Peace You Can Cut With A Knife: Hospitals, HMOs In Today’s Marketplace

Health plans want savings, and suspect they’ll find some in hospitals — which, for their part, say the Balanced Budget Act has stripped them clean.

Health care follows the money. Within the last four or five years, HMO executives engaged in tracking revenue have turned toward hospitals, looking for that great bugaboo of CEOs — waste. In doing so, they’ve encountered enough evidence to suggest that hospitals are doing better financially than the other two major players, plans and physicians. Costs and premiums are rising, and doctors swear they’ve given all they can. HMOs, with a little prodding from employers, are looking to hospitals for savings.

Not surprisingly, we get face-offs in certain markets. (See “Weed of Dissension Grows in Pottstown.”) These skirmishes will escalate into the industry’s second front, or they will dwindle, thanks to the realization that cooperation works better than confrontation. (This, of course, can hardly be described as a fearless forecast, sounding somewhat like Woody Allen’s prediction that in the future there will be a war, but only one side is going to win.)

“Tense,” replies Rick Wade, senior vice president of the American Hospital Association, when asked to assess the mood. “It cannot be, in the relationship with the HMO, that it simply gets a deeper discount and a better deal every year. There’s some point where that serves no one. It may serve some objective on the HMO’s balance sheet, but it won’t do a lot for the health of its covered lives.”

Nothing personal

Despite these ominous remarks, one thing needs to be understood when weighing HMO-hospital interaction: They’re two bureaucracies brushing against each other. So far it hasn’t gotten as personal as the fighting between HMOs and physicians.

“The people at hospitals and HMOs who are talking to each other are business people, and they’re talking about money,” explains Peter Kongstvedt, M.D., a partner in Ernst & Young. “It’s about money with physicians also, but it’s not institutional money: It’s their own personal money. That’s a big, big difference. The physicians also correctly or incorrectly — depending on the situation — see quality-of-care issues mixed in. The hospitals don’t. The hospitals aren’t going to deliver second-rate care. They’re going to analyze it and ask whether they can do it, as opposed to, ‘Well, we’ll just go ahead and let more people die.'”

Kathryn Stewart, M.D., M.P.H., medical director for care management at Christ Hospital in Oak Lawn, Ill., doesn’t view the HMO as the “heavy,” seeming to take the attitude that complaining about plans is akin to complaining about the weather.

“The HMOs will pass along to consumers, the employer group, and the hospital whatever it costs them to deliver care,” says Stewart. “It can’t lose money year by year and still stay in business. I think the costs are going to keep escalating until doctors start being more rational in terms of how they apply the use of resources.”

Even within individual hospitals, there seems to be disagreement on exactly how best to deal with managed care, notes William DeMarco, a consultant in Rockford, Ill.

“There are two very, very strong voices,” says DeMarco. “One says ‘Let’s get out of the inpatient-only business and get into the outpatient business through ancillary care.’ Then you have this strong, entrenched culture of the old hospital administrator who is saying, ‘Full beds are good business. My board of directors pays me based on how many beds I can keep full.’ What I’m hearing this year that’s new is that even hospitals that are full are losing money. Now that’s interesting.”

One of the duties Stewart was given when taking over the job at Christ Hospital almost a year ago was to decrease bed days. “I asked, ‘Why do you want me to bring down the number of bed days used? Most of your business is probably managed care and you’re still reimbursed on a per-diem basis.’ The board said, ‘Yes, but our contracted rate right now is so low with the HMOs that it barely covers our costs. We don’t want these people to be here any longer than they have to be, even though we’re being reimbursed on a per-diem basis.'”

Such maneuvering can only make bad feelings fester, warns Wade. “In some major markets, our hospital members see the HMOs as using every technique they can to either not pay them or slow down the speed at which they pay them. In New York, our members report to us as much as 180 days lag time in getting paid by some of the HMOs.”

Balanced budget burden

Tensions between HMOs and hospitals, present from the beginning, really began to accelerate after the passage of the Balanced Budget Act of 1997. The act slashed millions of dollars that historically had been allocated to academic medical centers as reimbursement for the cost of training new physicians who, in the course of their education, served Medicare patients. Kongstvedt points out that the act, while having a disproportionate effect on such facilities, hit everybody hard, including for-profit systems. The Balanced Budget Refinement Act, passed last November, alleviated some pain, restoring about $17 billion to Medicare, some of which will find its way to hospitals. However, that still means Medicare is out about $54 billion over the next five years, compared to what would have been if the original act had not passed.

“I don’t know how much more room there is to cut in hospitals, but it’s not as much as there used to be, that’s for sure,” says Kongstvedt.

Following the money through the halls of the modern hospital is no easy task. What seems accurate, according to Kongstvedt, is that hospitals are doing better than plans or physicians, but not nearly so well as they did 10, or even 5, years ago.

