Radical Surgery Is Needed on the Way America Finances Health Care
Never mind the operating room. The most critical procedures at hospitals these day are taking place in the billing department.
The scandal of the moment in medical care -- in which Tenet Healthcare Corp. is being audited by federal officials who are concerned that the hospital company may be overbilling Medicare for certain services -- is symptomatic of widespread problems in the way America finances medicine today.
The issue is one of incredible complexity and confusion in the way hospitals and doctors are reimbursed by Medicare and private insurance companies alike. One expert calls it a “discontinuity between rising costs of providing medical care and continued discounting of reimbursement.”
The difficulty stems from a failure so far to cope with an inescapable fact: As the American population ages, more people will be sicker longer and therefore will cost more to treat.
So-called outlier payments, which have been aggressively pursued by Santa Barbara-based Tenet, are one of the convoluted ways the system tries to compensate for that failure.
Practically every hospital and health-care provider in the country benefits from such payments. They are part of the way the system muddles along, patching an extra reimbursement here to cover an unnecessary shortfall there -- Band-Aid on Band-Aid.
Despite the curious term, outliers are not patients lying on cots outside a hospital ward. They are patients who require particularly long hospital stays because they have complications after surgery or simply because their age and level of illness make extraordinary treatment inevitable.
If, say, an elderly patient comes in with a respiratory problem and has to go on a ventilator, that could mean a 20-day stay in the hospital. Yet that would be longer than is specified for respiratory treatments in the contracts typically negotiated between hospitals and those on the other side of the table: private insurers and, in some cases, the federal Centers for Medicare and Medicaid Services.
The days the patient stays beyond contract terms are called the “outlier” period. But rather than leave the hospital eating the loss, the facility is actually reimbursed at a higher rate per day than the contract would otherwise allow.
Why higher? Because these outlier payments are closer to a hospital’s own list of prices for care, which are adjusted for inflation. The contracts with insurers and Medicare fail to fully recognize inflation as a factor.
Hospital payroll costs, for example, rose 8.6% in 2001 -- more than double the increase of the previous year -- because there are severe shortages of skilled hospital personnel. For example, there is a dearth of nurses in California, a situation that could get much worse if new state regulations go into effect specifying one registered nurse for every two or three patients in some specialties.
Still, Medicare and insurer contracts make little or no allowance for such cost escalation. So, outlier payments are used to compensate and keep hospitals and doctors offices functioning.
“Insurers and Medicare are very understanding in making the outlier payments because they recognize the problem,” says Blair Contratto, chief executive of Little Company of Mary Hospital in Torrance. Outlier payments account for almost 10% of revenue for Contratto’s nonprofit facility. (Tenet, for its part, is accused of boosting outlier payments to 26% of revenue at some of its hospitals.)
The fact that such a roundabout scheme characterizes the financing of the nation’s largest single industry -- with $1.5 trillion spent last year on doctors, hospitals, drugs and other treatments, 14% of the gross domestic product -- signals what a mess we’re in.
Is there a better way to handle all this?
The answer is a resounding yes -- but it would require the recognition that quality medical care is expensive and growing more so. As a first step, the financing system could become far more straightforward with relatively little effort.
“Contracts could include a 3.5% escalator clause to bring them closer to reality,” says Susan Medel, chief financial officer of TMGI Cos., a Pasadena firm that manages community hospitals in Chino and the east San Fernando Valley.
But longer term, truly tough choices must be made.
We need to own up to the fact that hospitals are treating more elderly and sick patients than ever before, thanks to changing demographics and technology that keeps the infirm hanging on. And somebody is going to have to pay for that.
In turn, there will be increasing strains on a system in which 41 million Americans already are uninsured. “Are we really saying that reductions” in medical care should be “experienced mainly by the poor?” asks Uwe Reinhardt, a Princeton University health-care scholar. “I would not want to make that call -- other than to plead that we be honest about it.”
One company that is trying to approach things in a more upfront way is PacifiCare Health Systems Inc., which covers 3.2 million people. The Cypress-based company operates the Secure Horizons HMO to provide total medical care, including pharmaceuticals, for Medicare recipients.
But Medicare’s reimbursements no longer are keeping up with rising costs. The federal health program for the elderly used to cover 95% of the medical expenses incurred by PacifiCare. Then in 1997, Congress passed the Balanced Budget Act and forced Medicare to cut back its reimbursement rates.
So now PacifiCare has come up with another solution: It’s asking its Medicare patients to foot more of the bill.
“About half our Secure Horizons members will be asked to pay higher monthly premiums to offset health-care inflation and insufficient federal funding,” says a PacifiCare spokesman.
Ultimately, every health-care consumer is going to be called on to do the same thing. It’s not an easy pill to swallow, but financial shell games like outlier payments can mask reality for only so long.
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James Flanigan can be reached at jim.flanigan@ latimes.com
