Managed Care Makes It Tough For Some Hospitals To Stay Afloat

True, there are other reasons the facilities have closed, but insurers' payment rates stand out. Is it better that some are history?

Maureen Glabman

St. Luke Medical Center in Pasadena, Calif., was born in the Depression and died 68 years later in 2002 from what its former CEO told the press was "weak managed care reimbursements."

Across the country, Emory Parkway Medical Center near Atlanta closed around the same time after 28 years, blaming its demise on exclusion from participation in some managed care plans.

And earlier this year, an even older facility, Caledonian Hospital in Brooklyn, closed after 93 years because hospital officials said it was underused, according to news reports.

These recent closings add to a growing body of statistics that reveal that nearly 18 percent of hospitals with emergency departments (EDs) — nearly 1 in 5 — shut down between 1991 and 2001, according to the latest American Hospital Association figures available. In 1991, there were 4,908 U.S. hospitals with EDs; by 2001, there were 4,045, a drop of 863.

Managed care payments and contracting practices are major contributing factors to the closings, say those familiar with hospital failures. Plan representatives fire back that the country was "over-bedded" and that technological developments, declining lengths of stay, and more use of convenient outpatient surgery centers have reduced the need for hospitals.

What is indisputable is that hospitals — with their attendant emergency rooms — are disappearing from the landscape at a time when ED use is escalating. In just four years, from 1997 to 2000, ED visits rose 13 percent, from an estimated 95 million to 108 million annually, figures that come from a survey of 1,500 hospitals released in March by the U.S. Government Accounting Office.

Like a game of musical chairs, as more EDs are removed, emergency patients jam remaining facilities and endure longer waits which, in some cases, cause critical delays in treatment. In fiscal 2001, two thirds of the nation's EDs were so full, they were forced to call for diversion at least once and reroute ambulances to other facilities. "Diversion override," a new, more frightening phrase, entered the ED lexicon recently. That's when all EDs in an area call for diversion at the same time, and all must by agreement reopen, even though they are at or beyond capacity. It is not uncommon in cities like Boston, Phoenix, and Houston.

"Diversion override is like carrying a can of gasoline into a burning building," says Todd Taylor, MD, vice president for public affairs of the Arizona chapter of the American College of Emergency Physicians.

A hospital's refusal to accept ambulance patients is directly tied to the number of available beds upstairs. If admitted patients can't be transferred out of the ED to inpatient beds, they remain "boarded" there, taking up space and requiring excess attention from doctors and nurses.

No beds in critical care

For example, at Atlanta's Grady Memorial ED recently, there were 113 patients actively receiving care. Thirty-three had been admitted but there were no beds free in critical care, telemetry, or medical isolation. Patients waited in the ED 6 to 30 hours, some of them resuscitated four times over that period. And some patients, slated for admission, completed their stay in the ED without seeing an inpatient bed, says Arthur Kellermann, MD, MPH, chairman of emergency medicine at Emory University School of Medicine, Atlanta, and a board member of the American College of Emergency Physicians. ED gridlock this severe is not only a threat to patients, Kellermann asserts, but the entire community.

He notes that Grady Memorial, Atlanta's only public hospital and Level 1 trauma center, serves as the cornerstone of the region's response to terrorism and other mass-casualty events.

Calling ED gridlock "a growing crisis," the Joint Commission on Accreditation of Healthcare Organizations in May proposed new leadership standards to help alleviate the problem. "Patients in overcrowded EDs are at high risk of experiencing treatment delays or inadequate care," according to proposals expected to appear in a final form in the 2004 Hospital Accreditation Manual.

Financial woes are the primary reason hospitals fail, wrote researchers at the University of California at Berkeley in a 2001 report, "California's Closed Hospitals, 1995–2000," a finding backed by a 2002 Office of Inspector General study, "Hospital Closure 2000."

Why they fail

Dollar issues relate to mismanagement, competition, an inability to secure referrals, lack of a primary care network attached to the hospital, tight competition in an area, rising pharmaceutical and technology costs, an increase in patients who don't pay, the burden some hospitals took on by purchasing unprofitable physician practices, and a nursing shortage that prevents hospitals from staffing unused beds.

But hospitals also close in no small measure owing to managed care, wrote Berkeley researchers: "Managed care, technological developments, capitation and competition combine to push some hospitals out of business."

Managed care experts attribute 15 percent to 30 percent of the reasons hospitals shutter to managed care contracting and payment issues. "When hospitals are working on slim, single-digit margins, a payer denial rate of 15 percent can be the difference between survival and closure," says Robert Corrato, MD, MBA, the CEO and president of Executive Health Resources, a company of physician advisers that acts as an intermediary between payers and hospitals to resolve claims disputes.

