The Neverending Battle to do More With Less

By Matt Skoufalos


Just like many of the patients they see, many hospitals in the United States are in survival mode. Beset by shrinking reimbursements, spiraling operational costs, and a constantly shifting political landscape, they press on along an endless drive toward peak efficiency at a desperate pace that affords no slack. For some facilities, even that will not be enough.

Policy-watching can be a bit like augury, but all bellwether discussions of health care revenue start with the Centers for Medicare and Medicaid Services (CMS), which offers even less clarity than usual in the current legislative climate. As millions watch to see whether the government will repeal or replace the Affordable Care Act (ACA), some wonder what will come of the arrangements brokered with the initial passage of the law.

Jim Leonard is director of Healthcare Business Development at GRM Document Management Services of Philadelphia, Pennsylvania and a former hospital CIO at the Regional Medical Center in Memphis, Tennessee. To his thinking, the biggest wrinkle in every reimbursement policy discussion is anticipated Medicaid reimbursement reductions; specifically, he’s worried about the fate of Disproportionate Share Hospital (DSH) funding under any repeal or replacement of the ACA.

According to a June 2016 issue brief on Medicaid Hospital Payments, the Kaiser Family Foundation noted that the ACA would cut DSH payments by $43 billion between 2018 and 2025, with annual reductions starting at $2 billion in fiscal year 2018 and hitting $8 billion annually by fiscal 2025. That same year, an American Hospital Association-commissioned study estimated that even after restoring DSH cuts, the impact of repealing the ACA would hit hospitals to the tune of almost $166 billion. (The same study also calculated that the DSH cuts alone would already cost the health care sector nearly $103 billion.)

“Prior to the ACA, hospitals would do what they could, but a vast majority of their care was written off as charity,” Leonard said. “Disproportionate share funding was provided to hospitals that wrote off more. ACA encouraged hospitals to contribute to their activity: as a component of ACA ramping up, that DSH funding ramped down over five years, and was ultimately towards 20 percent of what it used to be.”


According to a report issued by the Congressional Budget Office in late June, the latest version of the bill in the House of Representatives would cut Medicaid by $834 billion through 2026, and the Senate version would trim $772 billion. Either plan would remove some 14 to 15 million people from the rolls of the insured, and with neither of the current proposals reinstating disproportionate share funding, hospitals could be hit with volumes of pre-ACA charity care patients and no revenues to offset the impact. With many institutions running on incredibly slender profit margins, Leonard said the immediate impact could likely be mass closings of facilities catering to some of the most vulnerable populations in the country.

“We’re going to go back to the early 2000s with this charity care hitting the hospitals, but we’re not going to reimburse,” he said. “We already close about two hospitals a month across the U.S. because they can’t make ends meet.”

According to a 2017 count provided by Becker’s Hospital Review, the country is shedding these hospitals fastest in rural areas. In the last six years, 80 such hospitals have closed, and Becker’s cites a February 2016 study that suggests some 673 of the remaining 1,829 rural U.S. hospitals are at risk of shutting down. Leonard foresees that the smallest community-based urban and rural hospitals that aren’t acquired by larger partners would simply be forced to close. The Regional Medical Center of Memphis, where he was CIO, was both a Level I trauma facility and a safety net hospital for local, indigent populations as well as those from neighboring Arkansas and Mississippi, for example.

“We had an awful lot of charity care from folks in the surrounding area that really didn’t have another alternative,” Leonard said. “Memphis has Baptist Healthcare, Methodist Healthcare, and all these larger entities did not want the Regional Medical Center of Memphis to go away because they shunted a lot of what would have been charity care for them to the safety net hospital.”
“Grady in Atlanta, Martin Luther King in Los Angeles, Cook County in Chicago – these hospitals that are really now providing a lot of the safety-net services for inner-city areas will also be significantly damaged by this because of pulling people off Medicaid and not providing disproportionate share funding through the states,” he said.

But exactly how severe the impact of any reimbursement changes on the horizon might be is entirely uncertain due to the absence of any detail around the ACA and any changes to it.
“CMS can’t react to that until they get a bill that is actually law, and they begin to generate responses to that law that affect reimbursement to hospitals,” Leonard said. “No one knows what that law’s going to look like.”

Complicating matters further, he points out that the hospital industry was already “on the tail end of meaningful use” funding, which in itself yielded unintended consequences. After facilities moved to new electronic health records and electronic medical records, many struggled to address “the drastic infrastructure cost increase” in supporting the newer, more expensive software, Leonard said.

“If you had a hospital that was running Meditech and then moved to Cerner, their operational costs to make that move – not buying, but running that EMR and staffing the people – you’re tripling your costs,” he said. “To run Epic, it’s quintuple costs. Yes, the funding associated from CMS paid for the acquisition of that EMR, but that funding is gone.”

“Those hospitals that didn’t pay close attention to that cost are in trouble,” Leonard said. “The ACA saved them, it kicked that can down the road. Because more people came onto Medicaid, and we were doing less charity care, we covered our bases there for a little bit, and it covered up that problem with some additional monies coming from the Medicaid program.”

