Hospitals frequently hire outside management consultants in an effort to improve operational efficiency. I have been on both sides in the past, as someone who has brought in consultants to review our own operations and as someone who has been a paid consultant to other hospitals to review their operations. A recent study in the journal JAMA suggests that money spent on management consultants may not be money well spent.
Non-profit hospitals frequently hire outside consultants to evaluate hospital business operations including finances, management structure, staffing, billing, and patient flow. Depending on the size of the hospital and the scope of the consult, these management consultants can require many months to complete and can cost millions of dollars. In the JAMA study, the investigators found that during a 12-year period, 20% of U.S. non-profit hospitals obtained outside management consults at an average cost of $15.7 million per consult. Management consulting companies often promise enormous cost savings, citing examples of hospitals that saved $100 – $200 million after implementing their recommendations. But do they really deliver on what they advertise?
In the study, 306 non-profit hospitals that hired management consultants between 2010 – 2022 were compared to a control group of 513 matched hospitals that did not use outside management consultants. The investigators found no significant difference in nearly all measurements including:
Net patient revenue
Operating expenses
Fixed assets
Bad debt
Days’ cash on hand
Total margin
Operating margin
Inpatient length of stay
Total inpatient days
Patient experience score
Patient mortality
The only measure that reached statistical significance was a reduction in 30-day readmission for patients hospitalized with stroke; there was no difference in readmission rates for patients with pneumonia or acute myocardial infarction.
So, why do hospitals hire outside management consultants?
There are many reasons why hospitals or departments bring in outside consultants. Every institution’s situation is different but there are several common themes when it comes to the motivation to hire a management consulting company.
The hospital board does not trust the hospital leadership. Hospital board members do not serve on the board of trustees as their full-time jobs. Indeed, many, if not most, non-profit hospital boards are voluntary and members do not receive any income for their service. Larger hospitals do sometimes pay board members but it is usually a relatively small amount and since these board members are generally successful business owners, attorneys, and bankers, the amount they receive is a pittance compared to what they earn from their regular full-time jobs. Consequently, most board members simply do not have enough time to devote to in-depth scrutiny of day-to-day hospital operations beyond looking at monthly profit and loss statements. The CEO of a corporation with annual revenue of $5 billion might bring prestige as a hospital board member but the reality is that CEO will actually have very little time to devote to oversight of hospital business operations. The solution for many board members is to have the hospital pay someone else to come in to do an in-depth analysis of operations so the board members can be sure no-one in hospital management is screwing up.
There is a new hospital CEO, dean, or department chair. The average medical school dean in the United States only stays on the job for an average of 4 years. Department chairs last a little longer, with an average tenure of about 8 years. These medical school leaders are often hired because of past success in one facet of academic medicine (usually research) and not because of their business acumen. Because these new chairs have generally not been chairs before and new deans have not been deans before, there is a steep learning curve in the first year on the job. And because new chairs and deans are commonly hired from other institutions, they are generally unfamiliar with the business operations of their new department, hospital, or college. There is a saying in academic medicine that new department chairs are hired because of their previous research successes and fired because of their financial management failures. The solution for these new leaders who lack a lot of experience in business management is to hire someone who is an expert to tell them what to do. It is unfortunate that our medical schools do not value a Masters of Business Administration degree or Masters of Healthcare Administration degree as much as they value previous NIH RO1 grants when looking at applicants for deans and department chairs.
The hospital leadership knows what the problems are but want to blame unpopular solutions on someone else. Several years ago, an academic hospital in another state hired me to do a review of the department of internal medicine’s business operations. I was able to complete it in a week for a few thousand dollars; if they had hired McKinsey & Company, it would have taken more than a year and cost several millions of dollars. The thing was that the hospital leadership already knew what the core problem was. There was a department of cardiology and a separate department of internal medicine that included all of the other specialties. The structure had evolved that way because a particularly powerful cardiologist had threatened to leave and open a competing private cardiology practice unless he could have his own department, separate from the rest of internal medicine. Because the cardiology group brought so much money into the hospital, the dean and the hospital acquiesced and gave him his own department. The result was a huge salary disparity between the cardiologist and the other internal medicine specialists and major conflicts when it came to the deployment of internal medicine residents. I’m pretty sure that the hospital knew that this was the root of the department of medicine’s financial woes and faculty dissatisfaction but they wanted to be able to say that the solution of reuniting cardiology back into the department of internal medicine was my idea rather than theirs so that the chairman of cardiology would be angry at me rather than the hospital’s internal leadership.
What are the downsides of hiring an outside management consultant?
