A Plan To Solve The US Healthcare Crisis

The full plan can be found at bhrmanagement.com

A Plan For Solving The United States Healthcare Crisis
By Greg Burbridge
August 11, 2004

Background:
In 1964 Medicare came into existence as part of the “Great Society” endeavor. At that time, healthcare costs were modest and no one could have anticipated the increases that now have the Medicare, Medicaid, and Private Health Insurance Industry on the verge of bankruptcy. Additionally, many individuals are without health insurance and are totally unable to afford medical insurance or medical care.

Interestingly, prior to Medicare the largest provider of hospital care in the US was the network of Catholic Hospitals. Before Medicare, owning hospitals was generally not a profitable business. To build and equip a hospital required charitable or tax funding. Staffing the hospital often required unpaid staff in the form of nuns or lay volunteers. Today, 40 years after the advent of Medicare, the largest provider of hospital services are “for-profit” hospital companies. Why the change?

This change in ownership primarily occurred because Medicare paid more than the cash cost of care by paying for a non-cash expense called “depreciation”. Payment of this non-cash expense meant cash receipts exceeded cash expenses. Now, owning hospitals looked like an attractive business.

As Medicare continued to pay hospitals full costs, hospital costs continued to increase without constraint. This resulted in the upward spiraling costs we saw in the late 70’s. As hospital costs increased, insurance company premiums climbed!

Finally Medicare responded to the rising costs by putting a lid on inpatient costs by implementing a payment methodology called DRG’s (Diagnostic Related Groups). The idea was to provide a financial incentive for hospitals to decrease the time a patient stayed in a hospital since the payment was “fixed” regardless of how long they stayed. This was to have created “savings” that could be used to provide more care.

About the same time, doctors were discovering new ways of treating people on an outpatient basis. This looked like a good thing and was consistent with the Federal Government’s effort to decrease inpatient stays to save money.

Some doctors and entrepreneurs also took this opportunity to develop freestanding facilities to provide surgery, laboratory testing, X-rays, physical therapy and other services previously only available in the hospital. These new outpatient facilities seemed like a good financial bargain because their prices were substantially less than the now highly inflated hospital prices. These facilities didn’t use their costs as the basis for setting their prices. Instead, they simply priced their services below the hospital price. Furthermore, because these facilities took service volume from the hospital, hospitals again had to raise their prices. Each time hospitals raised their prices they inadvertently provided an opportunity to these new enterprises to raise their prices thereby creating greater profits to these new enterprises.

Hospitals, like any good business (which hospitals were now), wanted to maintain their cash flow and newfound profits. So, the hospital industry responded by increasing the cost of outpatient services to make up for the decline in inpatient revenue and outpatient volumes. They also increased inpatient charges as a means of getting more dollars per inpatient day from insurance companies and uninsured individuals. This made up for the declining income from Medicare and lost outpatient volume. This “cost shifting” simply shifted the financial burden from Medicare to non-Medicare payers. This again caused insurance rates to climb!

Note:
 The increase in hospital costs to insurance companies wasn’t based on actual increases in costs as much as the effect of “cost shifting”.

 As hospitals increased their charges for outpatient services, the physician or corporate owned outpatient facilities had no incentive to price their products near their costs either. All they had to do was undercut the hospital and they seemed like a good deal.

During the 1980’s the commercial insurance companies rebelled against this “cost shifting” and created HMO’s (Health Maintenance Organizations) and PPO’s (Preferred Provider Organizations) to negotiate lower payment rates for their patients. This sounded like a good plan except that meant that hospitals could only “shift” the costs to the patients or payers with whom they did not have a contract, the non-HMO/PPO insurance companies and the uninsured patient. This again caused insurance rates to climb.

So from 1964 to 1989 hospital costs increased at rates exceeding inflation, unrelated to actual costs, and resulted in equal increases in insurance rates. Our “solutions” seemed to backfire.

In the 1990’s HMO’s and PPO’s, in an effort to keep their cost of hospital care down, encouraged the use of prescription medications in lieu of either inpatient stays or outpatient services at a hospital. They even provided financial incentives to physicians who decreased these costs. The idea again was that drugs are cheaper than a day in the hospital, creating savings that could pay for other needed care. What happened?

