Medical Economics

What Medicaid Expansion Tells Us About America’s Health

Medicaid expansion has been a rallying cry for both the politically far left and the politically far right. This post will examine some of the healthcare differences between those states that participated in Medicaid expansion and those states that did not expand Medicare.

At its most simplistic, Medicaid expansion has increased federal and state government costs but decreased the cost of providing uncompensated care to the uninsured by hospitals and doctors. Medicaid expansion was a product of the 2010 Affordable Care Act but it did not roll out until 2014. In the five years since initial roll out, 33 states either have already implemented or are in the process of implementing Medicaid expansion and 17 states chose to not participate in Medicaid expansion.  The differences in health metrics between these states are summarized in the following table:


  1. Life expectancy. Based on data from the CDC, people living in states that adopted Medicaid expansion live an average of 1 year longer than those living in states that did not adopt Medicaid expansion (79 years versus 78 years). Because life expectancy reflects the cumulative effects of decades of healthcare and lifestyle habits, it is unlikely that Medicaid expansion per se resulted in a longer life expectancy but the difference in life expectancy instead reflects differences in long-standing approaches to health in different states.
  2. Smoking prevalence. Smoking rates are not much different in states that expanded Medicaid (17.3% of adults) compared to those states that did not expand Medicaid (18.0% of adults) as illustrated in a report by the United Health Foundation. In a previous post, I noted that cigarette smoking cuts the life expectancy of men by an average of 12 years and women by an average of 11 years. Given that the smoking prevalence is reasonably similar in both groups of states, the longer life expectancy in Medicaid expansion states cannot be fully attributed to smoking, alone. It should be noted, however, that the smoking prevalence in the non-Medicaid expansion states is heavily skewed by Utah, where the smoking prevalence is only 8.8% (dramatically lower than any other state and likely due to the Mormon influence in Utah). When Utah is excluded from the analysis, the smoking prevalence in non-Medicaid expansion states is 18.5%, which is significantly higher than in Medicaid expansion states.
  3. Hospital closure. Since 2010, there have been 85 rural hospitals that have closed in the United States. Most of these closures were in those states that opted out of Medicaid expansion. Overall, 59 rural hospitals have closed in states that did not expand Medicaid (3.5 per state) compared to 26 rural hospitals closing in Medicaid expansion states (0.8 per state). Unlike life expectancy and smoking prevalence, it is likely that hospital closures are directly related to Medicaid expansion. Rural and safety net hospitals usually serve a lower income population of patients and are more dependent on revenue from Medicaid than urban and suburban hospitals. In the past, those rural hospitals were supported by federal Disproportionate Share Hospital (DSH) funds that helped to cover the cost of caring for the uninsured and underinsured. The DSH funds are distributed based on a formula that includes the number of Medicaid patients seen at the hospital. However, the Affordable Care Act reduces DSH funds in order to offset the cost of expansion of Medicaid. Therefore, rural hospitals in states that did not expand Medicaid had less money coming in from DSH funds plus no increase in Medicaid revenues and so they found themselves going out of business. The states with the most hospital closures were Texas (14) and Tennessee (8), both states that did not expand Medicaid.
  4. Obesity. States that adopted Medicaid expansion have a lower prevalence of obesity (29.2%) than those states that did not adopt Medicaid (31.3%). Medicaid expansion has been in place for 5 years and it takes a lot longer than 5 years for the population of a state to become obese. Therefore, it is unlikely that there is a cause and effect relationship between Medicaid expansion and obesity. This is supported by the fact that if you examine maps of the trends of obesity in the United States over the past 20 years, the states that did not expand Medicaid had a higher prevalence of obesity before Medicaid expansion.
  5. Infant mortality. The United States has a disturbingly high overall infant mortality rate compared to the rest of the industrialized world. In fact, the only economically developed countries that have a higher infant mortality rate than the U.S. are Mexico and Turkey. Infant mortality is a good measure of access of care to economically and demographically disadvantaged populations since mothers are young and often uninsured or underinsured. Data from the CDC indicates that in 2016, states that participate in Medicaid expansion have an infant mortality rate of 5.8/1,000 live births as compared to states that did not participate in Medicaid expansion that have an average of 6.6/1,000.
  6. Teen birth rate. This measure tends to track with the infant mortality rate. Based on 2016 data from the CDC, the teen birth rate is higher in states that did not expand Medicaid (21.2%) compared to those states that did expand Medicaid (19.0%). There are many risk factors for teenage pregnancy including dropping out of high school, alcohol or drug use, lack of access to birth control, and poverty.
  7. Education. Based on a report by the U.S. Census, it turns out that there is less than one percentage point difference in the percent of adults completing high school in Medicaid expansion states (88.5%) compared to states that did not expand Medicaid (87.6%). However, there is a much larger difference in the percent of adults with a college degree in states that expanded Medicaid (30.1%) compared to states that did not expand Medicaid (26.8%). This suggests that the overall educational level in Medicaid expansion states is higher than in non-Medicaid expansion states.
  8. Firearm-related deaths. States that expanded Medicaid have a lower rate of deaths due to firearms (11.9 per 100,000 population) compared to states that did not expand Medicaid (15.3 per 100,000 population). There are many risk factors for death involving firearm including the availability of firearms and the prevalence of mental health disorders. The map of firearm mortality shown here is fairly similar to a map of gun ownership per capita so it does appear that guns are more abundant in those states that did not expand Medicaid. However, it is also possible that Medicaid expansion resulted in patients with depression and suicidal ideation having more access to mental health services thus making those people less likely to kill themselves or others with guns.

With the exception of rural hospital closures and possibly infant mortality, I do not believe there is a direct cause-and-effect relationship between Medicaid expansion and most of the indices of health discussed in this post. Instead, I believe that whether or not a state chose to expand Medicaid is a reflection of that state’s cultural attitude toward health. The residents of Medicaid expansion states probably had a higher valuation of health, had adopted more healthy lifestyle habits, and were more educated about health than those residents of states that elected to not expand Medicaid. There are also states that are clearly exceptions. For example, Utah (a non-Medicaid expansion state) has the lowest smoking prevalence, one of the longest life expectancies, no hospital closures, a high percentage of collage graduates, and very low rates of obesity, infant mortality, and teen pregnancy. However, because of availability of Medicaid for the disadvantaged population, for the majority of the country, differences in the adoption of Medicaid expansion has the potential to result in the healthiest states becoming more healthy, and the least healthy states become less healthy.

July 5, 2018

Medical Economics

Gaming Hospital Metrics

Hospital and physician performance is measured by a lot of different quality metrics and everyone wants to look good. Sometimes, there are ways to make yourself look good without actually being good – by gaming the metrics. Nobody actually talks about these gaming strategies but a lot of people think about them. I’m not recommending that anyone actually do these strategies but you should be aware of them so that when a physician or hospital reports fantastic quality metrics, you can be sure that the quality is real. Here are some of the ways to game the metrics:

