Some health insurance executives claim, and some news media have recently reported, that large provider systems like Sutter Health make health care more expensive by demanding higher-than-average reimbursement from insurers. To clarify Sutter Health’s position and shed more light on Sutter’s priorities, we’re posting this recent Q&A with Sutter Health’s leadership.
What is Sutter Health’s perspective on claims that hospitals’ demands for higher reimbursement from insurers drive up the cost of health care?
Sutter Health believes its reimbursements from insurers are fair, and reflect the high-quality and readily available health care that our doctors and hospitals provide to patients. Insurers contract with us for services of their own free will. There’s plenty of competition in Northern California — from Kaiser, Catholic Healthcare West, Adventist Health, John Muir and the UC hospitals, and from many independent hospitals and physicians. Sutter Health has held annual overall average price increases for commercial health plans to single digits in the past several years. Of course we have no control over whether health plans reflect our single-digit rate increases in what they charge consumers. Recently some health plans announced premium increases in excess of 20 percent, more than double the increase in reimbursement to our providers.
The reimbursement we receive from health insurance companies help fund Sutter Health’s commitments to ensuring our communities have adequate access to physicians, as well as fund our commitments to quality, safety, convenience and free care for the poor. While we continue to focus on meeting our community commitments over the long term, the for-profit health insurance companies focus on short-term profitability goals for their stockholders. For them, that means spending less for patient care, which represents the largest part of their budgets. The U.S. Congress found that the large for-profit insurers paid on average only 74 cents per dollar of premium from individual policies to doctors, hospitals and other providers, keeping the other 26 cents for their costs of administration and profits.
Certain health insurance plans maintain web-based pricing tools for members. Some of these tools post prices that the plans pay doctors and hospitals. Why hasn’t Sutter Health participated in these tools?
We want to provide consumers with fair and reliable information that is easily understood. Although several insurance companies have begun providing what they believe to be comparable data on prices between providers, Attorneys General of multiple states have disagreed with the approaches taken. Until they work the bugs out, we prefer not to add our data to the postings. We strongly believe a patient is best served by talking with a professional who can walk them through their personal health care needs, treatment options/choices and the estimated treatment costs of those options. Staff members at our hospitals and clinics regularly work with patients to answer questions about their estimated costs, and we plan to make estimates of our costs for common procedures available on our web site as soon as we can reliably do so.
Why are health care costs increasing at such a high rate?
The government pays less than the cost of care, so any inflation in health care costs must be borne by those who actually pay a market price. Since government-sponsored patients consume about 50 percent of the care in a typical health system, the cost-shifted to everyone else is double what it would otherwise be. For example, if inflation is 4 percent, a health system’s prices have to go up 8 percent to cover the increased costs of caring for government-sponsored patients when the government keeps its payments to doctors and hospitals arbitrarily low. Improvements in technology, drugs, and seismically-safe facilities all tend to drive the cost up faster than in other industries.
Health care providers, especially those like Sutter Health that invest in their communities (rather than giving that money to shareholders), have significant financial commitments. For example, we are replacing paper records with electronic systems and replacing hospitals at a time when per-bed construction costs have more than doubled, from $1 million about a decade ago to more than $2.5 million today. The other big cost driver is the success modern medicine has had in saving lives. Health problems that were once untreatable can now be treated, so we’re seeing more and more people living with chronic conditions. We’re absolutely committed to saving and extending patients’ lives, and we all need to be mindful that the costs of chronic care continue to be part of the nation’s overall health care bill.
How will health insurance reform impact your costs and affordability goals?
Our affordability imperative becomes even more important given cuts in reimbursement under health care reform. For Sutter-affiliated physicians and hospitals, Medicare cuts will likely total an estimated $124 million each year for the next 10 years – adding up to more than $1 billion in reduced Medicare reimbursement.
The United American Nurses Union/California Nurses Association has questioned Sutter Health’s commitment to “communities of working class people” and diverse populations. What’s Sutter’s response?
