Health care managers know this, and frequently consider lower payments for Medicare to be worth taking because the real costs are lower than they will generally admit. Now I will be able to run my business with my new entity! All of our clients are very important to us and deserve the individualized attention and service we strive for by assigning a personal representative to each account who provides his or her cell phone number. I quite like cooking www. Some First Class stamps heartsofhopeutah. Thanks for calling chikodichima.
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A two year old CT scanner may be replaced because a newer and shinier model is available. In a sense, this is a form of advertising aimed at both physicians and patients, trying to sell the notion that the hospital is the best and most modern. All of this adds significantly to hospital costs without providing any real health benefit to patients. What this means is that although the hospital has some fixed costs as well as some costs specific to each service provided, once a certain number of services are provided, the costs of additional services are much lower.
The cost of having one more patient admitted on a unit, or doing one more CT or MR in a day, or even of performing one more surgery in an OR is much lower than the average cost of using of these resources.
Just as a hotel can rent a vacant room for a much lower price, and an airline can reduce the price of an empty seat to fill it, hospitals could calculate reduced cost calculations when the marginal utilization costs them little. However, hospital cost calculations usually ignore this factor.
The nineteenth CT or the fifth surgery is reported as if it cost the same as the first. The issue of marginal costs is complicated, but it is a management fact that exists in every industry, and health care is not an exception. Health care managers know this, and frequently consider lower payments for Medicare to be worth taking because the real costs are lower than they will generally admit. Finally, there is our old favorite, cost effective, efficient, and quality oriented patient management.
The data collected by the Dartmouth Atlas project have demonstrated, year after year, that some hospitals and systems can achieve better health care results at much lower costs than other systems. The main difference lies in the appropriate use of high tech diagnostic and treatment approaches. The data clearly show that many hospitals could achieve striking reductions in cost by using more efficient approaches to managing patient care.
One other consideration deserves attention. Hospitals base their cost calculations on spreading the costs of various operating expenses evenly over all patients. However, there is at least one important area where Medicare patients actually cost hospitals considerably less than private insurance patients: This is an area of hospital management where costs are actually being shifted from private insurance to Medicare, rather than the classic opposite.
The situation with Medicare payments and hospital profits is much more complicated than some people would like to suggest. The losses many hospitals report may be real, but there is tremendous variation depending on management choices, location, and the ways in which costs are incurred. Some hospitals are indeed losing large amounts on Medicare services, while others actually are making a profit.
Most individual Medicare patients are profitable. Many others could make a profit if hospitals improved their operations. Medicare is an excellent program, has high levels of approval from its enrollees, and has provided good care for many patients who would otherwise be excluded from the health care system. Hospitals need to be protected from true underpayment, but Medicare itself and the American public also need to be protected from poor management that leads to increased costs and poor health care.
Can you post a solid source to substantiate below. From my understanding, there is often very little relationship between the hospital bill and the cost of providing medical services. Hospital list price rates are often five to six times what they routinely accept as full payment from insurers.
A commentary on The Health Care blog stated that friend had a surgical procedure done on an outpatient basis.
I know, I tried to research this a couple of years ago for a close family member, I had to slog through tons of hard-to-find bureaucrat-ese to even get a gist of what the story was. Another point on losses being due to ICU patients. There is a well described issue regarding ICU admission. It turns out that ICU admission is,of course, largely due to the patient health status.
However, it is also due to some extent to availability of ICU beds. There is no good evidence that this type of triage harms patients.
Conversely, there is some evidence that hospitals with an oversupply of ICU beds tend to admit patients who are less sick to ICU. This is yet another complication of the issue of cost and hospital management, overbuidling of facilities, and specifically of the issue of marginal costs and its application to hospitalization. I cannot imagine a more perfect job explaining and analyzing this issue.
Nothing of significance was missed or misunderstood. What a great article. If this had been written earlier this year, it would have saved me tons of work. You did a real service by pulling all this info together and explaining it so clearly.
Pat S, Superb article. Now get to work on how private insurance pays hospitals! I know how I get paid but have never thought to ask how our local hospital gets paid. JRossi — I have no idea how private insurers in California work.
