AHA, hospital executive support for hospital mergers, despite antitrust concerns

Hospital mergers have reduced annual operating expenses at acquired hospitals, and evidence from a study cited by the American Hospital Association shows quality and service improvements stemming from mergers. According to Charles River Associates, despite antitrust concerns from the Federal Trade Commission (FTC), hospital leaders believe that mergers are a better tool for achieving better care coordination and population health management than looser affiliations between parties.

Cost savings

An analysis of non-federal short-term acute care hospital mergers between 2009 and 2014 revealed a 2.5 percent reduction in operating expense per admission at the acquired hospitals, implying annual savings of about $5.8 million (derived from average annual operating expenses). Net patient revenue per admission also declined relative to non-merging hospitals, suggesting that mergers may reduce health care costs.

Interviews with hospital executives placed savings into three categories: scale-related savings from allocating fixed costs over a larger volume of patients, reductions in cost of capital, and standardized clinical processes. In particular, supply chain savings from group purchasing and reduced overhead following consolidation of back office services were cited as important cost-saving benefits of merging.

Quality improvement 

While the study was able to quantify some cost savings related to mergers, positive effects on quality were less obvious, despite executives stressing the impact of quality improvements following clinical standardization after a merger. Small improvements were observed in a decrease in the composite indices of 30-day readmission rates, 30-day mortality rates, and overall outcome, but the only statistically significant result was a 10 percent change in the readmission rate result. The authors admitted that the modest results may partially stem from difficulty in quantifying hospital quality.

Merger specificity

The FTC asserts that improved care coordination and other benefits touted by merger supporters are not merger-specific and can be achieved through other means of association. Hospital leaders disagree based on experience showing that “looser affiliations” between parties fail to provide the necessary level of commitment and accountability to achieve the necessary cost savings and quality benefits to effectuate health reform. The interviewees opined that alliances between parties are not able to overcome the divide of being part of different systems, resulting in unwillingness to invest capital, reluctance to share intellectual property, inability to align incentives and create a common culture, and regulatory roadblocks on information sharing. The authors noted that successful loose affiliations are usually narrow in scope, limiting the cooperation to combining supply chain efforts or developing joint back office function collaborations (without sharing data between affiliates). If clinical areas are involved, they are usually limited to support services.

Highlight on Puerto Rico: Just how bad will Puerto Rico’s Medicaid funding crisis be?

Puerto Rico is in danger of a serious Medicaid funding crisis beginning late 2017, according to a data point report by the Office of the Assistant Secretary for Planning and Evaluation (ASPE) under the HHS Secretary from January 12, 2017. Under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), territories like Puerto Rico receive not only an increased funding rate, but a temporary additional Medicaid funding amount for spending above their statutory caps for use between July 2, 2011 and September 30, 2019 (ACA sec. 2005), and another sum provided in lieu of funding for individuals enrolling in health insurance exchanges to be used by December 31, 2019 (ACA sec. 1323). (States only would only receive the sec. 1323 funding when the sec. 2005 funding is exhausted.) Amounting to $6.4 billion, these funds will not reach 2019 but instead will be depleted as early as the first quarter of fiscal year 2018 (or the fall of 2017). The route that Puerto Rico takes in responding to this funding crisis could take this situation from bad to worse.

Background and ACA

Both states and the federal government pitch in to jointly fund the Medicaid program. The amount that comes from the federal government is called the federal medical assistance percentage (FMAP). How much FMAP a state receives is based on its per capita income, with the average being 57 percent (50 percent for wealthier states, 75 percent for the poorest), adjusted on a three-year cycle. U.S territories, like Puerto Rico, however, receive an FMAP amount that varies greatly from that of states because their rates are capped by statute.

Puerto Rico faces immense poverty, with individuals being eligible for Medicaid with an annual income of only $6,600 (compared to $15,800 for the continental U.S.) and families with an income of $10,200 ($32,319). Over one million people are enrolled in Medicaid in Puerto Rico. Under the per capita income formula used to calculate the FMAP of states, and still considering the statutory maximum that is in place, Puerto Rico would receive 83 percent (93 percent absent the statutory maximum). Instead, Puerto Rico’s Medicaid expenditures are matched at 55 percent. This is an increase from the 50 percent that was in effect prior to passage of the ACA.