Counties including Del Norte (the north state’s poorest county), Lake, Merced, Sutter, Yolo and Yuba have some of the highest poverty levels in Northern California – and Sutter Health facilities serve each of them. In many small and rural communities such as Los Banos, Tracy, Novato, Jackson, Davis, Crescent City and Lakeport, Sutter Health is the sole provider of emergency medical services. Also, Sutter Health hospitals together serve more MediCal patients in our Northern California service area than any other health care provider. Sutter Health is building or has a continuing presence in diverse urban areas as well, such as downtown Oakland, San Francisco’s Mission District, midtown Sacramento and Stockton. Ironically and unfortunately, the nurses union formally opposed Sutter Health’s plans to construct new, seismically safe hospital facilities in urban Oakland, downtown San Francisco,Santa Rosa and right here in Castro Valley.
by George Bischalaney
President & CEO, Eden Medical Center
National health care reform is now apparently right around the corner. After years of discussion, and more recently, weeks of debate in the House of Representatives, legislative action is now in the hands of the Senate. If enacted, it will be the most significant health care legislation in decades.
As a provider, it is both welcomed and feared. Welcomed in that it will help bring insurance to millions of people for whom it is now out of reach. In making this possible, it creates the possibility of opening doors for routine health care services that should help prevent late diagnosis of disease, which becomes problematic and costly to treat. From our perspective as a hospital provider, better access should redirect many people who use our emergency departments as their primary care providers.
But change comes with a cost. The mind-numbing price tag of reform is expected to be offset by future savings. In the short term, it will require shifting payments currently dedicated to the Medicare program.
Most hospital providers do not make a profit in caring for Medicare patients overall. There is no doubt that we need to drive inefficiencies out of the health care system in order to help address this issue. But that alone may not do it. When costs are rising at a rate of 4-8 percent per year and reimbursement is 3 percent or less, we are constantly falling behind. There are many reasons for escalating costs. Consider the constant introduction of new drugs, high tech and high-cost diagnostic and therapeutic equipment, and of course labor. Health care is a service business and 60% of hospital costs can be tied to salaries and benefits. The cost escalation of these items alone will keep us chasing the elusive break-even point. And once there, if achieved, there is still ongoing capital investment that is necessary to maintain the capabilities expected of community hospitals.
The final package is likely still months away. Even then, it will take time to analyze and truly understand the effects, positive and negative, of this landmark movement. We hope that the final outcome will have the proper balance, consider as much as possible all the consequences, and result in a healthier and more stable provider system.
I welcome your feedback.
Economic Survey Shows 64% of Hospitals
Cannot Secure Funds for Seismic Compliance Mandate
The nation’s ongoing credit crisis and deteriorating revenues, caused in large part by governmental underfunding, is jeopardizing the ability of California’s hospitals to comply with state-mandated deadlines for seismic retrofitting, according to an updated economic impact report released today by the California Hospital Association (CHA).
The report, which is based on a survey of hospital chief financial officers (CFOs) conducted in April 2009, shows that 64 percent of hospitals report that they will not be able to access the capital necessary to comply with the state’s 2013/2015 seismic deadlines. More than a quarter of hospitals statewide (28 percent) have seen their interest expenses increase during the first quarter of 2009, while many other hospitals have been frozen out of the credit market entirely. As a result, hospitals throughout California are faced with limited access to capital and increased costs of borrowing. These dual challenges come at a time when hospitals are facing an unfunded mandate for seismic improvements estimated to cost up to $110 billion without financing charges.
“This report makes clear that revisiting the current timelines for the seismic mandate is essential,” said CHA President and CEO C. Duane Dauner. “The faltering economy is forcing all segments of our society to make difficult decisions. For many community hospitals, these decisions come down to whether or not they will be able to ensure that patients have access to care 24 hours a day, seven days a week.”
Under current state law, the state could force hospital buildings that are not in compliance with the seismic standards by January 1, 2013 (or January 1, 2015, if an extension has been granted) to close their doors to patient care. An estimated 900 acute-care hospital buildings, out of a total of 2,700 structures, face closure if they cannot meet the 2013/2015 deadlines.
In order for hospitals to access affordable capital for projects such as those related to the seismic mandate, creditors and rating agencies evaluate a hospital’s balance sheet and its demonstrated financial stability. Creditors also look for sustained operating results, specifically operating income of greater than 3 percent. In aggregate, California hospitals reported operating margins of less than 1 percent for each of the last three years, with margins in 2007 and 2008 in the red, according to the CHA report.