Kongstvedt, a former CEO of an HMO and a true expert in an era when that term is carelessly bandied about, has sources that are unavailable to the rest of us. “You won’t get much on the publicly-traded ones,” he says. “You’ll only find out what the corporation makes, not the individual hospital. Medicare gets data that isn’t necessarily public.”

The bleak picture of how hospitals are doing is not often reinforced by actions, DeMarco points out. “The hospitals tell you that the Balanced Budget Act is chopping back their reimbursement 17 to 30 percent, and it’s ‘Woe is me,'” says DeMarco, “but look at how the hospitals are building. Rockford’s an example. The three major hospital systems here have all announced $20 million expansion plans and yet they’re all saying ‘Woe is me.'”

Here’s how Wade sees the financial picture since passage of the act. “There’s a group, the size of which is shrinking, that is doing well,” he says. “There’s the largest segment, in the middle, that is doing OK. When I say OK, it means that there is a margin there, but not the kind of margin that the investment community thinks is adequate. Then, there is a growing segment on the other end that is on the edge, or losing money. Five years ago you could say it was a third, third, and third.”

Who’s making money?

Amy Philbrick-Howarth, vice president for provider network management at Massachusetts-based Neighborhood Health Plan, says pinning down who the “cash cow” in health care is these days is problematic.

“Providers are not the only ones losing money,” says Philbrick-Howarth. “While providers indicate they are losing a lot of money, very few have actually gone out of business — but many HMOs have.”

“Worse,” after all, is a relative term. In some markets, hospitals are doing better than, say, capsizing health plans or medical groups. Kongstvedt and Wade are reluctant to generalize beyond a region.

“In certain places, where you’ve had specific things going on — for example the actions of Columbia/HCA as it sold hospitals or got out of markets — that has changed the whole dynamic,” says Wade. “In some communities, you had the insurance companies leaving the Medicare/HMO marketplace in droves. That had an impact. In some areas, the Balanced Budget Act is having a much more deleterious effect than in others.”

Wade adds, however, that hospitals are going to stay no matter what. He seems to consider HMOs’ relative mobility as a form of disingenuousness. “The fact is that the hospital can’t pull out of the market, or arbitrarily raise prices in many cases, or make adjustments that a private corporation can,” says Wade. “We have to stay in the community. We have to take all comers and a great deal of what we are paid is very tightly regulated. HMOs have the leverage. They’ve always had the leverage — even in a time when there’s excess capacity.”

HMOs are not as freewheeling as hospital executives think, says Kongstvedt. “HMOs can’t just willy-nilly drop hospitals and add new ones,” he says. “It’s a very painful procedure to do that and the marketing people raise hell.”

Individual markets will determine just who has the leverage, Kongstvedt reiterates. “In certain markets with high managed care penetration — particularly out West but also in some East Coast markets — some hospital systems were accepting global capitation and they just got killed,” says Kongstvedt. “So they’ve basically been dropping those contracts and going back to something else: per diems or DRGs. In very, very rare cases the hospital will drop from global capitation back to some fee-for-service basis, unless it’s a hospital with essentially a monopoly.”

Friction between HMOs and hospitals has grown to where it affects even an integrated and insulated system such as not-for-profit Kaiser Permanente.

“Even though we operate our own hospitals in California, we have experienced such membership growth in the past 10 years that we do have to contract for some services with hospitals outside our system,” says Mary Ann Thode, R.N., J.D., M.P.H., chief operating officer of Kaiser Permanente in Northern California. “For specific procedures such as cardiac surgery, we negotiate global contracts that include the hospital and provider fee rolled into one. Local hospital delivery systems are telling us that they are in dire financial straits and in some cases are requesting increases of 60 to 70 percent in their global fee. Our response to this will be to continue to internalize everything we can in the future for purposes of both quality and efficiency, giving our members all of the benefit of an integrated system.”

Thode says even Kaiser’s integrated system could have a difficult time in the for-profit world. “You’d need common incentives for all the entities — the HMO, the medical group, and the hospitals — to make it work. Everyone has to be working toward the same thing — the production of a high-quality, efficient model of care. Whenever profit enters the equation and the goal is to return profit to the shareholder rather than to strengthen and improve quality of care, it becomes difficult to manage.”

Stewart, the hospital medical director, thinks the player who holds the key to better relations is neither the hospital nor the HMO, but the physician.

“In terms of how many days they keep their patients here — that kind of thing — they’re not punished by the HMO,” she says. “The hospital is punished. Yet the hospital doesn’t have any direct control over the physicians and how they behave. Cigna has told me that when it identifies an inappropriate day it notifies the hospital that it’s going to deny payment. I said, ‘Well, do you then deny payment to the physician? That would be a big incentive for the doctors to behave the way we want them to at the hospital.’ Cigna said, ‘No, our computer systems don’t have the finesse to be able to do that. We can’t tease out that portion of what we owe them.'”