 Possible scenarios

Two scenarios are provided in the report as options for Puerto Rico to approach the exhaustion of funds. First, Puerto Rico could continue to spend the same amount of its own funds in fiscal year (FY) 2018 as in 2017, adjusting for inflation on a per-enrollee basis, which would result in a decrease in spending to 44 percent less than that required to maintain current enrollment of over one million today. Around 500,000 people would lose coverage. Although this scenario is similar to the funding that was in place prior to the ACA, considering that officials may choose to prioritize infrastructure and debt payments over Medicaid, they may decide on scenario two.

The second option is that Puerto Rico spends none of its own unmatched funds over those necessary to get the maximum federal funding, but that would result in spending being 80 percent less than that required to maintain the current enrollment, and nearly 900,000 individuals would lose Medicaid coverage.

In either case, it is assumed the Puerto Rico will reduce coverage (lowering income eligibility levels or capping enrollment) rather than reduce benefits for those covered by Medicaid.

KFF offers facts about Medicare spending

As the new Administration and Congress consider changes to federal health care programs, including Medicare, a Kaiser Family Foundation (KFF) issue brief offers spending facts about the program, which currently accounts for roughly $1 of every $7 in federal spending. The brief indicated that repealing the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) would increase spending and worsen the program’s long-term financial outlook, but noted that Medicare faces challenges apart from ACA repeal, including higher health costs and an aging population.

Although the program faces financial challenges, KFF noted that Medicare “isn’t going broke.” The Hospital Insurance Trust Fund, which pays for Part A benefits, primarily through payroll taxes, is expected to pay for full insurance benefits until 2028, at which point it will be able to pay for 87 percent of hospital benefits. Part B physician services and Part D drug benefits, however, are paid for through a combination of general revenues and beneficiary premiums and are set only a year in advance. As a result, they are not subject to a funding shortfall, but higher projected spending would increase the amount of general revenue funding and beneficiary premiums required to cover costs. Spending on Part benefits is expected to rise faster than spending on benefits paid for under Parts A and B, with per-capita spending expected to rise 5.8 percent for Part D between 2015 and 2025, compared to 3.2 percent for Part A and 4.6 percent for Part B.

The aging U.S. population is resulting in higher Medicare spending. For example, the number of people over age 65 is expected to double from 2010 to 2050 from 40 million to 84 million, while the number of people over 80—who account for a disproportionate share of Medicare spending—is expected to nearly triple, from 11 million to 31 million. Medicare spending accounted for 15 percent of the federal budget in 2016, and is expected to increase to 18 percent of the federal budget, accounting for $1 in every $6 spent, by 2027. Average annual growth in spending is expected to increase more quickly between 2015 and 2025—at a rate of 7.1 percent—than it did immediately after the ACA was enacted between 2010 and 2015, when it increased at a rate of only 4.4 percent.

ACA provisions reducing payments to providers and Medicare Advantage (Part C) plans reduced overall spending growth from 9 percent between 2000 and 2010 to 4.4 percent between 2010 and 2015. KFF cited a Congressional Budget Office (CBO) report and stated that ACA repeal would add $802 billion to Medicare spending through 2025; KFF opined that repeal would lead to higher deductibles, premiums, and cost sharing for beneficiaries and would hasten the insolvency of the Hospital Insurance Trust Fund (see Repealing the Affordable Care Act—an unaffordable idea?, Health Law Daily, June 24, 2015). With the ACA in place, KFF reports that net Medicare spending is projected to grow from 3.2 percent of the gross domestic product (GDP) in 2016 to 5.7 percent of the GDP in 2046; prior to the ACA, net Medicare spending was projected to account for 8.5 percent of the GDP in 2046.

Hospital-owned physician practices continue to grow, but integration has issues

“The Affordable Care Act and changing economic conditions have encouraged an increase in the integration of physicians with hospitals,” according to a study conducted Marah Short, M.A., Vivian Ho, Ph.D., and Ayse McCracken, MBA, CPA for the James A. Baker III Institute for Public Health at Rice University. The Rice University study found that hospitals with physicians on salary rose from 44 to 55 percent between 2008 and 2013 and noted that a growing number of hospitals are employing primary and specialty care physicians, as well as hospitalists. The authors  concluded that the data showed an overall trend of increasing integration, but stated that many hospitals are transitioning to lower levels of physician-hospital integration. The study examined the trends in hospital integration over time designating four forms of integration based on the type of contractual relationship a hospital has with physicians.