  1. Never write an admission order in the emergency department between 9:00 PM and midnight. Hospitals calculate length of hospital stay based on the number of days that a patient is an inpatient. But… most hospitals count those numbers of days by the midnight census. So, a 4-day length of stay means the the patient was an inpatient for 4 midnights in a row. An easy way to cut a day off of the length of stay is to wait until after midnight to admit patients who show up in the ER in the evening. With electronic medical records, the determination of when a patient gets admitted is usually based on when the admission order is placed. Therefore, the sly hospitalist who wants to keep his/her length of stay low will do all of the work of admitting patients in the evening but not actually sign the admission order until 12:01 AM.
  2. Transfer long-length of stay patients to another service just before discharge. Outliers (those patients who are in the hospital for many more days than would be normally expected for their medical condition) are like hot potatoes – no one wants to be holding them when the get discharged. This is because the hospital length of stay is generally credited to the discharging physician and not necessarily the physician who cared for the patient during the rest of the hospital stay. So, the surgeon with a patient with catastrophic post-operative complications who has been in the hospital for 3 months would want to transfer that patient to the endocrinologist for “diabetic care optimization” a day or two before discharge – that way the endocrinologist gets credited with the 3 month length of stay.
  3. Keep unhappy patients in observation status. Hospitals have to report their patient satisfaction scores and internally, hospitals track patient satisfaction by physician – these scores are often used as part of bonus incentives for hospital-employed physicians. Patient satisfaction is measured by the HCAHPS surveys that are sent to patients after discharge. However, Medicare only requires patients who are in inpatient status to get the HCAHPS surveys and so patients in observation status do not get sent HCAHPS surveys. So, if a physician has an angry patient who they know is going to give them a terrible HCAHPS score, by keeping that patient in observation status, even if it is for 4 or 5 days, then the physician can keep the HCAHPS survey out of their hands.
  4. Give all of the hospital staff buttons that say “I’m a 10”. The HCAHPS survey boils down the results to those responses that are “top box” which means that they are rated either a 9 or a 10 on the 10-point rating scale. Medicare doesn’t allow hospitals to try to directly influence how a patient answers on the surveys (for example, a nurse discharging a patient cannot tell the patient “We’ll be sending you a survey about your hospital stay and I hope that you will rate us a 10”). However, every advertising executive knows the importance of subliminal messages. So by putting the number “10” at the top of the patient’s menu, on the inpatient walls, and on signs in the hospital lobby, subliminal messaging can work its wonders.
  5. Keep patients who are admitted near death in observation status. Inpatient mortality rate is also a metric that physicians (and hospitals) are measured by. However, if a patient dies in observation status, then that patient does not count toward the hospital’s reported mortality rate. Observation status is used for patients who are anticipated to be in the hospital for less than “2 midnights” and means that the patient remained an outpatient without being formally admitted to the hospital. So, no matter how sick a patient is, if the physician anticipates that the patient is going to die before two midnights pass, then by keeping that patient in observation status, that patient never counts toward the physician’s (or the hospital’s) reported mortality.

“Gaming the system” is defined as using the rules and procedures meant to protect a system in order, instead, to manipulate the system for a desired outcome. It is a law of nature to attempt to gain advantage within one’s environment in order to succeed and there will always be those who interpret the rules to their advantage. Awareness of how the rules can be manipulated can prevent us from being the ones who are taken advantage of.

June 23, 2018

Medical Economics

The 2017 Medicare Hospital Star Ratings: Better But Still Not Perfect

Two years ago, I wrote a (rather scathing) post about the 2016 Medicare star rating system for hospitals. Last January, I posted an update about the 2017 star ratings. The 2017 star ratings were supposed to be published last summer but Medicare delayed the release in order to revise the methodology and address some of the criticisms in the original formula. The 2017 star ratings were released this past winter and we anticipate the new ratings to be released in the next 2 months. Since the 2017 star rating was released, there has been more of an opportunity to evaluate who the star winners and losers were.

In 2016, there were 62 measures across 7 groups of quality markers and hospitals reported only those measures that pertained to their patients. Smaller and specialty hospitals that take care of more selective groups of patients reported smaller numbers of measures. For example, an orthopedic specialty hospital would not report on obstetric care measures since no obstetric care is delivered in that hospital. In an analysis of the 2016 star ratings, an article in JAMA determined that there was in inverse relationship between the number of measures that a hospital reports on and the number of stars that a hospital was awarded. In other words, the more measures reported, the lower the number of stars Medicare awarded those hospitals. There were two ways to interpret this data: either smaller and specialty hospitals provide better care to patients or the equation that Medicare used to determine the star rating was flawed.

The 2017 star rating system improved on the 2016 system with the result that there were more hospitals with 1 or 5 stars and fewer with 3 stars, thus decompressing the center of the rankings. However, once again, specialty hospitals reported only about half the average number of measures as major teaching hospitals (27.2 versus 51.4) but had significantly higher star ratings than major teaching hospitals. In all, 83% of specialty hospitals received a 4 or 5 star rating whereas 24% of major teaching hospitals received 4 or 5 stars.

It appears that how the different measures are weighted affects results significantly so that some hospitals can appear to be better or worse performers than they really are. Teaching hospitals care for a completely different population of patients than specialty hospitals – the patients are sicker, have different medical/surgical conditions, and have longer average lengths of stay. Patients at a tertiary care academic medical center have a higher mortality rate and readmission rate than patients at an orthopedic specialty hospital.

The 2018 Medicare star ratings will be released next month. We’ll have to wait to see if the formula improves over last year’s.

June 10, 2018

Inpatient Practice Medical Economics

The High Cost Of Observation Status

Medicare and commercial insurance companies love observation status. When a patient has to be hospitalized but only for “less than 2 midnights hospital stay”, then that patient is classified as being in observation status rather than admitted to the hospital. This classification means that the patient is technically an outpatient and not an inpatient and therefore the cost to Medicare is considerably less. Medicare uses this as a way to control the high cost of health care. But is it really less expensive when you look at the big picture?

To understand observation status, you have to understand the difference between Medicare Part A and Part B:

  1. Part A – covers inpatient care, skilled nursing care, home health care, and hospice care. Part A has no co-pay.
  2. Part B – covers outpatient medical and surgical care, emergency department care, durable medical equipment, and physician charges. Part B has a 20% co-pay.

So, if a person is in observation status, then Medicare Part A does not cover the bills, instead, Part B does. From the patient’s standpoint, this is a critical distinction because if that patient is considered an inpatient, then Part A covers the inpatient charges, including medication costs, with no co-pay. On the other hand, if that patient is considered to be in observation status (i.e., an outpatient), then Part B covers it but the patient is billed a co-pay and importantly, the patient is also billed the medication costs.

If you read the Medicare website, it sounds like the decision about whether a patient is considered as observation or inpatient is the hospital’s decision but this really could not be farther from the truth. The Medicare website states: Your hospital status (whether the hospital considers you an “inpatient” or “outpatient”) affects how much you pay for hospital services. But the hospital is not really the one making the decision about inpatient or outpatient. Medicare has very strict rules about what they consider to be criteria for inpatient status versus observation status. If the hospital believes that the patient should be inpatient status, and bills Medicare Part A, then Medicare can audit that patient’s chart and if they determine that the patient should have really been in observation status by their definition, then Medicare will ask for the Part A money back and in some cases can even fine the hospital for “fraudulent” billing. Moreover, if the patient has already been discharged then the hospital cannot bill the patient for their Part B co-pay or for the cost of the medications that the patient received due to the “MOON” regulations. In other words, if the hospital bills the patient as an inpatient but Medicare does not agree, then the hospital loses a boatload of money on that patient. Therefore, the hospital really, really wants that patient to be in inpatient status and not in observation status but risks not getting paid at all if Medicare disagrees with the inpatient status decision.

Another key difference between observation status and inpatient status is that there is a weird rule in Medicare that a patient has to be an inpatient for 3 days before being discharged to a skilled nursing facility for Medicare to pay for that nursing home charge. If the patient is in observation status, then the hospital cannot discharge the patient to a nursing home and instead has to discharge the patient to their regular home.

The reason Medicare and commercial insurance companies like observation status so much is because they don’t have to pay the hospital as much. But the costs do not go away, they are just transferred to the patient, instead. Many patients are shocked when they were sick enough that they needed to be hospitalized but then get an enormous bill for a 20% co-pay for all of their costs plus a bill for all of the medications that they received when they were in the hospital. These additional co-pays and medication bills require additional layers of administrative costs on the part of the hospital in order to bill and collect and can also be both costly and confusing to the patient.

So, from the patient’s perspective and from the hospital’s perspective. it is better to be an inpatient than to be in observation status. But from Medicare and insurance companies’ perspective, it is better to be in observation status than inpatient status. This has resulted in the hospitals becoming a battle ground for deciding who is an inpatient and who is in observation status.

