Brockton (Mass.) Hospital chief executive Norman B. Goodman takes pride in his hospital’s record – no layoffs in 100 years. But facing $16.8 million in Medicare cuts by 2002, he may be hard pressed to keep that tradition.
“If nothing changes we’re going to have to cut programs, and that’s going to mean layoffs,” said Goodman, whose hospital runs 26 clinics and treats 50,000 emergency room patients per year. “I’ve been in (the) business since 1972, and it’s the worst I’ve seen it.”
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It’s the worst because hospitals and health maintenance organizations nationwide are reeling from the cuts that Congress made to Medicare – the federal program providing health insurance to persons 65 and older and to those with certain disabilities – as part of its efforts to balance the budget in 1997. Because of the Balanced Budget Act of that year, New England hospitals, many of which rely on Medicare for as much as half their budgets, have been forced into streamlining their practices and, in some cases, cutting services and even staff.
Meanwhile, HMOs are also suffering huge losses because of shifts in the way that moneys are distributed – forcing them to be more tenacious in negotiating with hospitals on Medicare rates. Cuts have also contributed to the decisions of some plans to end their services to Medicare patients in certain areas.
Now, many experts charge that Congress created a host of new problems when it sought to correct Medicare’s traditional deficiencies two years ago.
“This whole region is hemorrhaging,” said Edward J. Quinlan, president of The Hospital Association of Rhode Island. “We’re not alone, but our region does seem disproportionately harmed by the Balanced Budget Act.”
Especially given the high concentration of Medicare beneficiaries in Rhode Island. About $340 million in Medicare payments will be taken out of the Ocean State because of the bill, Quinlan said. He added that Rhode Island hospitals have cut 2,000 jobs in the past two years. They lost a collective $46 million in 1998, he said.
When Congress passed the bill, however, it was seeking to extend the life of the Medicare Trust Fund, increase efficiency, and respond to the changing needs of Medicare beneficiaries.
For example, Medicare patients seeking benefits not covered under traditional, fee for service Medicare – such as prescription drugs – have flocked to join HMOs. In 1985, 1.2 million Medicare beneficiaries were enrolled in HMOs, according to the Health Care Financing Administration, the federal agency that administers Medicare and Medicaid, the health insurance program for the poor.
Today, 6.2 million of the 39 million people covered by Medicare are enrolled in HMOs. Seeing the growth, and reacting to evidence that HMOs could provide services more cheaply than Medicare, Congress in 1997 created the Medicare + Choice program to allow more forms of managed care to serve Medicare patients, giving beneficiaries more choices.
It also sought to correct inequalities. Before 1997, Medicare reimbursed HMOs for 95 percent of the traditional Medicare fee-for-service costs for their county. Therefore, HMOs operating in urban areas received higher payments than those in rural areas, since Medicare costs are lower in less populated counties.
The problem, many believed, was that the system encouraged HMOs to operate in the higher fee, urban areas only. Some also contend that the program contained incentives for health plans to sign up the healthiest Medicare beneficiaries only.
To correct these problems, Congress created a ‘risk adjustment’ process by which Medicare payments will be redistributed from lower cost health plans to those which care for the sickest patients. Adjustments will be phased in over five years, beginning on Jan. 1, 2000.
Congress also altered the reimbursement formula to encourage managed care plans to serve rural areas. Instead of paying HMOs 95 percent of the cost of the fee for service program of the area, reimbursement rates would be based on a blend of local and national rates.
In addition, lawmakers capped payment rate increases. Under the bill, health plans receive either the new “blended” Medicare rate, a minimum 2 percent increase, or the new, national floor rate – whichever is greatest. Because of budget restrictions, however, most health plans received only the 2 percent increase in 1998 and 1999, far below the increases of 5 percent or more in prior years, according to Mathematica Policy Research Inc., a Princeton, N.J. firm.
The changes will accomplish at least one of Congress’s goals: The Medicare Trust Fund will now last until 2008. And if the surpluses that are expected to mount in the fund between 2000 and 2005 materialize, it may well last until 2015.
But many – from health care professionals to policy analysts to lawmakers – now say that the changes created several unintended consequences, and that Medicare beneficiaries will suffer because of them.
“What we are likely to see is that people may have to wait longer for services (and) travel farther to receive particular services,” said Alison Cohen, a spokeswoman for the Massachusetts Hospital Association. “The fact is, hospitals cannot continue to absorb cuts of this magnitude.”
Massachusetts hospitals will lose $1.7 billion in Medicare payments by 2002, Cohen said. Medicare is the largest payer of health services in the state and it accounts for an average of one-third of hospital budgets. At Brockton Hospital, Medicare accounts for 45 percent of the budget.
