Oct 28, 2022 - Health

Hospitals test the goodwill of Congress on Medicare cuts

Illustration of the US Capitol forming the top of a red cross symbol.

Illustration: Shoshana Gordon/Axios

Hospitals are pleading with Congress to postpone looming Medicare pay cuts, citing what they say has been an extraordinarily difficult year. But that unified message belies the fact that hospitals' financial situations vary significantly, and experts say some facilities would be just fine without lawmakers' help.

Why it matters: The industry has not been scrutinized as much as other health groups, despite being the primary driver of rising medical costs. But if Congress does play hardball in the coming months, it could deal a crippling blow to some facilities or create warped financial incentives for others.

Driving the news: The American Hospital Association (AHA), which represents the industry writ large, and the Federation of American Hospitals (FAH), which represents for-profit hospitals, sent letters this week to congressional leaders that outline their policy asks for the lame-duck session.

  • "America's hospitals and health systems are facing crushing financial challenges," the AHA letter says, adding that its members are "navigating unprecedented increased expenses from supply chain disruptions, workforce shortages, and labor and drug costs."
  • Both groups asked Congress to delay a scheduled 4% year-end cut in Medicare payments to hospitals and providers, along with other various policy items. FAH is also asking for Congress to address an expected reduction in what Medicare pays physicians next year.
  • These items alone would likely cost the federal government tens of billions of dollars.

The big picture: Hospitals asking Congress for money or to delay payment cuts is nothing new. In recent years, such lobbying took place against the backdrop of skyrocketing prices that private insurers paid to hospitals. Meanwhile, facilities serving vulnerable populations have struggled to survive.

  • Those hospitals that fared well before the pandemic are generally doing well now. But churning out profits has become harder in the face of surging inflation and labor shortages.
  • "Hospitals face this general stress, and what it means is that the hospitals that are shakier financially are going to feel this problem more acutely," said Paul Ginsburg, a former MedPAC vice chair and a senior fellow at the USC Schaeffer Center for Health Policy and Economics.
  • "Those that are often the most powerful hospitals that are earning very large margins, their margins might fall for awhile, but they'll still be very profitable," he added.

State of play: Hospitals say that rising expenses more than cancel out their post-pandemic volume increases.

  • While the current financial environment is turbulent for hospitals, some experts believe that the environment should stabilize in the next year or two.
  • "Generally hospitals have access to good capital and should be able to weather the storm," said Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy. If hospitals have to make cuts or make up profits, they likely can, he added.
  • "There probably are areas where hospitals can cut costs with minimal to no effect on patient care," Adler said.
  • Other experts have warned that cost-cutting measures could include axing unprofitable services, including ones disproportionately used by minority and low-income populations.

"Some hospitals may have more resources than others to cope with those ills, but the pressure is really across the board," said Chip Kahn, CEO of the FAH.

  • If the 4% cuts do go into effect, "I think we're at a point now, particularly with the pressures of workforce, that some hospitals would have to consider closing or reducing services."

Yes, but: Most hospitals do lose money on Medicare, although the 15% of them that MedPAC has deemed "relatively efficient" do better. Hospitals argue that low government reimbursement rates force them to charge commercial insurers more.

  • Efficient hospitals had an all-payer total margin of 7% in 2020, higher than the 5% margin earned by the rest of the industry, according to the MedPAC's March report to Congress.
  • Put together, this suggests two things: If Medicare rates drop, hospitals will probably try to charge private payers even more. And if Congress ever tried to tie assistance to hospital margins, it would end up penalizing efficient hospitals and incentivizing them to spend more.
  • "It's hard to punish the inefficient when you need them," said Len Nichols, a fellow at the Urban Institute.

Details: Hospitals have experienced negative operating margins all year through August 2022, data from Syntellis and Kaufman Hall show. Experts note that operating margins are generally lower than total margins.

  • In Q3 earnings posted so far, most hospital companies are seeing higher revenues than they did in the third quarter of 2021, but expenses are outpacing that growth. Additionally, company profits have dropped significantly compared to 2021.

Zoom in: Some groups are asking for more targeted assistance to specific kinds of hospitals, like rural facilities, certain urban hospitals and those that treat large numbers of uninsured or underinsured patients.

What they're saying: For decades, "the hospitals have told me they're going to shutter, they are broke, and that Medicare reforms will essentially impoverish them. And they're still there and doing incredibly well," said Gerard Anderson, a health policy professor at Johns Hopkins.

  • "If I take a historical perspective, this is a story that has played out year after year after year, and profits remain in the 5–7% for most hospitals."
  • At the same time, "there are clearly hospitals that are in trouble," he added.
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