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Hospitals, look to your left, look to your right — one of you won't be here in 4 years

September 13, 2009
by Marc D. Paradis
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Why Value-Based Purchasing will put at least one-fourth of hospitals out of business

Remember your first day of college orientation? Do you remember when that college president or dean gathered all of the incoming freshman into an auditorium and said these words “Now, look to your left and look to your right - one of you won’t be here in 4 years … because our graduation rate is 2/3 of our matriculation rate.”? Of course we all thought, that poor sucker to our left doesn’t have a chance. Well, The Center for Medicare and Medicaid Services (CMS) is proposing something similar for all hospitals receiving medicare risk-pool dollars.

CMS is considering adopting Value-Based Purchasing (VBP) as part of its reimbursement model and VBP is also a core cost-control component in many of the healthcare reform proposals snaking their way through our capital’s corridors. On it’s face, VBP seems like a great idea, namely that reimbursement levels should be tied to objective measures of value such as quality of care, quality of outcome and quality of patient experience. After all, why should a hospital with a high rate of complications during coronary-artery bypass graft (CABG) surgery, a high rate of 30-day readmits after CABG surgery and/or a consistently aloof and condescending staff before, during and after CABG surgery be paid as much per procedure as a hospital with a low-rate of complications during CABG surgery, a low rate of 30-day readmits after CABG surgery and/or a consistently caring, responsive and communicative staff before, during and after CABG surgery?

Intuitively, I think that we would all agree that the first hospital should be paid less, if at all. More importantly, the vast majority of the public believes so and hence our representatives will vote so. But let’s take a deeper look. Specifically at the Senate Finance Committee’s Description of Policy Options Transforming the Healthcare System: Proposals to Improve Patient Care and Reduce Health Care Costs, April 29, 2009 wherein existing metrics such as the Department of Health and Human Services (HHS) core measures as presented on the Hospital Compare website and the CMS-mandated Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) measures will be combined in a non-obvious, yet-to-be-defined way in order to yield a percentile score for each hospital which is relative to all hospitals in the country. In other words, just like college students in Intro to Econ, each hospital will be graded on the curve and someone, at least one, must get a zero. The good news of course, is that someone, at least one, must get one hundred. Those hospitals scoring 76 and above will receive all CMS risk-pool dollars plus a modest bonus of perhaps 3 percent. Hospitals scoring between 26 and 75 will receive CMS risk-pool dollars on a linearly pro-rated basis. Hospitals scoring 25 or less will receive no risk-pool dollars. Let’s consider 3 hospitals, each with $4 million in risk-pool funds eligible for refund. The first hospital scores a 90, the second hospital scores a 50 and the third hospital scores a 10. The first hospital will receive $4.12 million over the withholding period, the second hospital will receive $2 million (note that is a net loss of $2 million) over the withholding period, the third hospital will receive no risk-adjusted dollars at all, a net loss of $4 million (for more details see Hal Andrews and Gunter Wessels article in August’s issue of HFM).




I applaud everyone's very thoughtful and useful remarks here. I would say that from my standpoint, it's clear that it is inevitable that some hospitals will go out of business over time, under Medicare value-based purchasing schemas, particularly once private insurers begin to put similar programs in place. When one looks at the cost trajectory of health care and particularly of hospital care under Medicare, it will be financial impossible to sustain all the hospitals currently in operation in the U.S. I agree with Marc Paradis that there is some unfairness in terms of using relative performance measures versus absolute performance measures in this context but it is also true that the current path forward of Medicare is unsustainable. So larger, stronger academic medical centers, and larger, stronger community hospitals, will survive, while many under-performing community hospitals close. However, it is also true that protections will be put in to keep critical-access and safety-net hospitals alive. When one looks back at the financial history of hospitals in this country, one can see that some overbuilding inevitably took place in the middle of the last century, and we as a society will have to pay for that going forward. It's unfortunate, but not surprising, in the end. The good news is that those hospitals that survive will be stronger, higher-performing (both in terms of care quality/clinical outcomes and operational efficiency), and that is an outcome that must occur for our health care system to sustain itself into the coming decades.

