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The Keckley Report

Hospitals Took It on the Chin Last Week

By June 25, 2018March 1st, 2023No Comments

Last week was noteworthy for hospitals: we may look back in months ahead and note the confluence of four announcements as the beginning of a consequential shift in U.S. health policy toward the role played by hospitals.

1.) Restrictions on association health plans lifted: Tuesday, the U.S. Department of Labor (DOL) issued a final rule  that loosens restrictions on association health plans (AHPs) that are offered by employers in certain geographic areas or in a particular industry and to sole proprietors and their families. Per the Congressional Budget Office, loosened restrictions on AHPs will increase coverage by 4 million. The American Hospital Association (AHA) and the Federation of American Hospitals (FAH) had urged DOL to withdraw the AHP changes citing concerns that the expansion would “destabilize health insurance markets for individuals and small groups.” An Avalere study (February, 2018) estimated 2.4 million to 4.3 million ACA marketplace enrollees would move into AHPs by 2022, potentially eroding the long-term stability of the individual insurance market. As a result of the AHP expansion, premiums would rise in the individual insurance market and the small-group market by up to 4% and 2% respectively. Last year, 4 million were added to the ranks of the uninsured in the U.S.

The potential impact of association health plans on coverage is unknown, but their history suggests healthier adults might find them attractive and sicker will not find affordable coverage elsewhere. That means more bad debt for hospitals. The new rule will be phased in starting September 1, 2018.

2.) Stark Law limitations on physician-hospital financial relationships under review: Wednesday, CMS (the Centers for Medicare and Medicaid Services) issued a Request for Information (RFI) seeking input on how to remedy “undue regulatory impact and burden” of the physician self-referral law (“Stark Law”), the legal framework that has governed physician self-referrals and financial relationships between physicians and hospitals since 1990. The RFI suggests CMS wishes to loosen restrictions so hospitals and physicians can share financial risks for care coordination initiatives and revisit definitions of “commercial reasonableness” and “fair market value” used by courts to determine appropriateness of business relationships.

3.) HHS expanding to become ‘Health and Social Welfare’: Thursday, the Office of Management and Budget (OMB) released its 132-page re-org plan for federal agencies and programs that oversee healthcare programs. Notably, HHS would be re-branded as the Department of Health and Social Welfare as it picks up oversight for a number of social services programs including SNAP (Supplemental Nutrition Assistance Program) and others. And three research programs– the Agency for Healthcare Research and Quality, the National Institute for Occupational Safety and Health, and the National Institute on Disability, Independent Living and Rehabilitation Research—would be moved under the National Institutes of Health, which operates under HHS. The expansion of HHS oversight in these areas will likely accelerate the integration of social determinants with traditional care delivery in regulatory oversight and reimbursement of hospitals by the federal government.

4.) Gawande named CEO of Amazon, Berkshire Hathaway, JP Morgan venture: In January, the trio announced they were creating a not-for-profit venture to create a new model for employer health that’s more cost effective and innovative than the status quo. In March, they announced plans to make their venture a for-profit company and potentially offer their solutions to other employers. Last week, they named Atul Gawande as CEO of the venture, surprising most industry watchers who had expected a seasoned operator to be the choice. Gawande, a Harvard Medical School professor and New Yorker staff writer, is best known for his bestseller “Being Mortal” that chronicled medical error across the system. A PWC study estimates that medical costs for employers will grow at 6% in 2019, on par with the past five years, but is unlikely to result in healthier or more productive employees. The Wall Street Journal’s headline on page B1 read “Author to Run New Health Venture”; the New York Times labelled its page one coverage “Boldface Name for Bold Venture in Health Care”. It’s clear Gawande faces high expectations from the venture’s three sponsors while scores of other employers watch closely.

Each of these signals a significant shift in policy with equally significant impact on how the healthcare market operates. Together, they have the potential to reshape the landscape in our system and are particularly disruptive for hospitals.

In my view, there are three immediate impacts for hospitals:

Intensified pressure on hospitals to control costsThe government—federal, state and local– and employers bear the brunt of rising health costs. In 2016, government spending for healthcare (federal, state and local) accounted for 46% of total spending (covering 57 million on Medicare, 76 million in Medicaid and a third of the children in the U.S.); employers and private insurance picked up another 27% (CMS). Drug prices and hospital costs have been the primary drivers of the cost increases (Avalere) that have averaged more than 5% annually in recent years and are forecast to increase 6% annually for the next decade. To combat drug costs, HHS Secretary Azar and FDA Director Gottlieb are tag teaming to implement cost control strategies including price transparency, increased generic competition and others.

