Hospital Profit Margins From Medicare (MedPAC Graphs).

You want to know why Obamacare will destroy your access to health care?  It's because Obamacare massively expands government intervention with substandard market prices. To guarantee access to health care, the Obamacare core principle is to expand Medicaid to tens of millions of poor (term used extremely loosely) while taking away extra money hospitals are paid to care for indigent populations.  Can hospitals survive on Medicaid?  The answer is no.  It is a resounding no.  But to help put that answer into perspective, look no further than the reality of how hospitals are paid by Medicare.  As a general rule, Medicaid pays much less than Medicare.

To understand how much money hospitals collect from Medicare, I present to you the March 2011 Report To The Congress Medicare Payment Policy by MedPAC (Medicare Payment Advisory Commission).  It contains 361 pages of enlightenment that will open your eyes to the reality we currently face.  If this report is too much to handle in your busy day, make sure you read the three page 2011 MedPAC Fact Sheet that sums up their 2012 recommendations.

Embedded deep in the long version on pages 50 and 51 are two very telling graphs that explain quite clearly the reality of the situation we find ourselves in.  Medicare cost growth is out of control and unsustainable.  We are on a crash course with financial suicide far worse than the 1.5 trillion dollar yearly deficits under Obama and Co.  We are looking at 99 trillion dollars of unfunded mandates and the Storms on the Horizon should jolt anyone with any sense reality back into a state of submission and purpose.

So what's the problem?  Why can't we just cut payments to hospitals?  Aren't they cashing in and getting rich on the backs of old people who are offered an unlimited buffet of health care?  The answer is no.  Hospitals are not getting rich on your illness.  In fact, on average, hospitals lose money on every Medicare patient that shows up  to get served.

From the MedPAC article referrenced above, I present to you two graphs (pages 50 and 51 of the report linked above)

Graph of hospital Medicare margins:  in patient, outpatient, and overall

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Overall Medicare margins by hospital group from 2005-2009


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What does this all mean? I think some of these graphs need to be put into context. There are actually some hospitals that have positive profit margins from Medicare as their payer. What are the characteristics of these hospitals? Is their severity of index lower? Are their complication rates lower? Are their 30 day readmission rates lower? Are hospitals that employee their physicians more efficient and therefore lead to higher margins?

If you want to dig a little deeper into what characteristics are associated with positive profit margins for Medicare payments, there is a rather fascinating (at least I think so) discussion from pages 50-60 of the long MedPAC report linked above.    Here are the ending words in that MedPAC discussion:
Historically strong performers continue to have lower cost in 2009. Hospitals that were low-cost and low-mortality providers from 2006 through 2008 continued to have lower  costs in 2009. The median standardized Medicare cost per discharge in the efficient group was 10 percent lower than the national median, compared with 2 percent higher for the other group. The lower costs allowed the relatively efficient hospitals to generate higher overall Medicare margins. The median hospital in the efficient group had an overall Medicare margin of 3 percent, while the median hospital in the other group had an overall Medicare margin of –6 percent. Among the relatively efficient hospitals, 65  percent had positive Medicare margins compared with 34 percent in the other group. The distribution ranged from –3 percent at the efficient groups’ 25th percentile to 7 percent at the 75th percentile. For the comparison group, the 25th percentile was –17 percent and the 75th percentile was 3 percent. 
We also examined relatively efficient hospitals that faced consistent overall financial losses (including revenues and costs from all payers and all lines of business) to see if any of these hospitals were in danger of closure. Among the efficient group, 2 percent (four hospitals) consistently had negative total (all payer) margins from 2006 through 2009. Among these four hospitals, one has since partnered with a larger facility, one is contemplating offers to be purchased, and one is planning to tear down the existing facility and its parent system will build a more efficient facility at the same location. The fourth is a teaching hospital that appears to have financial resources from a foundation that supports the hospital. Therefore, we find that consistent  all payer losses are rare among the relatively efficient hospitals, and we expect closures to be a very rare event.  Among the less efficient hospitals, a much larger share (8 percent) faced consistent financial losses during the  2006 through 2009 period. This loss could stem from their higher cost structures.
This is interesting.  How do I interpret this?  Basically the folks at MedPAC are saying that efficient hospitals can generate positive margins under current Medicare payments. We know Medicare is bankrupt and going forward the numbers look catastrophic.  Even at current payment rates, the numbers going forward are catastrophic.  Which means future payments are only going to continue their declining trend.

I know very few businesses that would jump at the opportunity to generate 3% profit margins under a scenario of perfect execution.    But that's the reality we find ourselves in with Medicare.  At greatest efficiency, hospitals can expect a low single digit profit margin.  At worst, the numbers are a death sentence.  There is no room for error going forward.   Can we keep hospitals open with current funding?  The folks at MedPAC think we can, if all hospitals would just follow the lead of efficient hospitals.  Unfortunately, Medicare is not Medicaid and dumping millions of Medicaid folks onto the payroll while taking away funding for the indigent won't fix anything.  It will only systemize underfunding as a standard business practice.  

How do I interpret all this economic madness?
  1. If you're efficient, you're more likely to maintain positive profit margins, but it is still not guaranteed.
  2. By default, most hospitals in this country are not efficient because most, on average, maintain negative profit margins with Medicare.  If they were efficient, MedPAC says they could generate profit from Medicare.  
  3. Well run hospitalist programs have the opportunity of a lifetime to be that guiding light, turning inefficient hospitals into efficient ones by driving:
    1. A culture of standardization
    2. A culture of safety
    3. A culture of quality
    4. A culture of communication
    5. A culture of progress
    6. A culture that gets it
    7. A culture that demands IT support by default and not having to beg for it
Take everything you've read above about the state of hospital Medicare finances and put it into context with the 57 million dollar hospitalist advantage and you can understand why the hospitalist salary trends continue to show rapid growth and expansion of value that is willing to be paid for.

In the new era of hospital finances and government intervention, it may  not about how much more money you can bring in, it may be more  about how much money you can prevent from leaking out.  There are two sides to the margin equation.  Taking the contrarian view, perhaps squeezing hospital margins is exactly what we need in this country to force change in a 2.5 trillion dollar business that was used to getting paid for everything with no questions asked.  

Alternatively, the other option is simply to stop accepting Medicare and Medicaid money and become the hospital of choice for people who get sick once a year with cellulitis and bronchitis.   And that is where many physicians are taking the lead.


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