Hospitals Must (and can) Make a Margin on Medicare!

I don’t know how many times I have heard health care executives moan that they cannot make a margin on their inpatient Medicare patients. I also don’t know how many times that I have wondered if they are right.

Joan Moss, a researcher with SG2, a health care industry think tank and consulting firm just posted an article titled “Redesign Systems to Perform at Medicare Payment Rates.” (Note: To access the article, you have to join the SG2 community, so there is no link provided.) The thrust of Joan’s article is this: Hospital’s can, and must, generate a margin from it Medicare portfolio.

According to the Kaiser Family Foundation, Medicare payments to hospitals, on average cover 90.6% of the actual cost of providing care. Medicaid is much worse, paying only 72% of  costs. The shortage is funded by payments from private insurers who, on average, pay 132% of the  cost of providing care to privately insured patients. (This results in a hidden tax many of us pay in the form of higher premiums, but more on that later.)

According to SG2, employers are pushing back as their health care costs spiral upward. So, SG2 envisions a future where the Medicare payment for services may become the commercial payment as employers insist that insurers ratchet down on providers. So they asked the question: Are there any community hospitals which are managing their patient populations in such a way as to make a margin on Medicare?

SG2’s review of 400 community hospitals identified 4, yes 4, taht are generating a margin. Chilling data for hospital CEOs.

On the flip side though, SG2’s study also shows that it can be done. Among SG2’s findings, the successful hospitals:

  • Kept length of stay at or below the Medicare geometric mean;
  • managed productivity (worked hours per patient day) well below the database average;
  • achieved mix-adjusted cost per case of over $1,000 below the comparison group, and;
  • achieved similar quality metrics to the comparison group.

What does all of this mean?

Hospital CEOs should envision a future of payment for all patients at Medicare rates. In most markets, Leaders adapt their products and service offerings to the market’s economic realities. Innovation, process improvement, six sigma quality, collaboration with vendors, etc. allow them to bring down the cost of their offerings while improving quality. Hospital leaders simply must do the same. Those who want to stay ahead of trends will focus on improving operations now.

1% of the hospitals in SG2’s group are able to do so. That’s a lot of opportunity.

(Ed. note: My firm is a member of SG2 and we have found considerable value in that membership. If you are a health system executive, I would encourage you to visit the SG2 website. The information is factual, prompt and understandable.)


One Response

  1. The Mayo Clinic in Arizona just dumped Medicare. I guess that Mayo didn’t feel that Medicare, our existing ‘public option’ is worth the diminishing reimbursement it pays. Ironically, the Mayo Clinic is help up by the president as the model of American health care. Should the rest of us follow them and divorce from Medicare also?

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