Digging in

Hospitals are learning how to defend themselves, says Wade. “I think in some places, through mergers and consolidations, you’re beginning to see hospitals work together to deal with issues. In California, for example, Catholic Healthcare West and the hospitals that are part of its system are beginning to draw lines with HMOs and are saying, ‘Wait a minute. Let’s stop. We can’t continue along this path.’ I think some of the strength coming from the mergers and consolidations is helping hospitals deal more rationally with managed care.”

This sort of strategy has had uneven results, says David Friend, M.D. M.B.A., vice president and director of Watson Wyatt Worldwide. “In the ’90s,” the consultant says, “hospitals have had to band together in increasingly large, and not always synergistic, alliances to survive the onslaught of short-sighted managed care practices.”

Friend surveys the gathering storm clouds with trepidation. “Creating another win-lose battlefield will further deplete finite hospital resources, damage already thin HMO credibility, marginalize the physician’s role, and hurt patient outcomes.”

No one ever said that war has to make sense.

Weed of dissension grows in Pottstown

While the strain placed on hospitals in recent years may be the result of bureaucratic grinding rather than actual malice, some hospital officials are beginning to take it personally.

At Pottstown Memorial Medical Center, outside of Philadelphia, for instance, patient days denied or adjusted by HMOs have been increasing at what one official considers an alarming rate. The denied-or-adjusted figure grew from 482 in 1995 to 2,113 in 1999, a spurt that caused John J. Buckley, Pottstown’s president and CEO, to publicly question HMOs’ methods. After all, we’re talking about a sizable chunk of revenue. The amount that the hospital didn’t receive, thanks to those denials and/or adjustments, rose from $278,000 to $1.2 million in the same span.

Buckley, not surprisingly, declines to name names.

“It’s not unique to any one health plan,” he says. “Our number of cases that are reduced from acute-care rate to something lower than acute-care rate is increasing.”

Don Liss, regional patient management medical director at Aetna U.S. Healthcare, was recently quoted in the Philadelphia Business Journal as saying that increased reliance on broadly accepted clinical guidelines spurred the surge in denials. (Aetna officials declined to speak to Managed Care for this article.)

“It’s fair to say we have identified more inefficiencies in the health care delivery system that result in overutilization of hospital services without an underlying clinical reason,” Liss said. “For example, there is a considerable amount of credible medical literature from respected university centers that says it is possible in most cases to definitely rule out a heart attack within about six hours, without a hospital admission. This is actually occurring today in many California hospitals. In the Philadelphia region, hospitals have not established these types of programs.”

As so often happens in health care, clinical and financial concerns merge in this issue. Is there too much waste?

“That’s going to vary from hospital to hospital,” insists Buckley. “Some hospitals are more efficient than others. Any organization — whether it’s a hospital, a doctor’s office, a manufacturing company — there are always going to be some inefficiencies. Our industry is trying to identify those inefficiencies and make sure we have the most cost-effective, streamlined, high-quality services possible for our patients.”

Buckley points out that HMO executives do not come to his hospital to see firsthand how and why patients are placed in acute care. “We would be happy to share information with them,” he says.

Liss reportedly indicated that Buckley may soon get his wish. Aetna U.S. Healthcare has placed “clinical field coordinators” in some Philadelphia-area hospitals. Their function is to help identify ways to improve efficiencies and arrange nursing home or outpatient testing. “We have made a concerted effort to work with hospitals…,” Liss said.

This is something that the consultant William DeMarco likes to hear. “I’ve been telling people for quite a while that the hospitals, the physicians, and the employers should get together regularly to find out what they can do at their community level to improve care,” says DeMarco. “Then they should go to the managed care company and say ‘This is what we’re willing to do’. There are managed care companies now — not the big 10 — who would listen.”

This is not to say that no interaction takes place now, says Buckley. “We’re in constant communication on a daily basis with managed care organizations: letting them know what we’re doing with patients; telling them why we feel the patient needs to be here; explaining the patient’s clinical condition.”

Of course, in some situations this interaction rests largely in the hands of hospitalists — and hasn’t always functioned well, contends Rick Wade, senior vice president for the American Hospital Association.

“Depending on the hospitalist, it can be healthy,” he says. “Depending on the hospitalist, it can be unhealthy. As one CEO said to me the other day, it’s kind of like ‘Who’s the hospitalist of the week?’ Often, this hospitalist doesn’t know the patients. He’s kind of in there bumping around, and he’s really making things less efficient.”

Meanwhile, Buckley has been addressing the situation, in part, by aggressively appealing denials and reviewing internal processes. Has that helped? “With certain managed care players, things have improved. With others, they have not. We’ve seen fewer denials.”

MANAGED CARE February 2000. ©2000 MediMedia USA