Among the factors impacting operating margins is a significant increase in the number of uninsured patients seeking care in hospital emergency rooms. According to the CHA report, more than 57 percent of hospitals have seen a rise in the number of uninsured patients during the first quarter of 2009, most likely as a result of rising unemployment and the loss of job-based health coverage. This is a 22 percent increase since CHA released its first economic impact report in January. Additionally, more than half of California’s hospitals are reporting a decrease in inpatient admissions and elective procedures.
In 2008, the costs of uncompensated care provided by California hospitals totaled $11.3 billion. Of that amount, Medicare payment shortfalls accounted for nearly $3.7 billion, while Medi-Cal underpaid hospitals to the tune of $4.1 billion. An additional $2.1 billion in 2008 losses are attributable to bad debt and charity care.
“California hospitals are not unique to the negative impacts of the economic recession,” Dauner noted. “The unfunded seismic mandate, however, places an extraordinary burden on our community hospitals at a time when they can least afford it.”
Access the full copy of the special report, called California Hospitals and the Economy — Ongoing Credit Crisis Jeopardizes Seismic Compliance Mandate.
By George Bischalaney, President & CEO, Eden Medical Center
Last week, the Obama Administration kicked off its efforts to address one the President’s stated priorities, health care reform. What does that mean, and what will be the result? I wish I really knew.
According to the President’s advisers—and Obama himself during the campaign—there is a need to extend health care coverage to millions of uninsured people across the country, while reducing cost and improving quality. Truly admirable goals with which very few could disagree.
Early discussion of President Obama’s plan calls for creating a savings of $634 billion over the next ten years to help fund reform. A recent article referred to this as a “down payment” on the overall expected costs. About half of this amount is targeted to come from reduced payments to Medicare and Medicaid (known as Medi-Cal in California) providers. On the surface, this is a disquieting concept.
Not too long ago, Eden Medical Center was recognized as one of lowest cost hospital providers in California. It should be no surprise that our costs have risen over the past few years. We have invested heavily in new equipment, both in medical technology and information technology, in order to continue to bring state-of-the-art services to our communities, and to provide our physicians and clinical staff the best tools to diagnose and treat our patients.
Last year, our labor settlement with registered nurses resulted in a three-year agreement that will give the nurses a 20% wage increase over the term of the agreement in addition to improved benefits. This kept our wages comparable to other local hospitals.
One of the benefits Eden Medical Center employees enjoy is a fully paid health plan for themselves and their families. Last year, the average cost was approximately $22,000 per year for an employee and family.
Despite these costs, Eden remains one of the lowest cost providers when compared to peer groups throughout the State. But as can be imagined, it is difficult to contain costs in our environment, especially when 60% of our costs are employee-related expenses. We are, after all, a service industry that is people- and technologically-driven.
The early announcements about health care reform create some concern. To expect to realize the savings needed to fund the plan through reduced payments to health care providers is very troubling.
Physicians are increasingly affected by efforts to reduce reimbursement. Many physicians talk of extending their days, working longer hours, much of which is devoted to the increasing amount of paperwork demanded from them. At the same time, we as patients expect them to remain current in the knowledge of new drugs and treatments in order to serve us to the best of their ability. This is resulting in a shrinking primary care base at a time when our population is aging. How does the plan for reform intend to address this?
Government payers of healthcare services for hospitals—the Federal Government for Medicare, and the State for Medi-Cal—are not paying the full cost of care at the present time. For each patient that is covered by Medicare or Medi-Cal, the cost to care for that patient exceeds current reimbursement. Further reductions will increase the gap that is, out of necessity, made up by insured patients—those lucky enough to have coverage through their employers. This is a cycle that needs to be broken if we are to have true health care reform.
The problems with our health care system are very complex. Reducing payments in an attempt to reduce costs will not yield the full reforms that are needed. I can only hope that this is not another piecemeal approach to change. A broader view of the systemic issues is needed. With the President’s staff talking about implementing reforms by the end of this year, it is questionable as to whether or not this will actually occur.
As always, your questions and comments are welcome. We will respond as quickly as possible.