Number and impact of hospital-employed physicians

The number of physician practices owned by hospitals/health systems rose 86 percent between 2012-15, with the percentage of physicians employed by hospitals or health systems increasing in every region of the country, according to a study prepared by Avalere Health and released September 7, 2016, by Physicians Advocacy Institute (PAI). This study also found that by mid-2015, one in four medical practices were hospital owned and 38 percent of U.S. physicians were employed by hospitals and health systems. In 2015, hospitals employed more than 140,000 physicians. In addition, from 2012 to 2015, hospitals acquired 31,000 physician practices. PAI noted that the acquisitions typically involve the acquisition of the services of multiple physicians through employment contracts, as well as the practice’s physical building and equipment.

Kelly Kennedy, PAI executive vice president, stated that “The shift toward more physicians employed by hospitals could mean higher costs for the entire health system. For patients, it impacts both where they receive and how much they pay for care.” Robert Seligson, PAI president and chief executive officer of North Carolina Medical Society, added that “Payment policies from governmental agencies and health insurance companies heavily favor large health systems and [that] makes it challenging for independent physician practices, especially smaller practices to survive.”

Accountable care organizations and payment innovations

“Through integration, hospitals could better control physician practices to increase efficiency and decrease costs,” by reducing duplication of services, providing clinical benefits, and improving communication and coordination of care between hospitals and physicians, the Rice University study explained. The authors further noted that the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) encouraged the integration of physicians with hospitals when it established accountable care organizations with the goal of reducing health care costs while encouraging  doctors, hospitals, and other health care providers to come together voluntarily to give coordinated high quality care to their Medicare patients. ACOs and medical homes will continue to spur integration in coming years, the study predicted.

Regulations mandated by the ACA have offered various payment innovations and opportunities for physicians and hospitals to participate in value-based contracting. These options provide better solutions with less operating and financial risks for hospitals and physicians, the study noted, perhaps allowing hospitals and hospitals to forgo integrating. Hospitals can form a successful ACO, while physicians can maintain their private practice and both benefit from the shared savings. However, hospitals seeking to participate as a Medicare ACO must build relationships with primary care physicians (PCPs) and will have better control of hospital referrals for inpatient and outpatient care if the PCPs are hospital employees, according to the Rice University study.

Conflicting interests in integration

Conflicting interests played a role in the choice to integrate or de-integrate, the study explained. Hospital employment of physicians is influenced by a variety of factors, including preparation for value-based contracting and the attraction of certain specialists that generated a significant patient volume. Hospitals studied were uncertain whether to employ highly compensated specialists or primary care physicians. Specialists considered the risk of declining incomes and sought partnerships with hospitals because reimbursement for ancillary services are paid at a higher rate when billed as the service of a hospital provider organization than when provided in private practice.

Other issues facing the integration of a hospital and an independent physician practice include payer contracting for Part B services; billing, coding, and collections process; staffing costs, policies, and procedures; and supply chain management. The differences in operation between the two may result in increased clinic operation costs along with pressures on physicians to contain costs. The differences in operation between the two may result in increased clinic operation costs along with pressures on physicians to contain costs.  The study recommends that hospitals create a governance structure with strong physician leadership and experienced practice administrators to address  and assimilate the practices into the hospital’s infrastructure.

The study noted that “a successful partnership requires physicians and hospitals to have aligned goals and strategies consistent across the organization.” When determining whether to integrate, the study recommended that hospitals and physicians consider whether there is both a cultural and financial fit and expectations of the physician and the hospital need to be clearly defined and aligned. While physician practices operate as small businesses, hospitals function as more sophisticated business entities, the study explained.While physicians may expect few changes in the way they do business, hospitals likely will expect physicians to operate their clinics in alignment with hospital systems, processes, and policies, and align referrals with its medical staff and outpatient services. .