Corrato and others point to the following ways hospitals lose money on managed care patients:

  • Retrospective and concurrent payment denials.
  • Slow or delayed payments.
  • Onerous documentation requirements that slow down payments.
  • Underpayments.
  • Day carveouts, where MCOs refuse to pay for the last day of a patient's stay.
  • Payment exclusions for treatments considered experimental even though they have been used for years.
  • Bundling of charges.
  • Precertification and prior authorization for outpatient procedures that are later denied because benefits expired or patient information is incorrect.

"Smaller hospitals in some areas are disadvantaged from larger hospitals in not getting contracts or in not obtaining good reimbursement rates," says John Edelston of HealthPro Associates. He's a managed care consultant and the former chairman of the Los Angeles County Emergency Services Commission. More than any other kind, small facilities were more likely to close, according to the Berkeley report of California's closed hospitals. In Georgia, for example, 26 hospitals folded between 1991 and 2001, 21 of them under 100 beds.

Some believe in natural selection for hospitals, and say that small, weak ones should close. "How many closed hospitals were lower quality-of-care facilities that were not doing enough procedures to keep skills up?" asks Donald Young, MD, president of the Health Insurance Association of America. "Medically, it's better to drive 50 to 75 miles for quality care. The answer is not to try to keep open all rural hospitals that have only 10 percent occupancy, but to be able to stabilize and transfer emergency patients to hospitals that give patients what they need."

What's more, hospitals are closing because of shorter lengths of stay owing to DRGs and technological improvements that allow patients to recover faster, Young says. "The closures come about because there is less use and need for hospitals."

In a November report, "Capturing Lost Revenues," the Health Care Advisory Board, whose 2,000-plus members are health systems and medical centers, lays blame on hospitals for MCO denial rates that carve about 12 percent of gross inpatient charges. The board cites poor capture of patient information, inaccurate medical documentation at the patient bedside, ineffective collections, and appeals. "Fully 90 percent of managed care denials are preventable ... translating into additional revenues of $3.3 million...."

Administrators bear the burden for their hospital's financial failure in other ways too, experts say. "The MCO contracts sit in file cabinets where no one can compare incoming payments to the contracts to know if hospitals are being underpaid," says Corrato, the consultant. Edelston, of California, adds that hospitals frequently accept MCO contracts they don't understand and lose money.

Worse, some hospitals neglect to renegotiate their MCO contacts for four or five years, though there are new hospital technologies, increased costs of pharmaceuticals and legislative mandates regarding length of stay that should be added.

Edelston recommends renegotiating yearly or every other year. And finally, he says, some hospitals with EDs would do better to terminate their MCO contracts altogether because they are losing money on them and, in fact, would make money if they charged MCO patients standard rates in the ED instead of accepting their insurance.

With fewer hospitals in certain markets, those remaining have leverage to choose the MCOs with which they want to negotiate, set rates, cease contracting with specific plans to avoid price concessions, litigate more payment disputes, and dictate terms for how they will handle paperwork, says William Sarraille, JD, a lawyer who frequently negotiates disputes between payers and hospitals.

"When there was excess capacity, plans could say, 'If you don't give me this rate, then I'm going down the street.'" Edelston says. "In many communities, when it comes to available beds, there is no more down the street."

Adding more ambulances

After Pasadena's St. Luke folded last year, nearby Huntington Medical Center experienced a 27-percent increase in ED visits, said a facility spokesman. And, despite Huntington's best effort to streamline patient flow and cut diversion, it increased 11 per cent, Richard Tadeo of the Los Angeles County Emergency Medical Services reports. It is on diversion more than one fourth of the time that the ED is open, roughly six hours daily.

Another result of the failure of St. Luke is that the Pasadena Fire Department had to add more ambulances to compensate for travel time to get patients from the St. Luke area to Huntington. And, because of increased diversion, sick and injured patients ride in ambulances longer as drivers seek hospitals that will accept them, Tadeo says.

HIAA's Young maintains that ED crowding problems arise because state and federal governments are not providing enough support to public hospitals.

New hospital openings might alleviate ED crowding. But few hospitals have opened in recent years and when new facilities are built, they are often created as specialty hospitals without EDs — cardiac, orthopedic, behavior, surgical — sometimes targeted at a niche to relieve owners of the burdens of EMTALA law. (For more on specialty hospitals, see our Legislation and Regulation department on Page 11.)

The federal EMTALA (Emergency Medical Treatment and Active Labor Act) mandates that hospitals with EDs must screen — and if an emergency medical condition is present, stabilize — any patient who comes to the ED, regardless of ability to pay. Ninety of 130 hospitals that opened between 1991 and 2001 are specialty facilities.

Maureen Glabman, of Miami, is the 2000 Columbia University Reuters Fellow in Medical Journalism.

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