Healthcare Reform Will Hurt Hospitals

By Richard A. McGrath, CIC, LIA
Hospital News

Many hospitals are closing, merging or experiencing deep financial problems.  But if proposed healthcare reform being debated by Congress becomes law, the financial condition of hospitals will become even worse and the quality of healthcare will suffer.

How much worse financial conditions become depends, in part, on how Congress handles reimbursements to hospitals and physicians for patients covered by Medicare and Medicaid.

Currently, both government programs pay healthcare providers at below-market rates, resulting in higher charges and higher premiums for those who are privately insured.  Cost shifting by Medicare alone was responsible for 12.3% of the increase in private health insurance costs from 1997 to 2001, according to a study in Health AffairsHealth Affairs found that for every dollar of costs hospitals incur, they receive $1.22 from private payers, but only 95 cents from Medicare.

Worse still, Medicare will cut payments to physicians by 21 percent beginning in 2010, with further cuts down the road, unless Congress passes legislation to prevent the cuts.  Legislation has passed in the U.S. House of Representatives, and is now being taken up in the U.S. Senate.

Medicare reimbursements are worrisome to hospitals and other healthcare facilities, but Medicaid reimbursements are an even greater problem.

Medicaid reimbursement rates vary from state to state, but Medicaid generally pays much less than Medicare.  So much less, in fact, that the American Medical Association and other industry lobbyists consider it a victory that the version of healthcare reform approved by the House would boost Medicaid reimbursement to 80% of Medicare rates in 2010 and gradually to 100% in 2012.

However, reform being debated in the U.S. Senate would keep Medicaid reimbursement rates at their current level, while dramatically increasing the number of people eligible for Medicaid coverage.

What To Expect

While no one knows what the final version of healthcare reform will look like, it would be wishful thinking to believe that the House version of reimbursement rates will be adopted.

One reason is the overall cost of the plan.  Although the alleged reason for reform is to make healthcare more affordable, both versions have a projected cost of more than $1 trillion.  The “economic stimulus” package approved by Congress early in 2009 was the most expensive piece of legislation in history with a price tag of $787 billion.  It would become a distant second to the cost of healthcare reform.

Congress is looking for ways to reduce the projected cost of healthcare reform to less than $1 trillion and reimbursement rates are a prime target.

Of course, estimated costs are not the same as actual costs, which could carry even more bad news for hospitals and physicians.  If past history is a guide, the actual cost could be far greater than $1 trillion.  In its first year, Medicaid was projected to cost $238 million, but ended up costing $1 billion.  After adjusting for inflation, Medicaid costs have multiplied 37 times and this year alone will cost $251 billion.  The initial cost of Medicare was $4 billion, but it now costs $428 billion and its annual costs continue to increase far faster than the rate of inflation.

Even with these increases, Medicare is in such poor financial shape, it is “headed for a financial abyss,” according to The New York Times.

Given its financial condition, the pending retirement of 77 million baby boomers, and our ever-increasing life expectancy, you might assume that much of the budget for healthcare reform will be going support Medicare.  On the contrary, Medicaid spending will increase dramatically, but, to compensate, the approved House bill would cut Medicare spending by $426 billion over the next decade.

Given the financial pressures this will place on Medicare, it is unlikely that reimbursement rates will increase.

As for Medicaid, the Congressional Budget Office estimates that an additional 15 million people will be covered by Medicaid.  The House measure would extend Medicaid eligibility to those earning up to 150% of the federal poverty level, while the Senate version would extend eligibility to 133% of the poverty level.

Even if Medicaid reimbursement rates were on par with Medicare rates, hospitals would be losing money on 15 million new patients.  The improved reimbursement rates would not apply to community health centers, which would treat many of the new Medicaid patients.

On the positive side for hospitals, a major goal of the reform is to reduce the number of uninsured patients.  Both versions of healthcare reform require everyone to purchase insurance or pay a fine.  Both versions also mandate that insurers cover anyone who pays their premiums, regardless of medical history.

We haven’t even touched on the “public option,” the most controversial section of the proposed reform.  If it is included in legislation that is signed into law, many believe that the public option will eventually replace private health insurance, since it will be subsidized by taxpayers and will initially have a significant price advantage.

In lieu of the public option, Congress is also considering expanding eligibility for qualifying for Medicare and Medicaid.  Instead of waiting until age 65, people as young as 55 years of age would qualify for Medicare.

Currently, private insurance premiums are higher than they would otherwise be, because hospitals need to cover the losses from government-run programs.  What will happen when there are no more private programs to subsidize the government programs?  Will the cost of the government program escalate?  Will government reimbursement rates get slashed?  Or both?

Another cost consideration for hospitals and other healthcare providers is the cost of health insurance for their own staff.  If we’re spending $1 trillion to make health insurance more affordable, will hospitals at least enjoy some relief with lower health insurance premiums?  Not really.  The Congressional Budget Office predicts that healthcare reform would result in relatively level premiums for most employers, but higher premiums for individuals, many of whose are uninsured.

While many of the uninsured will be eligible for coverage through Medicaid, others who have chosen not to buy coverage will end up paying more or be fined for not buying insurance.  So how is this making health insurance more affordable?

Quality Issues

The added cost of healthcare that would result from healthcare reform might be worth it if it resulted in improvements to the quality of care, but it’s likely that care will be compromised.

If hospitals are closing today because of financial difficulties, imagine what will happen if healthcare reform is approved.  Fewer hospitals and fewer doctors can only result in lowering the quality of healthcare.

While both the House and Senate versions of the legislation spend many pages addressing quality, much of the projected quality improvement would come from new government agencies.

The House version, for example, would create a Center for Comparative Effectiveness Research that would “conduct, support, and synthesize research on outcomes, effectiveness, and appropriateness of health care services and procedures.”  It would also establish a Center for Quality Improvement to “identify, develop, evaluate, disseminate, and implement best practices in the delivery of health care services.”  The Senate version would create a Patient-Centered Outcomes Research Institute “to identify research priorities and conduct research that compares the clinical effectiveness of medical treatments.”

In other words, both bills take much of the healthcare decision making out of the hands of doctors and put it into the hands of government agencies and committees.

Given this shift of control, a group of physicians from the American Medical Association, in testimony before Congress, stated that government-imposed treatment guidelines in Congressional proposals would compromise the quality of care and even prevent them from fulfilling their professional responsibility to their patients as their highest priority.

Both bills include many, many more changes.  The House bill is nearly 2,000 pages long and the Senate bill exceeds 2,000 pages.  That alone should make Americans wonder how their healthcare will be affected.  When a bill is that long, what else does it contain that will affect our health?

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at

This article is written for informational purposes only and should not be construed as providing legal advice.