They are expensive. In the recent JAMA study, the average cost of a management consultant for an entire hospital was $15.7 million. Consultants brought in for a more narrow focus or brought in for a review limited to one specialty or one department are considerably less expensive. Regardless, an extensive review by a consulting company usually involves flying in numerous staff for days or weeks at a time as well as hundreds of billable hours doing analysis and report generation behind the scene. The result is a very large expense. There is a very good reason why senior partners of large healthcare consulting companies have personal incomes of up to $5 million per year.
No one likes to be investigated. For the rank and file employees, the outside consultants lurking in the hospital hallways can seem like homicide detectives who suspect everyone of being a criminal. Staff (and physicians) can feel like their job is at risk of being eliminated or that the consultants are going to accuse them of not doing their job right. Because the consultants generally take months to interview staff, analyze reports, and do direct observation of hospital activities, the sensation of being under the microscope for so long can lead to burnout, mistrust, and anger among staff.
Consultants feel obligated to find that something is wrong. I’ve reviewed reports from many different outside management consultants during my career and never once did one conclude that “Everything is great. You are already doing everything right.” In order to justify their cost (and existence), consultants will always find something wrong. But often, their recommendations are not realistically actionable or would have their own negative unintended consequences. Early in my career as the treasurer of our department, I brought in a highly regarded outside consulting company to review our faculty salary plan and advise about modifying it. They ultimately recommended instituting a new physician compensation plan that was overly complicated and would have negatively incentivized clinical revenue generation. Change simply for change sake can be unnecessarily disruptive.
When are management consultants actually useful?
Even though this new study showed no benefit in the measurements evaluated, I do believe that there are occasions when outside management consultants can be useful.
Specific, targeted operational areas. The more that you can narrow the scope of the consultant, the better. For example, we determined that our days in accounts receivable was higher than benchmark departments so we hired a revenue cycle consultant to specifically advise us on how to improve our billing operations. It was relatively inexpensive and allowed us to target just one area of our department’s business operations. With institution of her recommendations, we were able to reduce our days in accounts receivable, reduce our insurance denial rate, and improve our overall collection rate. This consultant was extremely beneficial from a financial standpoint.
You need supportive evidence to fire somebody. Sometimes, you realize that you need to terminate someone in a leadership position because of suspected incompetence. But you are at risk of being perceived as seeking personal vengeance or eliminating personal competition. In this situation, the fallout could end up damaging you. An outside consultant concluding that a change in management is needed can be perceived as an objective independent justification for terminating a specific person or downsizing a specific department. As an example, years ago, we had a medical system CEO who was disliked by a large number of physicians and widely believed to be incompetent. Several of the division directors and other hospital leaders signed a letter to the president of the university demanding that the CEO be fired. The local newspaper got a copy of the letter and created a very public scandal. Ultimately, the president did fire the CEO but by the end of the year, all of the division directors who had signed the letter also lost their jobs. A management consultant recommending replacement of the CEO would have been far less messy and would not have resulted in an expose by the local newspaper.
You are considering purchasing or merging with another hospital. You would not buy a house without first having a building inspection and you should not buy a hospital without having its operations inspected. In this situation, you are far better off knowing what the operational problems are before purchasing a hospital than waiting until those problems are painfully apparent a year later. An outside management consultant can be useful in this situation.
The hospital management is extremely understaffed or extremely overstaffed. If the hospitals management team is woefully understaffed, there may not be enough people to do basic operational management or improve operational efficiency. On the other hand, if the hospital’s management team is bloated, then the hospital’s overhead expenses will be excessive and operations could be slowed by the weight of the excessive bureaucracy. In these two situations, the benefits of a management consultant can significantly outweigh the cost. But you don’t want to pay a consultant $15 million just to tell you that you need to just terminate a single $100,000 per year hospital manager position.
You are auditioning the consultant. Say that your hospital’s chief financial officer is close to retirement and there is a CFO at another hospital that you are interested in recruiting to replace him or her. One way to “test drive” this CFO would be to hire him or her to do a financial management consult for your hospital.
It is best to not need a consultant in the first place
If your hospital has an intelligent, experienced, and competent group of leaders, then they should have the necessary skills and expertise to optimize hospital operations internally without the need for a management consultant’s report. Too often, management consultants are equated with auditors, with the thinking that every hospital should have a periodic management consult. But whereas every large organization does need to have regular audits, they don’t need to have regular management consults.
Moreover, a management consultant should not be used as a substitute for hospital board members who lack the time or expertise to evaluate hospital operations. This can be a real problem if board members are selected purely because of their political connections or because they are famous for their success in some other industry.
Too many new hospital CEOs, college of medicine deans, and department chairs view management consultants to be a necessary and expected requirement when taking on a new job. Although sometimes such a consultant is necessary, all too often it is obtained because the new leader lacks the necessary experience, skills, or confidence to do the job he or she was hired to do.