Rhode Island fares no better. For example, Kent County Memorial Hospital in Warwick will lose $40 million by 2002, said Patti Melaragno, director of public relations at Kent. The reductions forced the hospital last fall to cut 19 workers – the first layoff in its nearly 50 year history.
The cuts have forced hospitals to change the way they operate. Kent, for instance, saves money by allowing nurses to take time off during the relatively quiet summer months while keeping their benefits.
In addition to becoming more efficient, hospitals are compensating by expanding business. For example, Roger Williams Medical Center in Providence has been hiring more doctors – who often bring their patients with them.
But even Roger Williams is not immune to the cuts, which will cost it between $25 to $30 million over five years.
“Typically we’ve had good financial results – we’ve had margins,” said President and Chief Executive Officer Robert A. Urciuoli. “In this environment we’re looking for a break-even budget.”
Many say the crisis facing hospitals and HMOs stems from the manner in which the changes were made. For example, the ‘risk adjustments,’ which will increase payments to HMOs that serve the sickest patients, will save the Medicare Trust Fund $11.2 billion over five years. According to the Health Care Financing Administration, those cuts are justified because Medicare had been overpaying HMOs prior to 1997, since health plans had been serving the healthiest of Medicare beneficiaries.
But in creating risk adjustments, Congress intended for money to be redistributed, not taken away, said U.S. Rep. Michael Bilirakis, R-Fla. He has filed a bill that would amend the original legislation so that future redistribution of funds will not affect the overall Medicare budget.
Health plans also charge that the cost of complying with new regulations created in the Balanced Budget Act have hurt their business. Additional costs, coupled with reduced payments, have forced 99 Medicare managed plans to cut Medicare services in their areas or pull out of Medicare + Choice programs altogether this year. About 327,000 Medicare managed care enrollees will be affected.
“The plans have had such severe cuts, they’re now in a crisis situation,” said John Murray, director public of affairs for American Association of Health Plans, a Washington, D.C. based group. “It’s only right that they say, ‘We have a commitment to provide high quality, affordable care. If we cannot do that in a market, we should not be there.'”
Some observers note that health plans over the years have competed for seniors by offering services that are not covered by Medicare – often for little or no extra cost. These services – such as eyeglasses, hearing aids, and preventative care – are expensive and even harder to provide when payments are being cut.
What angers health plans, however, is what they call the “Medicare Fairness Gap,” the difference between what Medicare will pay HMOs and what they will pay into the fee-for-service program. By 2004 the gap will reach 13 percent, Murray said.
That’s why Gail R. Wilensky, chairwoman of the Medicare Payment Advisory Commission, an independent federal body created by the Balanced Budget Act to advise Congress on Medicare payment policies, believes lawmakers replaced Medicare’s old problems with new ones in 1997.
“Congress tried to resolve one problem, substantial geographic disparities, but introduced a new problem by assuring that very different amounts would be spent by Medicare in (the) same geographic areas,” Wilensky said. “It strikes me that this is a more targeted problem than saying, ‘There’s not enough money.'”
Still, some 85 percent of Medicare beneficiaries are still covered by the fee for service program, said Tricia Smith, the chief federal health lobbyist for the American Association of Retired Persons (AARP).
The fee for service population is “older, sicker, and much more expensive – that is very, very well documented,” Smith said. She added that arriving at a fair payment system for HMOs is an extremely complicated task, and that having private-sector firms involved with a federal program sets up a “collision course” of sorts between health plans’ desires for profits and taxpayers’ desire for savings.
Congress may attempt to correct some of these new problems. A staff member for U.S. Sen. Jack Reed, D-R.I., said he expects the Senate Finance Committee to introduce a Balanced Budget Act “fix” package in September that will increase payments to hospitals, health plans, and home health care – which has been severely hurt in Rhode Island. Of the $40 million that Kent County Hospital expects to lose in Medicare cuts, for instance, $13 million will come from home care, Melaragno said.
But that does not deal with another problem that particularly hurts Rhode Island. Part of the Balanced Budget Act calls for payments for graduate medical education to be phased out. Since the Ocean State has several teaching hospitals, including Bradley and Meriam hospitals in Providence, the cuts are particularly painful.
“There’s no question that the reduction in Medicare payments has had a very drastic impact on us,” said Mark Montella, senior vice president, government relations for Lifespan, whose hospitals serve Brown University’s medical program. “They have drastically reduced the subsidy for the education of medical residents – we view that as a very serious issue.”
Serious enough to merit immediate attention, said John Murray, of the association of health plans. More and more health plans will exit Medicare markets if no action is taken by Congress soon, he said.
Meanwhile, hospitals that have prided themselves for being steady employers may find it harder and harder to compensate.
“It’s very clear to me that something is fundamentally wrong with the system and how it’s financed,” said Goodman, of Brockton Hospital. “It’s a terrible situation all around.”