The most recent victim of this battle is the knee replacement. in the past, knee replacement surgery was considered an inpatient procedure but recently, Medicare has classified knee replacement as an outpatient surgery. But almost no one goes home the same day that they have a knee replacement – those patients need physical therapy, need to recover from general anesthesia, and need to have their pain managed. The result is that almost all patients spend at least one night in the hospital after a knee replacement.

But Medicare will allow for a knee replacement surgery to be billed as an inpatient if the physicians and the hospital can document extenuating circumstances why that particular patient needs to be an inpatient (in other words, why that patient is expected to spend more than 2 midnights in the hospital). These extenuating circumstances are usually co-morbid medical diseases, like sleep apnea, heart failure, insulin-dependent diabetes, etc. But the catch is that these conditions need to be documented in the patient’s chart before surgery because Medicare rules require the decision about whether an order for inpatient admission to be made before or at the time of surgery. This generally means that the patient has to go to a “pre-admission testing evaluation” by a physician, nurse practitioner, or physician assistant where these medical illnesses can be laid out in a way that justifies the surgery taking place as an inpatient procedure.

Furthermore, the hospital has to employ a “physician advisor” who can then review the chart and confirm that the patient actually meets the requirements for inpatient status. The physician advisor must then document his/her opinion about whether the patient really needed to be an inpatient or not and also document their reasoning why so that the hospital has documentation to submit to Medicare auditors in the event that the patient’s admission is denied by Medicare. Many smaller hospitals cannot afford to have a group of their own physicians who are trained in the nuances of inpatient versus observation status and be on-hand for 24 hour decision-making so they will contract with an external physician advisor company such as EHR (Executive Health Resources) who they will pay to have physicians who can review the patient’s chart and offer a determination about whether or not the patient should be inpatient or observation status.

In the final analysis, Medicare and insurance companies pay less for observation status, the hospital has to add an expensive layer of administrative costs, and the patient is personally responsible for more of the costs. The net effect is more total societal costs to deliver health care but lower costs directly paid by Medicare.

So, does observation status reduce healthcare costs? The sad answer is no. It actually adds administrative costs and transfers those costs back to the patient or to the hospital.

June 3, 2018

Medical Economics Physician Retirement Planning

Age Of Physicians By Specialty

At this month’s American Thoracic Society meeting, it was reported that 1/3 of practicing pediatric pulmonologists in the United States are over age 60, a scary number since that indicates we are soon facing shortages of pediatric pulmonologists. It turns out that it is not the only specialty with disproportionately older physicians and these statistics have implications for our future physician workforce. In the U.S., air traffic controllers have a mandatory retirement age of 56 years-old, national park rangers are 57, military officers are 64, and pilots have a mandatory retirement age of 65. In the Roman Catholic Church, priests have a mandatory retirement age of 70. There is no mandatory retirement age for physicians and consequently, some specialties have become very top-heavy with older doctors.

The Association of American Medical Colleges tracks physicians in different specialties by the percent who are under age 55 versus those who are over 55 and the data is summarized in the graph below:

For all physicians combined, 56.8% are under age 55 and 43.2% are over age 55. However, some specialties are disproportionately older or younger. My own specialties of pulmonary (15% under age 55) and critical care (84.3% under age 55) is probably more a reflection that most of these physicians are dual certified and tend to do more critical care earlier in their career and migrate to more pulmonary later in their career. Similarly, emergency medicine with 65.4% under age 55 is a relatively new discipline that did not become recognized as a specialty until 1979 and did not offer a board examination until 1980.  There are some specialties that are more concerning. For example, pathologists, psychiatrists, cardiologists, and thoracic surgeons tend to be older whereas interventional radiologists, nephrologists, and pediatricians tend to be younger. Those specialties that have more than 50% of the physicians over age 55 are likely to be in high demand in the next 10 years as these older physicians retire.

A study in the Journal of Medical Regulation from 2017 analyzed the U.S. physician workforce by a number of parameters, including age. Taking all physicians together, 29.3% of practicing physicians are over the age of 60. The reasons why there are so many older physicians in the workforce are complex and include (1) a later age of entry into the workforce due to lengthy training requirements, (2) a high amount of debt from the cost of education, and (3) less physical demands than many other professions.

The median age of retirement from clinical activities by physicians is age 65 years as shown in this graph from a study published in the Annals of Family Medicine. The retirement age varies by specialty, for example, the median age of retirement from clinical activities is about 64.5 years for OB-GYNs and 66.5 years for cardiologists. Women tend to retire 1 year earlier than men. Because many physicians continue to be active in other professional activities after retirement from clinical activities (such as administration or education), the median age of retirement from any professional activity tends to be about 1 year later than the retirement from clinical activity. Therefore, the median age of retirement from any professional activity is at age 66 years when examining all physicians. But remember that these data are for the median age of retirement and that means that half of all physicians retire from clinical activity after age 65 years.

As a medical director, one of the most uncomfortable tasks I have to do is to tell an older physician with a long history of dedication to the medical profession and the community that it is time that he or she needs to stop seeing patients. It is not because of age per se but because of quality concerns. It turns out that this is a valid issue. A study in the BMJ found that for Medicare patients, the 30-day survival after hospital discharge depends on the age of the physician. 30-year old physicians had a 10.5% 30-day patient mortality rate whereas 70-year old physicians had a 13.5% 30-day patient mortality rate. Although part of these results could be because older physicians tend to have combined inpatient and outpatient practices with an older (and sicker) panel of patients whereas younger physicians tend to be hospitalists that care for a wider age range of Medicare patients, it is also quite possible that older physicians do not practice as high of quality of medical care as younger physicians. This has unfortunately been my experience with some older physicians.

There can be a lot of reasons why physicians retire and last year I wrote a blog post about “When Physicians Reach Their Use-By Date” to reminisce about how some of the more memorable physicians I have known retired. The keys are to have enough self-awareness to know when your clinical skills are lagging behind your peers and to be willing to pick up on subtle hints from those peers that you are not the clinician that you used to be.

So, what does all of this mean? First, doctors retire later than people in many other professions. Second, doctors who chose to work beyond age 65 need to be attentive to their quality of practice. Third, and perhaps most important from a national health care standpoint, certain specialties are dominated by older physicians who will be retiring soon, thus creating demands for those specialties that will be difficult to meet.

The hockey legend, Wayne Gretzky, famously said: “Skate to where the puck is going, not to where it has been”. I think that this has implications for our medical students who are selecting specialties – knowing what specialties are going to be in demand rather than what are currently in demand should affect their career choices.

May 26, 2018

Hospital Finances Medical Economics

How Many Days Cash On Hand Should A Hospital Have?

When a hospital runs a positive margin and makes money at the end of the year, everyone wants some of it – hire more doctors, hire more nurses, buy a new MRI machine, build a new hospital wing. It can be tempting to spend it all but should you? Liquidity is survival insurance for a hospital and it is essential to hold some money back. Every individual person should have an “emergency fund” with 2-6 months of expenses held in a checking/savings/money market account, and so should hospitals. These cash reserves are called “days cash on hand” and represent the amount of money it takes to pay all of the hospital’s expenses for that number of days.

A few year ago, Dr. Charles V. (Bo) Sanders gave a presentation at the annual Association of Professors of Medicine meeting that I was attending. He is the Chairman of the Department of Medicine at LSU School of Medicine in New Orleans and was describing the effect of Hurricane Katrina on the hospital and his department. Katrina flooded Charity Hospital which then closed, displacing most of the doctors in his department. With limited cash reserves, the hospital could not pay physician salaries and many of the doctors and nurses moved on. The hospital essentially died and was never able to reopen.

Charity Hospital is just one example of why a hospital needs to have sufficient days cash on hand but there are many things other than hurricanes that can temporarily close a hospital and require it to draw from cash reserves to cover payroll so that all of the employees don’t leave. Fire, flood, lapse of malpractice insurance coverage, prolonged power outage, unpredictable admission rates, you can think of a dozen other reasons that a hospital might have to reduce or close operations for a day, a week, a month, or longer.