“Now we talk about those people getting dropped off of Medicaid, and the disproportionate share funding not coming back, and this massive operational cost,” he said. “It’s a perfect storm for these hospitals. We’ve ramped up our cost structure to run the hospital without proper reimbursement to counteract it, and now we’re looking at Congress doing some things without understanding what they’re doing other than being fiscal hawk conservatives and trying to reverse the government spend.”

Trying to anticipate the direction of regulatory priorities is challenging enough for hospitals and other care providers; for technology vendors it can be a windfall or a calamity. Software and hardware developers able to seize on new regulations can avoid financial penalties or maximize the benefits of a lucrative reimbursement structure, however temporary. Denise Clarke, senior consultant at Boston MedTech Advisors in Dedham, Massachusetts, advises the startup businesses with which her company contracts that the steadiest path is the one centered on quality of care, health outcomes and cost savings.

“Some people might think FDA is the largest approval, but it’s the first that you go through,” Clarke said. “If you have a novel technology, you have to apply to get a new [billing] code, and once the code is created, that doesn’t even assure that you get coverage. It can be a long wait.”

Moreover, Clarke said even those technologies that offer better quality of care must offer more than an incremental improvement to be relevant to investors as well as to potential customers. Asking buyers to implement any new device, or to work with any new vendor, is often an invitation to changing workflow, which can be a big part of the opportunity cost.

“For a physician to change the way he’s doing his practice over 15 years, it has to be better clinical outcomes, better reimbursements,” Clarke said. “It’s hard to change people’s habits and behaviors. Hospitals love the status quo. Once they find something that works and works well and everybody’s trained, retraining staff on a new device, new procedures, new workflows, is an uphill battle.”

The most successful new medical equipment is that which is already aligned with reimbursement, Clarke said; for newer devices, developers must consider whether their technology will leverage existing reimbursement channels or must find new ones. She recommends that no manufacturer take on this task without the support of a reimbursement expert, and hopefully, with endorsements from professional societies who examine the clinical data around the technology in question.


Even for existing products, CMS policy changes can have real impacts beyond immediate reimbursement concerns, said Wayne Webster, CEO of the Boston, Massachusetts-based Proactics Consulting. Similar to Leonard’s observations about the increased costs surrounding EMR and EHR solutions, he said the impact of dose reduction requirements led many facilities to overspend in a rush to resolve their reimbursement concerns.

“When XR-29 was passed into law, people had to sit down and make rational decisions,” Webster said. “‘Am I going to spend thousands of dollars on another CT or look at my throughput and see how that reduced reimbursement’s going to impact me?’ For the OEMs, I’m sure it was a real shot in the arm for CT sales, but it was a one-time thing, and it doesn’t happen again and again.”

“If you chose not to put in the new software, you got paid less,” he said, “but the real impact was on people who took perfectly good commercial machines and replaced them. They spent a huge amount of money and basically don’t have anything that’s any better.”

Any particular CMS policy may have an impact on reimbursement, Webster said, and generally, it’s a downward pressure. Even studying the changes published by the government agency fastidiously may only reveal the most minimal of impacts if they fall outside of a providers’ specific area of practice. When providers consider leaving, entering, or expanding a given line of business, Webster recommends running a five-year analysis, at minimum, to generate a well-rounded projection of the potential future landscape.

“We work with that assumption in a hypothetical way,” Webster said. “We run the numbers based on throughput and individual reimbursement going down 5, 10, 15, 20 percent over those five years, and ask, ‘Can you afford to do this if this happens?’ ”

Webster calls this “the supermarket discussion,” not only in that the operating margins of both hospitals and food purveyors are comparably slender, but also in that it’s not always possible to pass along the costs of those products and services to the customer. Instead, he recommends looking at lines of service in the context of how changing reimbursements move their practices.

“I think 5 percent of the people I talk to look at the reimbursement number and don’t look at anything else when they’re looking at a new area [of business],” Webster said. “If you’re doing it for the money, that’s what you do. You find in hospitals, they worry about it, but you can always fine-tune. The only way CMS can control the budget is reimbursement.”

Webster foresees that in addition to downward reimbursement pressure, CMS will be looking to improve equipment usage time from levels of about 45 to 50 percent to about 95 percent. For hospitals, that will raise questions of efficiencies across a variety of modalities, including how to generate more throughput. But he also points out that imaging reimbursements have historically fallen from their introductory rates, and doctors aren’t ordering fewer scans.

“CMS can lower the reimbursement of a particular study, and more scans get ordered,” he said. “Now they’ll pay for one acquisition and one setup time, and people went nuts over it, but I didn’t see clinics shutting down, and I didn’t see hospitals saying they’re not going to do more CTs because they’re not getting paid enough. The money is in the system, but it’s very expensive. As certain [procedures] become older and older, they’ll pay less and less.”

Webster doesn’t foresee a solution for rural hospitals, however, particularly if throughput becomes a metric upon which reimbursements hinge. When population or consolidation aren’t feasible solutions to questions of reduced reimbursement, the only answer may have to come in the form of policy change.

“The rural guy says, ‘Who am I going to be bought up by?’ ” Webster said. “The answer is ‘nobody.’ ”