Hospitals now hooked on cash flow, did the only thing they could and increased the cost of each inpatient day and outpatient service to new and lofty heights. They had fewer days to deal with so they needed to get the most from each day. As a result, insurance companies saw two increases: increased use of drug therapy and hospitalization that, when needed, was very expensive. Insurance companies increased rates again!

By now a pattern is visible. Each time an effort is put forward to decrease hospital income, hospitals find a way to either shift their cash needs to someone else or they simply raise their rates to everyone. Hospitals are now real businesses that sell services that no one really wants, but some must have. As a consequence, to those few people that must have hospital services, the cost is very high.

In the late 1990’s the increasing upward use of outpatient services forced Medicare to develop a strategy for putting a lid on this explosive cost like they had done for the inpatient costs. In 2001, Medicare implemented a new reimbursement methodology that was designed to slow down what they paid hospitals for outpatient services. This payment methodology is called the Ambulatory Payment Classification (APC) payment system. This change did two things, it insulated Medicare from price increases for outpatient services and it increased the patient share of the total cost. Hospitals with nowhere else to turn had to strengthen their collection efforts on uninsured patients who are required to pay the full charge for services. These strengthened collection efforts have resulted in multiple lawsuits against many of the largest hospitals and hospital systems in the United States. Many of the hospitals involved are “tax exempt”. This means they pay no income tax and often no property taxes and receive lower interest rates on their debt. These lawsuits are requesting that hospitals treat uninsured patients without charge as part of their charitable missions and tax-exempt status (See the New York Times; June 17, 2004 “Nonprofit Hospitals Said to Overcharge Uninsured” By REED ABELSON and JONATHAN D. GLATER).

Current Status:
All of these historical actions were designed to accomplish one thing; to keep people out of hospitals. And they worked. Today, fewer people are hospitalized, but when they are, the costs are very high. When added to the cost of drugs and outpatient procedures, our total medical costs are out of control.

We can draw the following observations:

 It is clear from this brief historical look that the industry has now shifted the highest burden onto the shoulders of those least able to pay.

 The growth in physician and corporately owned outpatient facilities has not resulted in reduced costs, as they only needed to undercut hospital prices that were already not related to the actual cost of service.

 Insurance companies, unable to contract for real savings, have blamed their premium increases on drug costs.

 Insurance companies have raised their rates to self-insured people to unaffordable levels.

 Insurance companies have either raised rates or denied coverage to people with existing medical problems.

 Over 42 Million Americans are no longer covered by any health insurance.



Proposal

Treat hospitals services like we do fire, police, and emergency medical care.

When we call 911, we “expect” a fireman, paramedic, and police officer will respond and provide the emergency service (putting out a fire) and care (life saving procedures, or police protection) we need to survive. However, we do not ask only the people who call 911 to pay for 911. Instead, we all “pre-pay” for these services via our taxes. We do this so that those folks will be here, not just when we need them, but whenever anyone in our family or community needs them.

As a society we pay for these people to “standby” for our need though we may never need them. Additionally, we pay for their firehouse, ambulance, precinct station and equipment via bonds and local, state, and Federal taxes. I’m suggesting we apply the same principal and funding structure to hospitals to cover the hospital’s “standby” costs. We would still charge those who use hospitals for the variable costs (costs incurred only because that patient was treated) of their treatment and for costs above the standby level of costs for sophisticated services like cancer treatment.

The PLAN

1. Change the way we spend Medicare dollars. Redirect Medicare funds from paying for hospital charges to paying for standby costs.

a. Since standby costs do not include depreciation there would be immediate savings to the Medicare program.

b. These savings would pay for those services above the standby level.

2. State and local taxes could either be incremental or directly offset against the Federal Medicare tax.

3. Local communities would then make the decisions to fund trauma services, regional centers for burn treatment, and other high cost low volume services.

By funding the standby costs of a hospital, hospitals would be able to offer services like urgent care, outpatient surgery, outpatient laboratory testing, outpatient medications, and outpatient x-ray services at rates that only reflect the variable costs of providing those services.