In 2011, Moody’s Investors Service reported on the financial statements of 400 hospitals in their database. The overall median number of days cash on hand was 165 with a mean of 183. The range was from 11 days to 521 days. A 2013 analysis of critical access hospitals reported a median of 68 days. More recently, in 2015, Moody’s reported that the average for 350 hospitals and health systems had increased to 212 days. A 2014  Fitch Ratings report of nonprofit hospital and healthcare systems found that the credit rating of the hospital correlated with the number of days cash on hand with the “AA” hospitals having 289 days cash on hand and hospitals having a “BBB” rating only having 161 days cash on hand. A 2016 report by S&P Global Ratings indicated that “AA+” hospitals had 420 days cash on hand whereas “BBB+” hospitals had 149 days cash on hand; speculative grade hospitals (those that finance with “junk bonds”) had only 74 days cash on hand. The implication is that if your days cash on hand is high, the hospital’s credit rating is high and consequently, the hospital can get a better interest rate on bonds to do expansion, etc. In other words, more cash on hand equates to lower interest rates for loans.

From this analysis, it appears that the number of days cash on hand that is held by hospitals appears to be increasing over the past decade. I believe that there are at least three reasons. (1) The economic recovery since the great recession has led to overall better financial positions of U.S. hospitals. (2) Medicaid expansion (by those states that elected to participate) has led to a reduction in uninsured patients and this translates to improved margins. (3) Better analytics that are attendant to electronic medical records, better inventory management programs, and improved staffing programs has resulted in better hospital operational efficiency as well as better hospital billing efficiency.

There are a number of factors that can influence the ideal number of days cash on hand for any given hospital:

  1. Geographic location. Hospitals in areas vulnerable to natural disasters are themselves vulnerable to unexpected closings. For example, hospitals in low-lying coastal cities are vulnerable to flooding – Charity Hospital is an example of this. Other geographic vulnerabilities include susceptibility to regional wildfires, tornados, and earth quakes.
  2. Centralized versus decentralized. A hospital system built around a single large hospital (standalone hospital) is more vulnerable to closing operations than a hospital system with multiple buildings in different locations in the region. For example, if a water line breaks and floods the operating rooms taking them out of commission for 3 months to renovate, the centralized hospital will have no place to perform surgeries whereas the decentralized hospital system can redirect surgeries to alternative locations. The S&P bond rating analysis confirms this and indicates that standalone hospitals that had a “AA” bond rating had 100 more days cash on hand than decentralized health systems.
  3. Need for borrowed money. A hospital that is planning a $750 million expansion is going to need to borrow money by selling bonds. The current interest rate on a 20-year AAA rated municipal bond is 3.00% whereas an A rated bond is 3.50%. That is a $3.75 million dollar per year difference and over the course of the bond, a total of $75 million dollars additional cost for just that slight increase in the interest rate on the bond. For a “B” rated hospital, the difference in the interest rate that they can get on a bond can be even more, up to a full 1% higher. A hospital with a higher number of days cash on hand will be able to get a better bond rating.
  4. Need to pay off borrowed money. Most hospitals will have both cash and loans. If those loans were taken out at relatively high interest rates, then it may be more desirable to pay them off using the hospital’s cash. This can reduce the number of days cash on hand but can strengthen the hospital’s long-term financial position.
  5. Competitiveness of the regional health insurance market. When hospitals negotiate rates with commercial health insurance companies, one of their greatest leverage points is the ability to walk away from the table. By that I mean, the ability to tell the insurance company that if they won’t give the hospital the reimbursement rates that the hospital wants, the hospital will stop taking patients covered by that insurance company. If that hospital is the only hospital in a 50-mile radius, then they have a  pretty good bargaining position because the insurance company can’t easily send their patients to another hospital. On the other hand, if there are a number of other hospitals in the community, then the hospital has less leverage because the insurance company can simply redirect its insured patients to another hospital in town. If such a hospital has relatively few days cash on hand, then the commercial insurance company will know that the hospital really has no bargaining position since they don’t have the resources to survive a sudden drop in admissions if the insurance company sends them all to a competitor hospital. On the other hand, if such a hospital has a lot of days cash on hand, the threat of walking away from the table is much more real and that stronger negotiating position is more likely to translate into higher reimbursement rates from the insurance company. Thus, a hospital in a region with other competing hospitals needs to have more days cash on hand in order to effectively compete for the best insurance reimbursement rates.
  6. Anticipated large capital purchases. Hospitals will not generally sell bonds for purchases such as a new electronic medical record but these can be quite costly and are better paid for out cash. If the hospital plans on buying a new EMR or some other large-priced purchase in the next few years, then it it best to increase the days cash on hand in anticipation of that purchase.
  7. Admission fluctuation. Our hospital in Central Ohio has a fairly consistent number of admissions per month; it tends to go up during the influenza season but otherwise is fairly constant. On the other hand, a hospital in a ski resort community in Colorado may see a significant rise in admissions in the winter whereas a hospital in the Outer Banks of North Carolina may see a significant rise in admissions in the summer. Hospitals with greater fluctuation in admissions and ambulatory visits will need to have more days cash on hand than those with very predictable admissions and visits.
  8. Medicaid expansion. Between 2010 and 2018, 83 U.S. hospitals went out of business. The overwhelming majority of these were in states that did not expand Medicaid under the Affordable Care Act. In all, 19 states did not expand Medicaid and 63 of the hospitals that closed were in these states. That means that 76% of all hospitals that closed were in these states. Six of these states had more than 5 hospitals close: Alabama (5), Mississippi (5), North Carolina (5), Georgia (6), Tennessee (8), and Texas (14). Hospitals in states that did not participate in medicaid expansion have been faced with higher numbers of uninsured patients and are at a competitive disadvantage to hospitals that did expand Medicaid. Having a larger number of days cash on hand is desirable for hospitals in states that did not expand Medicaid.
  9. Donor attractiveness. Wealthy donors are wealthy because they have a lot of financial sophistication. Donors will often examine the financial viability of a hospital before committing large endowments: why donate to a hospital that is on the verge of going out of business? More days cash on hand is one way of demonstrating the hospital’s financial solvency and stewardship. More days cash on hand can translate to larger endowments from wealthy donors.

Although having a large number of days cash on hand sounds good, too high of a number can be bad. For example, it may be better to invest that money in a better-paying investment, for example expanding the hospital’s primary care base by hiring additional primary care physicians. Or, if the hospital’s quality metrics are below average, it is better to spend additional money to improve patient satisfaction, decrease hospital readmissions, or improve the infection control efforts. For public hospitals that are owned by the city, county, or state, having too high a number of days cash on hand can create a perception to lawmakers and the public that the hospital is hoarding the public’s money.

So, what is the best number of days cash on hand? From this post, it should be clear that there is not a single best number for all hospitals. I’d start with a number of about 300 for standalone hospitals and about 250 for hospital systems. Then move that number up or down depending on all of the variables mentioned above. For a decentralized health system in a Medicaid expansion state that does not have excessive natural disaster risk and does not anticipate purchasing large amounts of bonds, 130 days may be plenty. On the other hand, a centralized standalone hospital in a competitive market in a state that did not participate in Medicaid expansion and is at risk of natural disasters and also plans on a major building expansion requiring bond sales, 400 days may be more desirable.

The number of days cash on hand is something that physicians rarely think about and almost never incorporate in their decision-making about whether to take a job at a hospital. But I think that physicians should take notice of this number and if it is too low, ask the hospital administrators why it is low. If you can’t get a good answer, think long and hard about whether that hospital represents a risky career choice.

May 5, 2018

Inpatient Practice Medical Economics

The 5 Faces Of Value In Medicine

In medicine, we talk about quality a lot. But most of the time that we are talking about it, we’re really not talking about quality at all. You see, quality means different things to different people and most of the time, we are confusing quality with value.

