Summary: Not long ago the Medicare Payment Advisory Commission (MedPac) came out with a data book on Medicare spending. The information is condensed into tables and charts. As I looked at the charts, I found some surprises. Below, myths and facts about:
- how hard it is for Medicare patients to find a doctor
- where most of our Medicare dollars go
- increases in Medicare payments to physicians– and whether doctors automatically hike the volume of services they provide when Medicare cuts reimbursements for services.
- hospitals losing money on Medicare patients
- which hospitals make a profit on Medicare, and which hospitals cannot break even on Medicare reimbursements
MYTH #1 Physicians have been refusing to take new Medicare patients; many have a hard time making appointments.
FACT: As charts 5-3 and 5-4 reveal, Medicare patients report as good or better access than privately insured patients—even to primary care physicians.
* On each of the following charts just click on the image to enlarge if necessary
MYTH #2: The bulk of our Medicare dollars are spent on acute care during the final weeks of life.
FACT: About 25% of Medicare dollars are spent on patients during the final year of life—not during the final weeks.
In most cases, it is not possible to know how much time the patient has left—one year, two years, three years . . . particularly if they suffer from heart or lung disease or are simply “dwindling”—growing frailer as they grow older. See figure 1 here
Meanwhile, as table 2-7 shows, more than half of all Medicare dollars are spent treating long-term chronic conditions. And as table 2-8 illustrates, in recent years, reimbursements for certain conditions have been soaring by more than 10 percent a year, including: lymphoma, joint degeneration, chronic renal failure, lung disease, metabolic disorders, breast cancer, rheumatoid arthritis and stomach cancer .
MYTH #3: Medicare reimbursements to physicians have remained flat to down over the past decade.
FACT: As chart 1-2 reveals, from 1998 to 2008 Medicare fee-for-service reimbursements to physicians climbed by 75%. Of course, over the same ten years, the cost to the doctor of providing services also has risen. In some specialties, doctors who are solo practitioners or working with a small group of physicians have watched their real income drop, particularly if they are located in an area where the cost of labor and real estate is high.
But many doctors in more lucrative specialties have seen their income rise over the same. And those working in large groups that enjoy economies of scale have not been hard-hit by rising expenses.
The 75% increase reflects the fact that Medicare has raised fees for some services, but, as chart 8-2 shows, most of the hike in income can be traced to higher volume: doctors have been “doing more” as they prescribe more tests, and recommend more procedures. In particular, chart 8-2 demonstrates, they’ve been ordering more diagnostic tests, MRIs and CT Scans. From 2003 to 2006 Medicare reimbursements to physicians for imaging services rose by 11% a year.
In 2007, Medicare responded by capping physician fees for imaging. The conventional wisdom says that if fees for a medical service are lowered, doctors will make up the difference by increasing volume. But that didn’t happen. Growth in the number and intensity of imaging services slowed from 11% a year to 3.8%. This suggests that diagnostic testing had become so popular in part because it was so lucrative. Meanwhile, as chart 8-2 reveals, case “evaluation and management,” which is not as well paid, grew more slowly. (Evaluation and management involves listening to and talking to patients. In general our health care system does not pay as well for what some call “thinking medicine.”)
MYTH #4 Medicare has been underpaying hospitals for years. Reimbursements rarely match the cost of actually treating the patients, which is why hospitals must charge private insurers more.
FACT: From 1998 to 2008, Medicare fee-for service reimbursements to hospitals for outpatient services climbed by 85%. Payments for inpatient services rose by more than 40%. (Chart 7-4) During this time hospitals were treating more patients, but as Chart 7-7 shows, reimbursements outstripped growth in the number of patients served. From 1998 to 2008, total outpatient visits rose by just 32% while inpatient admissions crept up by just 12%.
This suggests that hospitals were performing more tests and procedures on each patient. Over the same span, length of hospital stays for Medicare patients fell. (chart 7-9)
Growth in Medicare reimbursements slowed from 2005 to 2007 as beneficiaries switched from tradition fee-for-service Medicare to Medicare Advantage programs. But of course Medicare was still footing the bill by paying Advantage insurers —that spending just doesn’t show up on this chart.