What would our health insurance costs be if we used Medicare and local taxes to pay for the “standby” costs of hospitals?
In rural America, the “standby” costs of a hospital are approximately 80% to 95% of their total costs. If the Federal Government and every person in the community that the hospital serves shared those “standby” costs, each hospital visit’s “variable” costs of treatment would be very low.

In urban America, the “standby” costs of a hospital are approximately 50% to 75% of their total costs. Again, if the Federal Government and every person in the community that the hospital serves shared those “standby” costs, each hospital visit’s “variable” costs of treatment would be very low.

 This change in funding would cause insurance company costs to decrease by 60% to 70%!

 This would translate into the same percentage decrease in insurance premiums!

 Health insurance would immediately become truly affordable!

 Even those patients without insurance would probably be able to afford to pay hospital charges.


This is a radical idea and incorporates both governmental financial support and an environment for private enterprise to participate.

The most important aspect of this idea is that no longer would only the sick pay for hospital care. Everyone in our society, including our 42 million uninsured, need to have available a modern, well equipped, and well-staffed hospital. Therefore, we all need to contribute to the costs of providing that vital community service. However, we would pay for those standby costs on a more equitable basis creating “real” savings that will result in our ability to provide more care to our citizens.

By removing this burden from our insurance premiums, the costs of pharmaceuticals will be relatively inexpensive. This should make the health benefits of our advanced medications available to all who need them, resulting in improved individual health by being treated to prevent heart attacks, stroke, diabetes, and other chronic illnesses.



We will “allocate” these tax funds by creating local citizen healthcare management groups (CHMG) similar to those set up during the Certificate of Need (CON) laws of the 1970’s. The details of the group membership, responsibilities, and authority will need to be defined by Congress.
These groups will assure that hospitals are equipped and staffed at levels acceptable to the community.

In communities with multiple hospitals, the “standby” costs for each hospital will include the same basic equipment, facilities, and staffing. Evolving community standards of care requiring new technology will be more easily met by all hospitals with a single source of financing. Physicians will be able to admit patients to any hospital and expect a consistent inventory of equipment. Hospitals will compete on the quality of their care rather than the size of their bank account.

Single source financing will accelerate the adoption of new medical technologies. Once a new technology has been proven beneficial, accepted by the medical community, and approved by interested Federal agencies, sales can be made across all hospitals rather than the wealthiest first. This means manufacturers will be able to produce more units sooner and thereby reduce their cost per unit. Not only will this plan not be an impediment to new technology development, this plan will encourage rapid deployment of new treatment modalities at a lower overall cost.

Some communities do not truly need multiple hospitals so the community can decide to combine hospitals where appropriate. Some communities are experiencing rapid population growth and need additional hospitals strategically located to meet their growing community needs for healthcare. These community groups (CHMG) can also decide how many and where it makes the most sense to establish trauma centers.

Establish “standby” costs for each hospital using the existing Medicare Cost Report Information.
The existing Medicare Cost Report database has all of the necessary information to determine which costs are “standby”. Since this report is already a requirement of the Medicare program for hospital participation in Medicare, no incremental reporting costs to the hospital will be incurred.

 The community, via the CHMG, can use this information in developing recommendations concerning the funding of multiple community hospitals.

 Annual updates to this cost report will provide the basis for adjustments to tax allocations or collection amounts.

Hospitals will “charge” for non-standby costs.
With the fixed “standby” costs now covered via Federal, state, and local taxes hospitals will only need to charge for the variable costs (costs incurred only because that patient was treated) of treatment and for costs above the standby level of costs for sophisticated services like cancer treatment.

This will “level the playing field” for hospitals in competing with physician and corporate ownership of freestanding outpatient facilities.
With the entry into the market of freestanding facilities sponsored by physicians or for-profit corporations clinical service volume left the hospital. With fewer units to spread standby costs over, rates increased making the new freestanding facilities appear to be more cost effective. By leveling the economic playing field, hospitals will be able to invest in these facilities and price them competitively.

Standby costs will include adequate nurse staffing for all open nursing units. This may help solve our national nursing shortage
Approximately 60% of a hospital’s operating expenses are salary. Of those, about 80% are nurses. So when a cost reduction is needed, nurses take the bulk of those cuts. This means most nurses not only have to deal with 24 hour schedules, they also have to contend with not knowing if they will have the work hours to pay their bills. This is one reason why we have thousands of nurses sitting on the sidelines or working outside of their chosen profession.