Value = Quality ÷ Cost

There are 5 faces to quality value:

  1. The physician. When you ask a doctor what quality is in medicine, he/she will tell you that it is getting the right diagnosis, prescribing the right treatment, and doing it in a timely fashion without complications occuring. In other words, quality to the doctor is doing the standard of care in medical practice.
  2. The patient. To understand what quality means to the patient, all you have to do is look at the questions in the CG-CAHPS survey. There are no questions about correct diagnosis or correct treatment. The questions are all about timeliness of the office visit, whether your questions were answered, and whether you were treated nicely. Because that is what is important to the patient: whether they could get an appointment to see the doctor when they wanted to, whether they had to sit in the waiting room too long, whether they get test results back quickly, and whether everyone in the office is friendly. Most of the time, the patient doesn’t know whether or not the doctor nailed the diagnosis or prescribed the proper medication so they judge the doctor on the service that they received. As physicians, we usually know who the good doctors are and who the bad doctors are – and then it surprises us when the bad doctors are rated higher than the good doctors in patient ratings and reviews. That is because what constitute “good” and “bad” in a doctor means totally different things to patients as opposed to physicians.
  3. The hospital. Every hospital has a quality department and that department will regularly report quality metrics. But many of these metrics are not really quality metrics, they are value metrics. For example, length of hospital stay, cost per adjusted admission, and emergency department throughput times are reported on just about every hospital quality scorecard in America but these don’t really translate into whether the patient’s disease was diagnosed and treated correctly, they are more directed toward the financial viability of hospital operations. If you examine the HCAHPS survey, then once again, you can get a pretty good idea about how hospital quality is judged: Was it clean? Was it quiet? Did the hospital personnel treat you nicely? Was your pain attended to? There is nothing in the HCAHPS survey about whether your condition was diagnosed correctly and whether the right surgery was performed or right treatment was prescribed.
  4. The insurance company. I periodically get quality scorecards sent to me from insurance companies that rate me on various metrics that the insurance company considers important. But they are usually dominated by whether or not the level of service charges that I bill are out of line with other pulmonary and critical care physicians. In the value equation, the most important component to the insurance company is cost – whether the doctor is charging too much, whether the doctor orders too many expensive CT scans or MRIs, and whether the medications that the doctor prescribes are the least expensive on the insurance company’s medication formulary. Furthermore, the insurance company is focused on the prevention and effective treatment of those diseases that will affect the patient during the time the insurance company is covering that patient and not with diseases (such as hepatitis C) that will not affect the patient until after they turn 65 and go off of the insurance company’s policy and onto Medicare.
  5. The employer. In the United States, it is ultimately the employer who pays for most medical care for Americans under age 65. That is because the employer hires the health insurance company to determine which doctors and hospitals to send the employees to and how much to pay those doctors and hospitals. To the employer, quality in medicine means keeping the employee in the workplace as much as possible. That means that the employer values physician evening and weekend office hours so the employee doesn’t have to take time off work for regular visits. It means preventing common illnesses such as influenza so that the employee doesn’t have to take time off work being sick. And it means keeping the employee’s children healthy so the employee does not need to stay home with a sick kid.

So, which of these five faces of quality is correct? The answer: they all are. And we in medical leadership roles need to recognize that quality means different things to different groups and for us to practice high quality medicine, we have to think outside of just what quality means to doctors.

March 30, 2018

Medical Economics

Why U.S. Health Care Is So Expensive

This month, an article in JAMA gives us some ideas of why American medical costs are so high. The authors analyzed data from the OECD (Organisation for Economic Co-operation and Development). The OECD maintains a huge database of economic information from most of the world’s developed countries. Their healthcare database is particularly useful to anyone interested in the international macroeconomics of medicine. One way of gauging the importance of an article in a medical journal is by the number of editorials that accompany it. This article has 4 accompanying editorials, about the most I’ve ever seen.

In the article, the authors compared the United States to 10 peer, high income countries: the United Kingdom, Canada, Germany, Australia, Japan, Sweden, France, Denmark, the Netherlands, and Switzerland. The U.S. is unique in many ways. For example, we have the largest total population, our total land area is second only to Canada, and we have the lowest percentage of the population over age 65. Nevertheless, most people would consider the citizens of these countries to be more socioeconomically similar to Americans than most other countries.

Not surprisingly, the results show that Americans spend far more on healthcare than other countries. 17.8% of our GDP goes toward health as opposed to a mean of 11.5% of GDP in peer countries. We spend $9,403 per person whereas the mean of the other countries is only $5,410 per person (in U.S. dollars). When you drill down, it turns out that we do not spend an excessive amount on inpatient care or long-term care, in fact, for both of these, we are the second lowest of the peer countries – we spend 19% of healthcare dollars on inpatient care (compared to a mean of 26%) and 5% on long-term care (compared to a mean of 16%). Where we spend disproportionately is in outpatient care at 42% of healthcare expenditures (compared to a mean of 31%) and administrative expenses at 8% of healthcare expenditures (compared to a mean of 3%). Another way that the United States differs significantly is in the percentage of the population that has healthcare coverage/insurance: in the U.S., 90% of the population is covered but all of the other peer countries have > 99.8% of the population covered. All of the peer countries have some form of national health insurance – the U.S. is the only country that is primarily composed of private, employer-based insurance plans. As a result, we have the highest “horizontal inequity index”, a measure of the degree to which a person’s wealth determines whether or not they have physician visits.

Unfortunately, all of that expense does not get us much. We have the lowest life expectancy at 78.8 years compared to a mean of the peer countries at 81.7 year. Our maternal mortality, infant mortality, and neonatal mortality are the highest of all peer countries. Interestingly, when it comes to determinants of health, we come in second to the lowest in prevalence of smoking at 11.4% of the population (peer countries mean = 16.6%) and slightly below average for prevalence of alcohol consumption at 8.8 L per person (peer countries mean = 9.1 L per person). Where we really stand out in determinants of health is in obesity: 70.1% of Americans are obese or overweight compared to a mean of 55.6% of the population in peer countries. No other peer country is even close to the U.S. in the percentage of the population that is obese.

In terms of our workforce, the U.S. has relatively fewer physicians per 1,000 population at 2.6 compared to the peer countries mean of 3.3. The percentage of our physicians who are primary care physicians is average (43% compared to a peer country mean of 43%). This means that the percentage of our physicians who are specialists is also average (57% versus a peer country mean of 57%). We also have an average number of nurses per 1,000 population at 11.1.

However, our physicians make more money than any other peer country: our primary care physicians make $218,173 versus a peer country mean of $133,723; our specialists make $316,000 versus a peer country mean of $182,657. Nurses also make more money in the U.S. at $74,160 versus a peer country mean of $51,795.

In terms of equipment, the U.S. has fewer hospital beds per capita (2.8 per 1,000 population versus a peer country mean of 4.8 per 1,000 population) and fewer long-term care beds per capita (38.8 per 1,000 population over age 65 versus a mean of 54.2 per 1,000 population over age 65 in peer countries). However, we have considerably more MRI machines (38.1 per million population versus a mean of 22 per million population in peer countries) and CT scanners (41 per million population versus a mean of 36.5 per million population in peer countries). The net result of this is that we do more MRIs per 1,000 population (118 versus a mean of 82 in peer countries) and CT scans per 1,000 population (245 versus a mean of 151 in peer countries).

When examining resource utilization, our admissions per capita for common diseases such as myocardial infarction, psychiatric disease, pneumonia, and COPD are average. But, we do considerably more knee replacements, Cesarean sections, coronary artery bypass surgeries, coronary angioplasties, and cataract surgeries than peer countries. Our hospitalization rates for diabetes and asthma are very high. Our hospital length of stay tends to be slightly lower than average for common conditions such as normal delivery and myocardial infarction; in fact our all-cause hospital length of stay is only about 5.5 days versus a mean of about 7.5 days in peer countries. Our wait time to see a primary care physician or specialist is about average. However, we are more likely to skip getting a consultation because of cost than any other country (22.8% versus a peer country mean of 9.4%).

