The recent debt ceiling legislation, the increase in risk-based reimbursement and pressures from commercial payors have put hospitals in a “perfect storm,” according to a report released Aug. 16 by MedeAnalytics. Due to the current economic downturn, healthcare reform and reductions outlined in the Patient Protection and the Affordable Care Act, hospitals can expect annual Medicare payments to drop $5 million over the next 10 years.

Total 2010 Medicare spending reached $528 billion, comprising 12 percent of the federal budget and one-fifth of total national health expenditures, according to to the report “Medicare Zero: A Comprehensive Analysis of the Impact of Health Reform and the Debt Deal on Medicare Funding of Hospitals and Strategies for Financial Survival."

“For various reasons, Medicare spending is increasing steadily—in absolute as well as relative terms—so all of these figures are expected to grow in the future.”

However, hospital payments under Medicare’s Inpatient Prospective Payment System (IPPS) program could drop $162 billion to $177 billion between fiscal years 2012 and 2021, the report by MedeAnalytics Senior Vice President of Marketing Ken Perez estimated. This number is the sum of PPACA-mandated reductions and an estimation of the reasonable range for proposed cuts from the Joint Committee for the debt deal, according to Emeryville, Calif.-based MedeAnalytics. These cuts would equate to nearly $5 million for the average IPPS-participating hospital, the company said.

"The challenges described in our report will constitute a significant threat to hospital finances for many years," Perez said. "Whether a hospital is currently profitable with the Medicare portion of its business, breaking even or losing money—because of the complexity and increased impact of reductions to Medicare reimbursement in the future—it is important to understand, monitor and take steps to mitigate the adverse effects of the reductions."

MedeAnalytics offered some strategies for hospitals to help reduce costs while still improving care:

• Partner with clinical leadership: Reinforce a financial-clinical partnership;
• Perform a detailed margin analysis: Identify low-margin MS-DRGs for which reimbursement is lower than the actual cost;
• Engage with service line managers and physicians: Create a clinical performance improvement action team of service line managers and physicians;
• Revamp care coordination: Evaluate and improve care coordination policies, including checklists and auditing;
• Ensure efficient operating room utilization: Optimize operating room utilization, which can be accomplished through scheduling, method changes and standardization; and
• Improve emergency room (ER) operations: Data analysis and review of ER supply and drug usage can improve ER operations.

 
“In general, hospital operating margins are basically at break even, and margins on Medicare are worse,” Perez said. “By targeting the largest and core activity of the hospital—the process and delivery of care—the previously mentioned strategies constitute areas of promising opportunities for the hospital to achieve financial gains or sufficient size to offset the reductions in Medicare reimbursement,” Perez summed.