With the funds secured via standby cost payments, hospitals would be able to provide a more stable employment environment to their nursing staff and provide greater nurse to patient ratios. No longer would we be forced, as the state of California recently did, to legislate minimal staffing levels.

The existing County Hospital safety net would be strengthened.
Existing county or city funded hospitals would have additional monies to pay for their standby costs and some of the indigent may no longer be without insurance to pay for the variable costs of their care. This funding would also allow people to go to any hospital for care thereby spreading the work across more hospitals and making healthcare more convenient and accessible.

Questions and Answers

The details of many aspects of the PLAN are not intended to be addressed in this outline. Further, most of the infrastructure is already in place to deal with the multitude of details that will need to be resolved. However, many highly visible concerns are addressed in the following questions and answers.

1. Under this PLAN, would the Federal Government then own all hospitals?

a. No!

b. Non-Profit (501c3) hospitals would see no change except that their charges could be decreased 60% to 70%, or more.

c. Existing for-profit owners could continue to be owners in the future. However, their profit will need to come from management fees rather than cash from depreciation.

 No longer would buying and selling hospitals enrich them or the investment banks and attorneys doing the deals.

2. Wouldn’t the PLAN’s change in funding force “for-profit” hospitals out of business?

a. Some form of transition payment methodology may be necessary to make this change in order to protect the investors yet not over compensate them.

b. Yes, the massive wealth amassed by these companies would be eliminated. This will represent real savings that will provide dollars for patient care instead of wealth building.

3. If the current owners want to get out of the business, will the Federal Government buy the hospitals?

a. If no other buyer is available, the communities they serve will need to purchase them and either operate them or contract for operating management.

i. This PLAN would once again encourage charitable groups and communities to be the owners of hospital facilities.

ii. The “standby” costs will include any debt service required to complete any sale or purchase transaction.

4. Will this mean freestanding Ambulatory Surgery Centers (ASC), Imaging Centers, and Laboratories will no longer be allowed?

a. No.

b. The ownership of these facilities may change to the ownership of the community hospitals since these facilities may not be able to compete with the new pricing schemes of hospitals.

c. This means once again, we will be removing depreciation from the cost of healthcare.

d. Many of these facilities are owned by physicians and are considered extensions of their offices. The physicians may wish to continue to own them for that reason but not for extra profit.

5. What is the difference between this PLAN and a "single payer system"?

a. The PLAN does not place 100% of the costs of care on one payer. Therefore, it is not a “single payer system”.

b. The PLAN spreads the cost of the hospital over the entire population rather than only those who get sick.

c. The PLAN is focused on the elephant in the room, hospital costs.

d. The non-hospital costs of our healthcare delivery system have been effectively controlled and are manageable in comparison to hospital costs.

6. The "Community Groups" did not work under CON and I don't see how the CHMG would work under this PLAN. The “have’s” and the “have-not's” (e.g., Scottsdale, Arizona versus Southeast LA) are too far apart in their financial ability to fund hospitals.

a. While the CON laws have recently been called anti-competitive, the PLAN does not suggest a return to franchising healthcare as was done under CON.

b. The “franchise” to run hospitals will rest with both the local community and the Federal Government since both are contributing to the cost of construction and operation of the hospital.

i. The precedent for this was set by the Hill-Burton Act, which provided funds for hospital construction only in the late 1940’s and early 1950’s.

ii. This time, the Feds would not just provide a one-time pool of funds, but would continue to stay involved in funding hospital operations.

iii. Under this PLAN, changes in technology and transportation systems that should have caused many hospitals to close in the past, will result in their closure as unnecessary to the community.

c. Because the Feds will bear the lion’s share of the standby costs the local community groups will need to represent a broader constituency than a narrowly defined community.

i. I would expect “local” to be defined as “State” at a minimum, but could go down to county and/or even city level. This detail needs further refinement.

ii. At this point of development, the PLAN is intended to provide a framework and goal to the final resolution of this and other issues.

d. The PLAN is designed to provide a basic level of care, unburdening the hospital from having to pick up a portion of its standby costs with each charge. This will create the environment for charges to finally be related to costs.

e. The PLAN does not prevent hospitals from receiving gifts or developing expertise in non-standby clinical areas. These costs will all be variable thereby reinforcing the need for insurance products.