We really stand out in pharmaceutical costs. Americans spend $1,443 per person versus a mean of $749 per person in peer countries. For common medications such as Crestor, Lantus, Advair, and Humira, Americans spend far more than any other country – generally twice as much as the next most expensive countries (Canada and Germany).

So, what is the bottom line?

  1. We pay too much for medications. The American economy is built on the principle of the free market – competition encourages innovation and keeps costs down. So one would think that with a system of multiple private insurance companies each negotiating among pharmaceutical companies for preferred “on-formulary” drugs, that the cost would be lower. The problem is that when it comes to drugs, it is an international market, not a national market. Countries with a centralized health system can negotiate with pharmaceutical companies with the purchase power of the entire populace of the country and this makes them very powerful negotiators. It is very much like these other peer countries are analogous to Walmart and the various private U.S. health insurers are analogous to the tiny mom and pop general stores – Walmart is always able to negotiate a better price from its suppliers.
  2. Our administrative costs are too high. The multi-layered health financing system that has evolved in the United States is a system of multiple middlemen, each taking an administrative cut out of the healthcare dollar. Each layer in this system creates additional paperwork and bureaucratic barriers that have to be navigated by the patient and the physician. All of this adds up to cost – 8% of our GDP goes toward healthcare administrative costs whereas only 3% the GDP of peer countries goes toward these costs. When it comes to healthcare administrative costs, other countries are eating our lunch.
  3. Our physician salaries are considerably higher than other countries. But, because we have fewer physicians per capita than other peer countries, the overall cost of physicians is similar to other countries. However, if physician numbers increase, then salaries will need to come down in order to avoid overall healthcare cost inflation.
  4. Americans get more CTs and MRIs than citizens of peer countries.
  5. We do more high-margin procedures, such as knee replacements and Cesarian sections than are done in peer countries.
  6. We have enormous economic disparities in healthcare. If you are a  wealthy American, you are more likely to see a physician regularly and you can get pretty good healthcare. But if you are a poor American, your access to healthcare is much less than poor citizens of other peer countries. If we are to compete on a global market in manufacturing, service sectors, and food production, then we need to have a healthy population of workers – all workers, not just the highly paid workers. Otherwise, healthcare disparities place our country at a competitive disadvantage to other countries when it comes to production of goods and services.
  7. Lastly, we are too obese. Obesity is incredibly costly. It is a major driver of diabetes, hypertension, coronary disease, sleep apnea, and hyperlipidemia. Obese persons are more likely to wear out their knees and need need knee replacement surgery. They are more likely to get gallstones and require cholecystectomy. Obese persons are much more likely to become disabled than non-obese persons. All of this adds to additional healthcare costs.

In this post, I am not offering any solutions, just pointing to the causes of our high cost healthcare. One of the telling findings of the JAMA article is that 23% of Americans believe that we need a complete rebuild of our health system – the mean percentage of citizens of peer countries believing that a complete overhaul was necessary was only 8%. Overhauling our healthcare system will be difficult – all of the factors resulting in our high cost result in groups of people making a lot of money off of the various layers of our healthcare system and those groups of people can easily become vocal lobbyists for maintenance of the status quo. However, if we are to remain competitive in a global economy, we cannot afford to have other countries outperforming us in healthcare value.

March 19, 2018

Medical Economics Physician Finances

The High Cost Of Physician Billing

When I open a newspaper, I expect to get depressed about the bad news that fills the paper. But when I open a medical journal, I don’t expect to get depressed, I expect to get enlightened about new methods, awed at new technological advances, and inspired by human stories… today, though, I just got more depressed.

An article in this week’s JAMA looked at the administrative cost of physician billing at Duke University Medical Center. To start, the authors mapped the entire billing process – it takes 12 different steps and involves many different people along the way. The results confirmed what most of us intuitively already knew: billing for medical services is costly and the time cost to the physician is excessive. The costs ranged from $20.49 to pay for the billing costs of a primary care physician visit to $215.10 to pay the billing costs of an inpatient surgery, and this was just for the physician services.

On the surface, this might seem like the costs to bill a primary care outpatient office visit are pretty low but the problem is that the primary care physician gets paid a very small amount for that visit, compared to, for example, an inpatient surgical procedure. So in many ways, it is more useful to look at the percent of the revenue that the physician gets paid for a service that has to go for billing expenses. The results are astounding. Fully 25% of what an emergency room physician gets paid goes toward paying for the cost of billing that service. For that primary care office visit, 15% goes toward coving billing costs.

Although revenue cycle staff do a lot of the billing work, disturbingly, a lot of the time of billing is done by physicians. So, for example, for that primary care office visit or for the ER visit, the physician spends 3 minutes preparing and submitting the bill. The amount of physician time to bill a general inpatient stay is 5 minutes. For either an outpatient or inpatient surgery, the physician spends 15 minutes doing the billing.

These results are likely conservative – Duke is a big organization with a robust electronic medical record system and most smaller physician practices are probably less efficient with more costly billing. The electronic medical record was supposed to simplify administrative tasks such as billing but it hasn’t. This study does not address why but I have some ideas why costs have risen in the era of the EMR:

  1. Transferring coding responsibilities to the physician. In the old days of paper billing cards, you kept a list of a dozen of the main diagnoses that you most commonly used at the bottom of the card. You would check a diagnosis and a level of service and you were done. The billing staff would do all of the data entry and file the bill. Now, the initial data entry is all done by the physician and so it takes more time for the doctor to enter an electronic charge than it used to to enter a paper charge.
  2. ICD-10. This was hyped as a more exact way of tracking diseases and conditions. It takes considerably more time to locate and select the exact code for a patient in ICD-10 than it did in ICD-9. The additional complexity may give more exactness to the diagnosis for billing purposes but this has zero impact on the actual care that the patient receives and only adds time and effort for the physician.
  3. Increased insurance scrutiny. Insurance companies may a living by denying charges. 20 years ago, I spoke with an employee of one of the largest health insurance companies in the country and she said that she was told to deny every 10th claim randomly because most of the time, the physician would not want to take the time and effort to appeal the denial and those denials translated into greater corporate profits. Although insurance companies are not so egregious now, they still pose time requirements on physicians for billing and approval. For example, today, I had to do 2 “peer-to-peer” appeals for tests that I ordered that were denied by the insurance companies. One was to get authorization for a cardiac echo in a patient who had a history of myocardial infarction who I was consulted on for shortness of breath – I have no idea why they denied it and the peer physician that they had me talk to approved it right away… but the phone call with multiple layers of phone tree recordings and time being put on hold took 6 minutes of my time. The other was for a chest CT – it was the third time I had called to appeal the insurance company’s denial. The first time was in November and it was approved without a fuss (but with a 4 minute phone call). The second time was in January because the patient got called out of the country on business unexpectedly and since the prior authorization approval was time-limited and the time expired, it had to be renewed (another 5 minutes phone call). Today’s was because he had to leave to go out of state on a family emergency this month and the prior authorization approval again expired so I had to renew it a third time (another 4 minute phone call). Insurance companies make a living by finding ways to not pay for medical services – if the physician really believes that they are needed, the physician pays the price in denial appeal time.
  4. Stupid rules. Nowhere is this more evident than in the observation status versus regular admission status designation for inpatient hospital stays. The coding and documentation requirements for billing these are immense and despite our best efforts, insurance companies will often contest patients being designated as inpatients unless they have spent 2 midnights in the hospital (less than 2 midnights, and they are considered outpatients). Another rule that insurance companies use is the “inpatient only” surgical procedure. If a surgery is classified as one that can only be performed on a patient if they are an inpatient, and the surgeon accidentally puts an observation status admission order (thinking that the patient will recover and only need 1 rather than 2 midnights of hospital stay), then the insurance company can deny the bill and doesn’t have to pay for the surgery. The amount of time that physicians and billing staff have to expend to document all of the nuances of observation status and inpatient only procedure status is huge and not a second of it impacts the actual medical care that the patient gets.