Hospital profit margins vary widely, but many do make a nice profit on Medicare reimbursements. As chart 7-12 shows, in 2008, one-quarter of hospitals had Medicare inpatient margins that were 6.5 percent or higher, while another quarter reported inpatient margins that were 20.3 percent below the cost of caring for patients. It’s worth noting that during the 1990s the average hospitals enjoyed Medicare profit margins that ran as high as 18 percent. Margins on inpatient care didn’t begin to sink until 2004. And even then, in 2008 thirty-seven percent of hospitals enjoyed positive profit margins while caring for Medicare patients– and 2008 was the toughest year hospitals had seen in fourteen years.
When you add profits made on outpatient care, inpatient psychiatric care, rehab, skilled nursing facilities and home health services, the cost of graduate medical care and bad debts, overall Medicare margins follow the same pattern. Chart 7-14 illustrates the fact that in the 1990s average overall margins climbed as high as 11.9 percent; in 2008 the average fell to -7.2% Nevertheless, in 2008 31 percent of all hospitals managed to report profits on total Medicare services, including outpatient as well as inpatient care, with one-quarter showing margins of 2.5 percent or higher.
MYTH #5 If Medicare tries to rein in spending on hospital care, the quality of care will suffer. Most hospitals are already operating on tiny margins. And there just aren’t many ways for hospitals to cut the cost of caring for patients.
FACT: After adjusting for differences in patient mix, wages, outlier (extremely ill) patients, transfer cases, interest expense, the costs of teaching, and the effect of low-income Medicare patients, MedPac researchers have discovered that when hospitals are under financial pressure either because they have fewer patients, a larger share of Medicaid patients—or because private insurers are paying less—some hospitals manage to become more efficient, and turn a profit on Medicare patients. (See table 7-20)
Hospitals that cannot make a profit on Medicare reimbursements tend to be those that are under little financial pressure, enjoying profit margins of 5 percent or more on their non-Medicare patients. (Note: most hospitals in the U.S. are non-profits; for a non-profit this is a very comfortable margin. Some , especially large academic medical centers, also boast huge endowments. )This shouldn’t come as a surprise. Like most other organizations, hospitals spend more lavishly when plenty of money is available. When money is tight, they are more likely to concentrate on avoiding waste.
As chart 7-21 reveals, how much it cost hospitals to care for Medicare patients rose and fell, from 1987 to 2007, depending on whether private insurers were paying more—or less. From 1987 to 1992, private insurers were generous, and hospital spending per patient rose by 8.3 percent a year during these three years. Then came managed care. In the 1990s, HMOs put hospitals under financial pressure, and hospitals managed to cap spending; during those years, hospitals costs when caring for Medicare patients rose by just 0.8% a year.
By 1999 insurers were scarred by the backlash against “manage care,” and they gave up. Meanwhile, thanks to a wave of consolidations, hospitals now had more clout in the marketplace and were able to demand higher reimbursements. They were no longer under so much pressure, and spending on Medicare patients rose.
There is no clear evidence that the overall quality of hospital care that Medicare patients received fell in the 1990s—or that it rose along with spending, after 1999. To the contrary, many nurses, doctors and patients report that the quality of hospital care has been declining in this century, even though fewer patients are dying either while in the hospital or 30 days after discharge. (See chart 4-1). Perceptions of quality are highly subjective, but there is solid evidence that nurses are doing more and have less time to care for patients. Meanwhile, the number of hospital patients who are injured while in the hospital is rising, and the rate of avoidable complications following surgery remains high at 10.75% (See chart 4-2 below)
Finally, if you include income from all sources including private insurers, out-of-pocket payments by patients, Medicare, Medicaid and other government payments as well as investment income, chart 7-16 reveals that from 1994 to 2008, average hospital profit margins ranged from 6.4% to 3.6% dropping to 1.9% only in 2008 due to losses in investment income. These, of course, are only averages. During this time, some hospitals were operating in the red.