There is one monster exception to this rule: Jim Jaffe — I am not quite sure what you are getting at, but I will make a couple comments. First, many hospitals would argue that the only reason they can survive is because private insurance pays them more than Medicare, covering their losses on Medicare and Medicaid. Denis Cortese, the CEO of Mayo Clinic, has been running a road show in which he claims that extending Medicare to non-seniors would destroy US health care, since it would cause a loss of the extra payments from private insurance that he claims sustains health care now.
Mayo, of course, is in an excellent position to negotiate aggressively for better payments from private insurers since it is, after all, the Mayo Clinic. Second, it is my impression that Medicare Advantage payers do not necessarily pay more than Medicare or less than Medicare.
Some Medicare Advantage players seem to pay quite a bit less. In my city, the largest provider system recently created a tempest by refusing to accept four Medicare Advantage insurers which had become popular with enrollees by issuing policies that had monthly fees lower than Medicare Part B. According to the health care system, one of the ways they were doing that was by paying providers and hospitals less than Medicare.
Medicare Advantage comes in three flavors, as far as I can see. Second, there are systems that entice clients with frills like gym memberships and so on, which they buy in bulk for low costs, partly because so few of their clients actually take advantage of the frill.
They can be good, bad, or indifferent. Third, there are systems that entice clients by offering their coverage for less than the cost of Medicare Part B premiums. In addition to the usual subsidy from the government, those systems do that partly by paying out less in claims, like the offenders in my home town. Pat S, Thanks for the info. In your state, do private plans bundle there hospital payments, as Medicare does, or is it more like fee-for-service.
JRossi — That varies with the arrangement that the insurers have with the hospitals. As I say, the most basic arrangement is fee for service with discounts, either negotiated or imposed, but almost every form of payment exists. Sorry to slander you with being in California. As I recall, you have moved around a lot, but thought you were based in LA area now. Where are you now? Thanks for the info, Pat.
Wow, this insurance stuff sounds too complicated for a dumb family doc like me. An MRI was ordered. The MRI building was 70 steps from the main building. Afterward, the procedure was reversed. We got a copy of the ambulance bill from Kaiser: If billed to Medicare, I know why that program is going broke. The neurosurgeon also failed to recognize the characteristic symptoms of hydrocephalus on the return visit, until prompted to look at a CT scan taken that morning.
He denied that the hydrocephalus had anything to do with the slip in surgery and damaging the dura. But he put in a shunt the next morning, though he could not tell us what model valve he had used. Marc— I know that some readers —you, in particular— know far more than I do about Medicare.
I rmemver that you have worked for Medicare in Washington. So I greatly appreciate your confirmation that Pat has covered this subject very well.
EVeryone— Let me add that this post began when Pat wrote a comment on this blog about Medicare payments that told me more than I had ever been able to find out about the subject. Art Appraisor— Like you, I had done research on this topic, but hit blank walls— thank you, for your comment. It also confirms my take that Pat S. He is a doctor and so understands the story from the inside.
Gunther— I am very, very sorry about what happened to your wife. Would you be willing to tell this story to a very good reporter represnting a large news outlet? Pat, you are quite right about ICU beds driving demand. This also occurs with hospital beds in general. The high availability of VA beds drives admission to the barely ill.
It is likely the explanation for the low readmission rates at VA hospitals. Health systems that cater to the employed, such as Kaiser, have the advantage of low disease prevealence and high payments. Hospitals where medicare dominates the payer mix have the opposite problem. You have made an excellent point regarding outliers.
These rare events tend to dominate overall costs. Many of these outliers are hopeless cases which will require EOL reordering, significant costs paid by the patient to discourage futile care and tort reform to bend the curve.
You make little mention of the irrational variation in the level of medicare payments geographically. Hospital featherbedding is a much larger problem that is never mentioned. Our hospitals have literally dozens of vice presidents with secretaries who themselves have secretaries and assistants, but no actual responsibilities. Pat Thanks for the reference.
ICU patients a likely source of pay disparity, but I would be willing to bet that hospital geography, case mix, type and size of hospital may change equation. The paper is more of a 30K feet looksie. Again, more than just hypothesis generating, but not quite the last word.
When Medicare writes about outliers they tend to focus on outlier payments, but their focus is budgetary and is on the payments as a percentage of all Medicare payments, not on numbers of patients. In general, Medicare believes their payments are adequate, and that overpayments for patients who are managed at a lower cost than the DRG payment cover underpayments for most outliers.