Healthcare economists are searching for ways to reduce the costs of American medicine. Currently, we have by far and away the most expensive medical care in the world, yet the quality of care that our citizens receive on average is lower than most other industrialized countries. By simplifying our billing process and doing away with senseless coding and documentation requirements, our overall costs will go down and physicians will have more time to spend taking care of patients rather than billing for the care that they provide. The editorial that accompanied this week’s JAMA article stated that in the U.S., we spend about $500 billion in medical billing every year. You could give a lot of flu shots, do a lot of screening colonoscopies, and buy a lot of blood pressure medications for $500 billion a year.

February 22, 2018

Inpatient Practice Medical Economics

Inpatient Palliative Medicine Services: Making The Right Economic Projections

The demand for inpatient palliative medicine services is very high and the supply of palliative medicine physicians is rather low. When considering bringing palliative medicine services to your hospital, the real value of palliative medicine is in what does not appear on the basic accounting pro forma. A robust palliative medicine service is a multidisciplinary team composed of a variable group of individuals that may include: physicians, nurse practitioners (or physician assistants), social workers, pharmacists, psychologists, and clergy. Palliative medicine is expensive and virtually all palliative medicine services will require some subsidy by the hospital since it is exceedingly difficult to pay for palliative medicine from professional billing alone. Here are some of the factors to consider when contemplating bringing palliative medicine to your hospital.

Estimate the clinical volume.

A commonly quoted figure is that 5% of the hospital census will use palliative medicine services (excluding maternity and psychiatry patients) and some literature supports up to 20% of inpatients will utilized palliative medicine. However, there is danger is just using a flat percentage of the hospital census. For example, patients in observation status rarely require palliative medicine. These are patients who are technically outpatients but who spend 1-2 days in the hospital, often for evaluation of symptoms such as chest pain, syncope, or vomiting.  Although many times these patients may have underlying diagnoses that warrant care by a palliative medicine specialist, this care is often better provided in an outpatient office setting due to their short stay in the hospital. Therefore, a hospital that has a high percentage of observation status patients will have less overall utilization of inpatient palliative medicine services.

One way of estimating the demand for palliative medicine consultation is to survey your inpatient services. The best way to do this is to take a “snapshot” of the demand on any particular day. To do this, pick a typical day and contact each hospitalist and admitting physician on that day to ask: “Hypothetically, if there was palliative medicine consultation today, how many of your patients would warrant palliative medicine services?”. Then check to see what each of these physicians’ hospital census is at that moment. In a typical community hospital, most of the patients who would warrant palliative medicine services will be medical (as opposed to surgical) patients. In a tertiary care hospital that has a lot of subspecialty surgical services (such as burn, trauma, surgical oncology, or thoracic surgery), this may be different. Next, take the total number of patients who would warrant palliative medicine services on that particular survey day and divide by the average length of stay – most hospitals will track medical and surgical patient length of stay separately so if all/most of the patients who are identified as potentially benefiting by palliative medicine are medical patients, then use the medical patient length of stay. This will give you the average number of new palliative medicine consults per day that you can expect. If you anticipate that you will only have routine palliative medicine consultation on weekdays, then multiple your number by 1.4 to estimate the number of new consults per day given a 5 weekday work week.

Estimating the number of inpatient return visits (after an initial palliative medicine consult) is tricky. On the surface, you could use your average hospital length of stay and assume that the palliative medicine consult is done on day one and then the palliative medicine service sees that patient every day for the rest of the hospital stay – so if your average length of stay is 4 days, then the number of return visits would be 4 -1 or 3. There are a couple of problems with this analysis, however. (1) Palliative medicine consultation may not be done on day #1 either because the need for palliative medicine services is not clear on the first hospital day or because the first hospital day falls on a weekend when palliative medicine services may not be available. Also, if a patient is admitted at 6:00 PM, then the initial palliative consult will not be done until the following day (second hospital day). (2) The palliative medicine service may not need to see the patient every day of the patient’s hospital stay (for example, when waiting for a critical test result, waiting for family members from out of town to arrive for end-of-life discussions, or weekends when palliative services may not be as regularly available). (3) The hospital average length of stay can be misleading since patients requiring palliative medicine services tend to have a higher length of stay than the average hospital patient. If you are unsure, then estimate 4 return visits for every 1 new consult.

The disease mix of the hospital will also impact the utilization of palliative medicine services. The big three are cancer, congestive heart failure, and COPD. So, even if there is a big cancer hospital in your community where most of the cancer patients go, you will still have a lot of need for palliative care if you have a high percentage of COPD and heart failure admissions.

Estimate The Professional Revenue

Ever since Medicare eliminated consultation codes a few years ago, all consultants now have to bill an inpatient new visit (CPT 99221, 99222, or 99223) rather than a consult code. Most initial palliative medicine visits will be 99223, for which Medicare pays $200 (99222 pays $136). CPT 99223 consists of 5.73 total RVUs (3.86 work RVUs, 1.58 expense RVUs, and 0.29 malpractice RVUs).  Therefore, the amount of money to go toward a physician’s salary from a new patient level 3 visit is about $135 (3.86 wRVUs x $35/RVU Medicare conversion rate). Lets say you do your survey of the need for palliative medicine services and you determine that working Monday through Friday, there would be an average of 3.8 palliative medicine consults per weekday and lets further assume that the palliative medicine physician works 46 weeks a year (assumes 3 weeks of vacation, a week of CME, and 2 weeks of holidays per year). That means that the palliative medicine physician will generate $118,000 toward salary + benefits from initial consults alone.

Next assume that there are 4 follow-up visits for every initial consult and assume an even mix of level 2 (99232) and level 3 (99233) return hospital visits. Using the same analysis as above, a level 2 return visit will generate 1.39 wRVUs ($49) and a level 3 return visit will generate 2.00 wRVUs ($70). Therefore, the palliative medicine physician would be expected to generate $55,000 per year toward salary + benefits from return visits.

By combining the projected new patient consults plus return visits, in this example, you come up with the palliative medicine physician being able to generate $173,000 toward salary plus benefits. Assuming a 25% benefit rate, that works out to generating $138,000 toward salary. Further assuming a $230,000 salary for a palliative medicine physician, this works out to the physician being about to generate about 60% or his/her salary by professional billing.

Should Palliative Medicine Physicians Bill Time-Based CPT Codes?

But what about time-based billing? Frequently, palliative medicine physicians spend an enormous amount of time for each visit, particularly when discussing end-of-life care or withdrawal of life support in the ICU. In these situations, it can be advantageous to bill “prolonged service” CPT codes in order to get paid for time rather than purely being paid a conventional level of inpatient service. The prolonged service CPT code 99356 (first 30 minutes to 60 minutes of prolonged services) generated 1.71 wRVUs ($60) and the prolonged service CPT code 99357 (each additional 15-30 minutes of prolonged services) also generates 1.71 wRVUs ($60). To bill prolonged services, the physician must first meet the time threshold for a regular new patient or return patient visit CPT code and then a minimum of an additional 30 minutes (99356) or 75 minutes (99356 + 99357). From the table, you can see the total thresholds that Medicare uses for prolonged service billing and that physician’s actual time has to be documented in the physician’s progress note in the patient’s chart. Using the prolonged service charges helps recoup the cost of the palliative medicine physician’s time when he/she needs to spend a lot of time counseling the patient and their family. But you really can’t make a living billing by time. If you calculate out the physician reimbursement on an hourly basis, then if a physician bills prolonged services, it works out to between $70 and $118 per hour from wRVUs. If you assume that the average palliative medicine physician spends 40 hours a week in patient care (leaving an additional 12 hours of a 52-hour work week doing non-reimbursable activities), works 46 weeks a year, makes $230,000 per year, and has an additional 25% benefit cost, then billing purely based on time, the palliative medicine physician can generate only about $139,000 per year toward his/her take home salary or about 60% of their income.