To address hospital costs, these announcements by DOL, CMS and OMB signal an intensified focus that comes on top of cost containment pressures already used by payers. Setting aside their legitimate role as safety nets for the underserved and laws requiring them to accept patients irrespective of their ability to pay (EMTALA), hospitals are a likely target for stepped-up aggressive efforts by the government, private insurers and employers to show correlations between their costs and charges. Transparency about administrative overhead, disciplinary action addressing waste and over-utilization, compensation and labor costs will be their targets and comparisons of outcomes, patient experiences and prices more readily accessible to consumers. And bundled payments coupled with reference pricing will accelerate their use of carve-outs for most high-volume, high-cost acute interventions.

Increased tension in relationships between physicians and hospitalsPhysician employment by hospitals continues to increase: 42% in 2016 vs. 25% in 2012. Most of the remaining independent clinicians have hospital privileges or participate in hospital sponsored accountable care organizations. The potential that the constraints of the Stark Law might shrink is good news-bad news for hospitals. It’s good news that CMS seems open to allowing physicians to be compensated for their contributions to the hospital’s bottom line. But bad news in that hospitals will face complicated discussions with physicians as new payment schemes allowing gainsharing will be on the agenda.

The expansion of HHS’ role in defining care in the broader context of social welfare (food security, loneliness, wellbeing) means every hospital and its physicians must also re-calibrate their clinical guidelines more broadly than diagnosis and treatment in their hospitals, clinics and offices. Hospitals already struggle with physician compensation issues, and surveys show the majority of physicians are stressed out and ready to quit. The discussions surrounding new legal applications of the Stark Law and expansion of accountability for patient care that includes their social wellbeing is certain to spike increased tension between hospitals and physicians. It’s certain to complicate matters for hospitals putting a premium on physician leadership and transparency in business relationships with clinicians.

New challenges in hospital contracting with employers: Employers provide coverage to 151 million Americans (Kaiser Family Foundation (Kaiser) and the Health Research & Educational Trust (HRET) 2017 Employer Health Benefits Survey). The majority of employers want to provide health benefits to their employees: only 53% do. Most that suspended coverage for their employees could not afford insurance premiums that increased at double digit rates. Thus, most employers in the hospitality, transportation, light manufacturing, retail and restaurant industries   suspended coverage to save money since health benefits aren’t vital to maintaining their workforces. And the rest are using high deductible plans to shift costs to employees.

Employers blame hospitals and drug companies for rising health costs; the public and the majority of physicians thinks the drug and insurance companies are the culprits (Texas Medical Center Health Policy Institute, Mayo Clinic). Gawande will lead an effort to guide large employers toward more informed, aggressive and direct relationships with hospitals. He has already signaled his attention to over-utilization and embraces the notion that necessary care includes social determinants in sinc with traditional diagnosis and treatment. Most hospitals do a limited amount of direct contracting with employers. They offer corporate wellness programs, executive physicals and primary care services. The combination of HHS’ expanded role in integrating health with human services programs with the DOL’s embrace of association health plans means hospitals must re-think their employer contracting strategies. Offering discounts and a modicum of primary care services is not enough.

The announcements last week point to a new reality for hospitals. They’re no longer the centerpiece of the health system: they’re a key player but co-dependent with others, including employers as the table is set for a new approach to healthcare delivery and financing.  

In my view, hospitals took it on the chin last week. Some will cry foul; others will adapt as they transition to systems of health accountable for delivery and financing of holistic care in their communities. And all will be impacted.


P.S. This week, the Healthcare Financial Management Association will convene in Las Vegas for its Annual Conference. No doubt, the changing complexity of the payment system will be a hot topic: last year, 453 new codes were added and 1821 code descriptions were modified in the 2018 ICD-10 Code Set required for reimbursement from CMS.  No doubt, the announcements last week and buzz about the Gawande venture will fill hallways at their meeting. For hospital CFOs, they add stress and more uncertainty to an already difficult environment for hospitals.