffiliated community hospitals may be as rare as the old corner grocery store.

This prediction isn’t rocket science. Medicare will continue to pay less in reimbursements than it would have without the passage of the ACA. That will squeeze the already tight margins of the smaller hospitals that don’t have the negotiating clout of the larger systems with either insurers or suppliers. This situation has been going on before the passage of the ACA, but the law certainly has accelerated the closure or affiliation process.

Other than D.C. intervention, the single greatest problem with the American medical system is the number of people who receive treatment but neither have insurance nor pay their bill. This includes all bad debts and so-called “charity” care.

The estimated cost of these “no-pays” to America’s hospitals is extremely high, nearly $40 billion. This figure does not include the underpayments to hospitals from Medicare and Medicaid that don’t even cover the cost of the medical care provided. This is the actual cost of treatment, not the price charged for these . Many would be surprised to learn that Medicare only pays about $0.87 on a dollar of actual cost. Medicaid pays only $0.88. These so-called “underpayments” are enormous. For 2016, they totaled $68.8 billion compared to those who didn’t pay at all ($38.3 billion).

What this means is that private insurance companies pay about 40% more to hospitals than the government does via Medicare or Medicaid. This premium seems high but it still just results in a minimal surplus. It doesn’t take a rocket scientist to figure that a staggering number of hospitals won’t survive if paid less than 90% of cost. It also doesn’t take a political scientist to figure that the voting public won’t permit a mass closing of America’s medical institutions so payments will likely move up to say, 104% of cost leaving a reasonable rate of return. But this would further blow up the Medicare for All cost, now calculated to be over $32 trillion over the next ten years, by likely adding about 18% to payments to hospitals.

At this point, the only strategy that will save America’s hospitals is a return to the free market where prices are published to inform consumers, low-cost/high-quality providers are rewarded and others forced to improve or close. Government is already causing hospitals to die a slow death. If Medicare for All becomes law, this will only accelerate their demise. Only real free market solutions will ultimately protect America’s great hospitals.

(Next up: PART 5: “Medicare for All’s” Fatal Flaws)

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