A more upbeat review of Hospital Financial Metrics from Thomson Reuters (as summarized by HFMA):

"Hospital Financial Metrics Improving: Industry Report

Hospital total margins recovered in the first quarter of 2009 with approximately 30 percent of hospitals operating at a loss, according to a new report from Thomson Reuters. In comparison, half of hospitals experienced operating losses in the third quarter of 2008, the analysis stated.

Median total margin improved for all 500 hospitals in the study, rising from 0.17 percent to 3.1 percent. However, results for individual hospitals in the first quarter of 2009 varied widely, from -1 percent or below in the bottom quartile to 7 percent or more in the top quartile.

Inpatient discharges for all hospitals began to decline shortly after the recession started but the rate of decline varied by type of hospital, researchers said. Expense growth was nearly flat in the first quarter of 2009, which researchers attributed to careful management of labor costs.

Hospital cash reserves continued to be stressed in the first quarter of the year, with median days cash on hand close to 90 days.

Download the report from Thomson Reuters (free registration required)."

Based on recent conversations with other senior hospital executives, many people think that your analysis is exactly correct. The winning strategy is clearly, "Race, dont chase."

Take the extra 20 seconds to put your sneakers on when you need to out run the bear.

Thanks for your post Marc. If the goal is to put the "bad" hospital out of business, then it's a good plan. But I don't see how you help a hospital get better by taking away resources. The bad will get worse and the good will get better. For more rural areas where there isn't another game in town, that could be a real problem. I suppose average (or worse) healthcare is better than none at all.

A report on a direct correlation between unemployment and the uninsured. Also from HFMA's website, Friday August 14th, 2009:

Impact of the Economy on Health Care: New Report

A 1.0 percentage point increase in the unemployment rate results in a 0.59 percentage point increase in the uninsured, according to studies cited in a new report from Changes in Health Care Financing & Organization, an initiative of the Robert Wood Johnson Foundation. While few employers actually coverage, they may cut costs by changing the benefit and/or restructuring cost-sharing with employees. Typically, employers in low-wage jobs (or those working in small firms) are most likely to be uninsured after losing their job, but this recession is affecting a broader swath of the workforce.

The report pulls together research findings to explore how health care is affected by the current economic cycle. The effects of the economy also include changes in the demand for (or access to) health care—as well as the financial status of practitioners and health organizations. Reports from across the U.S. describe falling revenues due to decreased demand for less non-urgent or elective care, more patients unable to pay their medical bills, significant losses in investment income, less charitable giving, and cuts in state and federal healthcare funding.

I have no problem with putting bad hospitals out of business, but only if they are unrehabilitatively bad. Sometimes "bad" is a point in time assessment and not an absolute assessment. Sometimes "bad" is a relative assessment and not an absolute assessment. Absolutely "bad" hospitals should be put out of business (or at the very least be rebuilt from the ground up in something like a charter school model such that the infrastructure is not lost).

However, I do have a problem with putting 1 out of every 4 hospitals out of business regardless of how well they are performing. Admittedly, many hospitals need prodigious application of the stick and the carrot to coax them into and through the operational and strategic changes necessitated by evidence-based medicine and pay-for-performance.

But relative value-based purchasing can lead to nothing but attrition and eventual collapse of the entire hospital infrastructure (or at the very least, it's replacement by entities not subject to relative VBP).

The math dictates that if I start off with 100 hospitals, after the first round of attrition, I will have 75 hospitals. After the second round I will have 56 hospitals after the third, 42 after the fourth, 32 and so on. By the time I get to the tenth round of attrition I am down to less than 4 or 5 hospitals.

That's unsustainable, silly and short-sighted policy.


Marc D. Paradis MS

Marc D. Paradis, MS, is Director of Strategic Data Services in Applied Informatics and a Manager...