They are charged with creating DRG payments that cover costs appropriately, and base their payments on empirical data. It is the hospitals and private insurers who argue that underpayment is a problem, and their organizations and academic studies by sympathetic researchers are responsible for most of the literature on the topic.
Most of the literature from MedPAC and other government sources focuses on the idea that claims of losses are related to poor management and errors. I would be very interested in seeing a breakout on outliers that included the frequency of outlier status being due to preventable management problems and errors. The only other thing I will add is that during 30 years of medical practice I must have sat through at least meetings in which hospital executives have exhorted the assembled medical staff to make every possible effort to control the costs of outliers because they account for most losses on clinical services.
Get out there and improve management of those patients and save the hospital bottom line. You seem to have a wealth of knoiwledge on this subject. Regional variations of Medicare payments are an issue that causes a lot of controversy among politicians and health care professionals. The variation for hospital payments is due to the calculation of the weighting factor for wages, the weighting factor for academic training centers, and the weighting factor for high populations of Medicaid and non-paying patients.
In some areas of the country these variation factors are partly mitigated by other weighting factors for critical access and regional referral status for hospitals in low population areas. Medicare believes that their weighting system is fair, and reflects real costs of hospital operation as well as protecting the financial position of hospitals providing critical services in low income areas, in rural areas, and of training institutions.
Vows by politicians to refuse to vote for needed programs unless their regions get more money are common features of political discourse on health care. It is absolutely true that every single health care administrator in the US believes their hospital is being cheated by the system, and should get more money. The issue that is valid in examining this question is whether calculations of wage costs and of service to low income patients are correct.
Those variations, which are based on cost of living calculations which in turn are largely based on wage and real estate costs with a contribution from politics, cause a lot of dissatisfaction.
I spent my entire career in areas that were on the low end of the payment scale, and often felt that the calculations were unfair. Your other points are largely true. The VA also sees a lot of very sick older vets with complex underlying health problems that have been neglected for years.
I would be willing to bet that COPD, congestive failure, type 2 diabetes, and liver disease are much more prevalent among VA patients than the general population. These patients result in a level of acuity in VA admissions that rivals or exceeds that of suburban hospitals that send some patients home that the VA might admit. My best guess is that the reason private insurers pay more is for competitive reasons having to do with offering coverage that allows them to secure clients.
Private insurers have to deal with the possibility that health systems will refuse to accept their insurance. That creates all sorts of potential problems with sales.
Medicare, of course, has its famous partial monopsony status. One piece of evidence that this is true is the large variation in payments by private insurers. Christopher, Don, Everyone Christopher— Your assertion that the large number of available beds drives VA hospital admission for patients who are barely ill is simply not true. As a result of the Gulf War, and now the War in Iraq—not to mention aging Vietnam Vets—we have a huge number of Vets needing all types of care. In most areas, capaciy is strained.
In particular, we have many Vets from the IRaq war suffering from serious psychological problems and post-stress trauma. Many need to be hopsitalized. One would think that since private insurers are payors, they would be arguign that hospitals are over-charging and could care for patients for less if they were more efficient.
They can always pass excessive costs on to the cutomer. This is why we need a public plan to look out for the public good. Higher quality care at a lower cost. Pat makes very good points about Kaiser and the VA in his Aug 26, 11 32 a.
Kaiser now has many Medicare Advantage patients. And we know that low-income people are far less healthy than the rest of the population. Also, while many Vietnam Vets were drafted into the army the effects of being in Vietnam trauma, stress, psychological problems drug addiction thanks to the wide availability of drugs made many of them unemployable or only barely employable when they came home.
So today, at age 60, they are poor and have little in the way of a support system. Thus the VA does become a nursing home for Vets who otherwise might be living on the street. I disagree with you that Medicare cannot just pass the costs on, for it would have to raise taxes. They have very creative ways to handle deficits, such as borrowing from the Treasury, and not paying back principal or interest, or simply taking from general revenues and increasing the debt.
Far from borrowing from the treasury, the treasury is borrowing from it. Granted, Part B, Medicare Advantage, and Part D are large users of government subsidies, partly, in the cases of Part D and Advantage, to give largess to various private companies that are major beneficiaries of the programs.