Either way you look at the professional billing in this model, the physician can generate about 60% of his/her income through billings (based on Medicare reimbursement levels). This means that a hospital is going to have to come up with about $115,000 subsidy per palliative medicine physician in order for the physician to have a competitive salary. In an academic medical center, it may take more than $115,000 per year after factoring in the addition costs of Dean’s tax, unfunded teaching/research, fellow’s salaries, etc.

Don’t Forget About The Intangible Benefits

After reading this analysis so far, you might wonder why any hospital would want to have palliative medicine? The physicians can’t cover their salary, they don’t bring any new admissions to your hospital, and they don’t bring in high value surgical cases. It may seem like all that they bring is additional costs. The real benefit of palliative care lies beneath the standard Profit and Loss Statement. The value of palliative medicine lies in the intangibles.

There is an abundant literature about the indirect cost benefits of palliative care. A meta-analysis of palliative care consultation in the ICU in the Journal of Intensive Care Medicine in 2016 showed that palliative care reduced the ICU length of stay and reduced the ICU costs by $1,100. A recent meta-analysis in the journal Palliative and Supportive Care showed that whereas there was a slight increase in total hospital length of stay by 0.19 days by bringing in a palliative care service, there was a 34% decrease in inpatient mortality. In a study of 2 academic medical centers published in the Journal of Palliative Medicine, the authors found that palliative medicine reduced hospital costs by $2,141 per patient for those patients with lengths of hospital stay < 7 days and by $2,870 per patient for those patients in the hospital for > 7 days. In a study from the Journal of Palliative Medicine from a single large urban academic medicine center, palliative medicine consultation in the hospital resulted in a reduction in 30-day readmission rate from 15.0% to 10.3%.

From these and other studies, we can make the following conclusions:

  1. Palliative medicine probably won’t improve your hospital’s overall length of stay
  2. Palliative medicine will improve the ICU length of stay
  3. Palliative medicine will reduce the inpatient mortality rate (by encouraging discharges to hospice when appropriate)
  4. Palliative medicine will reduce ICU costs
  5. Palliative medicine will reduce overall hospital costs per admission
  6. Palliative medicine will reduce 30-day readmission rates

The quality metrics of 30-day readmissions and inpatient mortality rates have minimal dollar costs to them but as publically-reported measures, these two metrics can have substantial public relations costs to them. On the other hand, because the ICU can often be a patient-flow bottleneck in many hospitals, there is a more direct financial benefit by reducing ICU length of stay in order to create additional ICU capacity.

Does Palliative Care Pay For Itself In Reduced Hospital Costs?

The real savings comes from reducing hospital costs per admission. By reducing ICU length of stay, the expense of the ICU’s higher nurse:patient staffing ratios, more intense use of respiratory therapists, use of mechanical ventilators, etc. can be reduced. Patients receiving palliative care can often have de-escalated care resulting in less frequent blood tests, lower use of antibiotics, discontinuation of chemotherapy medications, and reduced imaging tests. If you assume an average cost savings from the published literature of $2,500 per admission for those patients receiving palliative medicine consultation, then the hospital would need on an annual basis:

  1. 115 patients to cover the total cost of a palliative medicine physician (assuming that physician did no billing at all).
  2. 46 patients to cover the hospital’s subsidization cost per palliative medicine physician (assuming the physician bills for 40 hours a week of patient care).
  3. 50 patients to cover the cost of a nurse practitioner (assuming the NP does no additional billing)
  4. 28 patients to cover the cost of a social worker

Adding all of these together, to have a robust palliative medicine service with a physician, a nurse practitioner, and a social worker, the hospital would need to have 124 palliative medicine consults per year in order to break even.

Not all palliative medicine consults have equal economic benefit. Because of the high cost of the intensive care unit and long length of stay of patients requiring ICU care, palliative medicine consult to the ICU has the greatest financial benefit. Because ICU care can additionally be emotionally taxing for both patients and families, palliative medicine in the ICU can be particularly effective at improving patient comfort and satisfaction. Therefore, if there are only enough resources to provide limited palliative medicine consultation, start in the intensive care unit.

“Charge” Savings ≠ “Cost” Savings

There is a danger in preceding analysis, however. In many journal articles, investigators will report “costs” in the studies but what they really looked at was the patient charges in a hospital’s charge master. It is easy to figure out the patient charges but relatively hard to actually calculate the hospital’s true cost. For example, the hospital may charge $300 for a dose of an antibiotic but the true cost of the antibiotic medication is only $24; however, the charge will have to not just cover the actual purchase price of the drug but also the pharmacist’s time, the price to store the medications, the administrative cost of negotiating the purchase price from the manufacturer, the cost of the infusion pump to push the antibiotic through the patient’s veins, etc. The hospital also has to inflate the charges to make up for all of the uninsured patients or Medicaid patients that the hospital loses money on. Furthermore, the charges posted on the hospital’s charge master are only charged to uninsured patients – insurance companies individually negotiate what they will pay a particular hospital for any given service and the negotiated price is always less than the hospital’s charge listed on the charge master. Furthermore, Medicare will only pay the hospital the Medicare rate for any service, regardless of what the hospital charges for that service.

So, if we take a more conservative approach to interpreting the literature on cost savings by palliative medicine and assume that most of the time, when studies say costs but really mean charges, that the true financial benefit of palliative medicine is less than the benefit in charge reduction. Lets assume that a hospital has a gross collection rate of 40%, meaning that they get paid, on average, 40% of whatever charge is listed on their charge master. Then if the reduction in hospital’s charges is $2,500 per admission then the reduction in actual costs is about $1,000/admission. That changes the previous analysis so that the hospital would need on an annual basis:

  1. 287 patients to cover the total cost of a palliative medicine physician (assuming that physician did no billing at all).
  2. 115 patients to cover the hospital’s subsidization cost per palliative medicine physician (assuming the physician bills for 40 hours a week of patient care).
  3. 125 patients to cover the cost of a nurse practitioner (assuming the NP does no additional billing)
  4. 69 patients to cover the cost of a social worker

That robust palliative medicine service with a physician, nurse practitioner, and social worker would now need 309 palliative medicine consults per year in order to break even. The good news, is that 309 palliative medicine consults per year is a very low number and even a small hospital should be able to generate far more palliative medicine consults per year. For a very rough estimate, if your hospital has 2,500 medical admissions per year (not including observation status), then you will break even on your robust palliative medicine service.

Estimate Donor Potential

If you read the obituaries in your local newspaper, you’ll often find the sentence “In lieu of flowers, the family asks for donations to the Acme Hospice”. This isn’t surprising since the surviving family members see first-hand the enormous good that palliative care does. Furthermore, charitable donations are a little like a game of musical chairs, whoever is sitting in the chair when the music stops playing, wins – in this case, whichever charitable cause is with the patient when they die, wins.

So, when you set up a palliative medicine service, also set up a development fund where grateful families and friends can make tax-deductible donations in honor of those patients who benefitted by your hospital’s palliative medicine services. You can take about 5% out of a development fund per year and still keep that fund running in perpetuity without running out of money so once your palliative medicine fund reaches $2.25 million, you can cover the hospital’s subsidy costs to pay for your palliative medicine physician. Thus, a palliative medicine service is a long-term hospital investment: each year you have palliative care, your development donations add up and eventually your investment pays off.

The Bottom Line

The reason so many hospitals struggle with palliative medicine is that you cannot use the same type of pro forma that you would use for any other medical or surgical service. There is not much of a ramp-up period and it won’t bring you new business. The real benefit is improving the financial margin by cost reduction. Improved margin, better patient care, how can you lose?

December 27, 2017