7. I understand the concept of fixed and variable costs, but I don't understand who is going to pay for the variable cost if the Feds pay for the fixed cost.

a. The PLAN specifically uses the term “standby” because some of the “standby” costs fit the accounting definition of variable costs.

 By agreeing on a hospital operating level, we transition some variable labor and facility costs into the definition of standby costs.

b. The Feds are not the only payers of these standby costs. The PLAN also calls for local tax support. I would expect local to mean State at a minimum but could go down to county and or even city. This detail needs further refinement. Regardless of what level is finally decided on, this local taxing authority along with the Feds will together only pay for the standby costs.

 In the case of county hospitals, the Federal contribution may allow the county tax dollars to assist more than one facility.

c. The PLAN leaves the variable cost of care to the patient receiving care. So, there is still a need for insurance companies and Medicare to pay for some of these costs.

i. This PLAN will also make HSAs more attractive since the financial burden will be so much less.

ii. Insurance companies will need to offer financially attractive policies to secure business from employers and the self-insured to cover the variable hospital costs and the non-hospital costs of healthcare.

iii. The charges for these variable costs should be substantially lower than current Medicare reimbursement levels meaning their coverage should be funded by what used to be called “depreciation”.

8. I assume that the individual patient (or employer) will pay for the variable costs. The PLAN is interesting but still smacks of Government paying a larger portion of health care costs.

a. Because the PLAN removes the depreciation cost, the full “cost” of this care should not be greater than our current expenditures.

b. By removing some hospitals from the system, with community concurrence, we’ll save even more money.

c. The hope is all political parties will find this PLAN appealing since all parties gain a little and lose a little but the voters win.

9. The cost of "pre-paying" for hospital care will be substantial. In the range of $3,000 plus per person, per year. This would be to high a burden.

a. Currently the average Medicare Per Beneficiary payment rates are between $6,000 and $7,000. So $3,000 may be close to the hospital portion. But this is only for Medicare beneficiaries and does not include non-Medicare and the uninsured.

b. By adding in all wage earners in the US, the burden becomes much less.

c. Even if the local taxing authority (e.g., State) adds a tax, it should be pennies per person per month.

d. The PLAN anticipates that most people would be more than willing to pay a few additional dollars a month in taxes, if necessary, to avoid paying hundreds of dollars a month in insurance premiums.

10. I was told by a local hospital CFO that his hospital collects less than 40% of billed charges, much of which is lost due to charity care or uninsured.

a. Actually the reason for the low collection percentage is what was pointed out in the history section above. With prices having no relationship to costs, those insurance companies able to negotiate payment rates, and Medicare have created the 40% collection rate.

b. As evidenced by the current uproar over harsh collection efforts by hospitals toward the uninsured, hospitals’ charity actions have been hard to see. Ask that CFO how much of the 40% discount is really charity and bad debts. I think the number will be between 5% and 15%.

11. I am a little confused about the PLAN’s ideas on depreciation. How will hospitals be able to fund replacement facilities if they don't fund depreciation? I am told that one of the biggest financial hurdles in California in the next few years will be retrofitting hospitals or replacing non-conforming facilities due to earthquakes. At least one hospital closed in LA since it did not have the money to retrofit.

a. The PLAN includes payment of debt service as part of the standby costs. So, if the hospitals are truly needed by their communities, then the Feds and the local taxing authority provide the funds to pay the debt.

i. The first hurdle is community need. Once that is validated, then funding is made available.

ii. This excludes from the cost of healthcare, the standby costs of hospitals that are not needed in the system.

b. Interestingly, at least one hospital in California that is replacing itself, to meet the new earthquake standards, is decreasing their licensed bed capacity by 25%. This will also decrease standby costs. This is consistent behavior with the PLAN.

c. When a new governmental office building, or aircraft carrier, or airplane is built we don’t have funded depreciation to tap into. We either pay it out of current funds or borrow in the open market and pay it off over time. When it is paid off, that’s it. We don’t keep paying and paying and paying and paying. When it needs replacement, we do it again.