It is also true that Part A is going to go into the red sometime within ten years unless something is done. This is what makes the assertions that reform will hurt Medicare so ludicrous, since far from hurting Medicare, the reforms are necessary to save it, the only other choice being to increase costs and cut services to the beneficiaries to the extent that the program would be destroyed. The Trust Fund Perspective is nothing other than accounting, as if you were putting debits and credits in your calculator.
It is not dealing with actual cash. Don — You are right. The obligation to find the money to fund Medicare and Social Security is an obligation of the general fund, and the taxes, mostly income taxes, it uses.
The government has spent every penny of the Medicare and Social Security trust funds on tax cuts for high bracket payers and on misadventures in the Islamic world. But they still owe that money to the programs. I know that is popular idea among people of some political orientations, mostly because they would like to explain away the taxes that the general fund will have to raise to pay those obligations.
Just watch what happens to the ability to sell other government obligations and to any politicians who try to sell the idea that the trust funds have vanished with a poof. You can follow any theory of voodoo accounting you choose, but the government is stuck with the obligation because it is politically and economically impossible for them not to honor the obligation. The people who saved billions in taxes at the expense of the trust funds better get used to the idea that the taxman is coming back, and start saving up now, because the government is going to have to put that actual cash they borrowed back.
Meanwhile, we should return to our regularly scheduled programming, a discussion of the relationship between hospitals and Medicare, and the facts governing that relationship. An excellent informative post. Makes me want to read your book. My overall impression from reading your blog is the huge intricacy and complexity of the payment system. DRG payments are based on individual patients, and it seems inevitable that providers will game that kind of system to increase reimbursements.
Reimbursements could be calculated for large numbers of patients grouped into broad categories. The stability and predictability of aggregate-based payments would be greater. And because the variance of the group decreases with size, it should be more difficult to game the system—outlier billing would be detected quickly and could be audited.
To discourage cherry-picking, payments based on broad categories could be adjusted by statistics on the overall health of the population served. That is essentially what the DRG system is.
I am sorry if that was not clear in the original post. The problem being encountered is that like all collections of statistical data, there are some patients — outliers — who do not fit well in the general data. For hospitalized patients those tend to be either people with underlying health problems that complicate their stay and lead to longer admissions with more intense treatment, or people who suffer misadventures while in the hospital, either unavoidable or avoidable, that lead to them requiring longer stays with more intensive management.
This outlier status is pretty close to what would be expected in any statistical analysis of data based on humans, with outliers fairly near the first and second standard deviations, although the curve is slightly shifted from an absolutely standard distribution. However, the big news is that better management techniques by hospitals can decrease outliers, especially programs designed to provide effective care and avoid marginally effective or ineffective care, efforts to improve the baseline health of patients who are regular repeat users of hospital services, and programs to decrease occurrence of untoward events that complicate patient care.
There are programs on the shelf to begin accomplishing all these things, and certainly new ideas should be developed based on good research.
However, compliance with these things is not uniform or even widespread, for a variety of reasons mostly due to culture in health care and to the reluctance to recognize that up to this point a hospital may not have been doing the best possible job for some of its patients. The models available in places like Mayo, Cleveland Clinic, Kaiser, and others that have had success with these approaches show that it can be done. Meanwhile, I am not Maggie Mahar, but rather a guest commentator who is a whole different person.
Maggie invited me to submit this entry after reading a comment I made on another thread. Pat Medicare currently pays for outliers, the regs recently changed lengthened i believe. Two sides to that coin, but nonetheless, hospitals dont always take a haircut only a trim.
There is a system to give hospitals some relief for outliers. The situation remains the same: In the same vein as outlier payments is the fact that Medicare collects data and revisits their DRG payments on a regular basis, supposedly correcting when the payments are too small.
Here is an article about outlier payments from MedPAC, if you want to read more. This is guaranteed to drive most of the fans out the door, screaming.
As such, it does not help the complainers much, and does not fix the problems they are complaining about. Meanwhile, Medicare does not want to get into the business of doing detailed analyses of individual hospital costs, a return to the bad old days of cost based payments, and fraught with problems related to rewarding inefficient operation.
For example, here is an article from a consulting firm discussing how to game the outlier reimbursement.