So, before hiring an outside management consulting company to do a global review of your hospital’s overall operations, ask yourself a few questions. Can we reduce the consultant’s focus to a single, narrow operational issue? Are realistically achievable expense reductions or net revenue increases greater than the cost of the consult? Can you afford to wait the months or years it will take for the consultant to render the final report? Is the consult being used your current hospital leadership or board members lack the time or competency to do an internal evaluation of operations themselves?
There is a place for hospital management consultants. But the recent study suggests that U.S. hospitals are overusing consultants and many (or most) consultants promise greater results than they actually deliver.
Three events happened in the past week that should be concerning to all physicians and hospitals that take care of patients on Medicare Advantage Plans. First, the U.S. Congress Joint Economic Committee issued a brief concluding that Medicare Advantage Plans overcharge Medicare and cost 120% of traditional Medicare per enrollee. Second, Aetna was fined $117 million because of Medicare Advantage Plan false claims. And third, a study in JAMA found that in 2026, 10% of enrollees in Medicare Advantage Plans are being dropped from coverage. These three events will have a direct impact on medical practices.
What are Medicare Advantage Plans?
When a U.S. citizen turns age 65, they have a choice – either enroll in traditional Medicare or enroll in a Medicare Advantage Plan. Traditional Medicare includes Part A and Part B. Part A is free and funded by payroll taxes. Seniors pay a monthly premium for Part B with the rest of Part B funded by federal income tax. Most people with traditional Medicare will purchase a separate Medigap policy through a commercial health insurance company that helps cover deductibles, co-pays, and other healthcare expenses not covered by traditional Medicare. Additionally, most people with traditional Medicare will purchase a Medicare Part D policy to cover outpatient medications that are not covered by traditional Medicare.
A Medicare Advantage Plan (also known as Medicare Part C), is an all-inclusive health insurance policy sold by commercial insurance companies that bundles Medicare Part A, Medicare Part B, Medigap coverage, and usually a Medicare Part D plan. In addition, many Medicare Advantage Plans also provide perks that are not available to seniors on traditional Medicare such as gym memberships, dental insurance, or vision insurance. Medicare Advantage Plans are usually less expensive than the combined cost of traditional Medicare Part B plus a Medigap plan plus a Medicare Part D plan. For this reason, the Medicare Advantage Plans are very popular. Currently, 54% of Medicare beneficiaries are enrolled in a Medicare Advantage Plan and only 46% are enrolled in traditional Medicare.
Medicare Advantage Plans are inexpensive because commercial insurance companies have tactics to control costs that Medicare lacks. These include:
Prior authorization. By requiring many services, procedures, and referrals to get prior authorization, insurance companies can impose strict authorization criteria that must be met before a physician or hospital can perform a procedure or service. This is done under the guise of preventing unnecessary procedures and services. However, many insurance companies have very strict criteria that can create a barrier for procedures or services that are actually needed by patients. In addition, the prior authorization process is onerous, requiring time and expense for doctors and hospitals to call the insurance company and negotiate with an insurance representative. Because this is such a hassle, many physicians find the path of least resistance to be to forgo a certain test or procedure rather than have to deal with another tedious prior authorization, even if they believe that the test or procedure is needed for optimal care of the patient.
Denials. Frequently, there is no time to get prior authorization, for example, for an emergency hospital admission or for an urgently needed outpatient CT scan. In these situations, the Medicare Advantage Plan insurance company can retrospectively deny payment for the hospital admission or CT scan if the insurance company decides that there was insufficient indication for that hospital admission or CT scan. Physicians and hospitals can appeal those denials but the appeals require a great deal of time and paperwork. As a result, many of these services and procedures are written off because of the cost and effort necessary to appeal. Thirty years ago, a claims worker for one of the major health insurance companies told me that their company’s policy was to randomly deny every 20th claim because many physicians and hospitals would not bother to appeal them, ultimately saving the insurance company millions of dollars every year.
Provider networks. With traditional Medicare, a beneficiary can see any physician or hospital in the country that takes Medicare. Because nearly all doctors and hospitals that provide care to adults accept Medicare, this means that the person with traditional Medicare can see any doctor he or she wants. Each Medicare Advantage Plan insurance company will have its own limited number of in-network doctors and hospitals. Beneficiaries have to pay steep extra costs to see a doctor who is out-of-network or go to a hospital that is out-of-network. This is sometimes unavoidable, for example, if a person needs a surgery done by an in-network surgeon but the anesthesiologist is out-of-network. In the past, insurance companies had no motivation to keep their list of in-network physicians current. Indeed, they were actually incentivized to let those lists become out of date with “ghost doctors”, physicians who had retired or moved and were no longer practicing in the area. By making it harder for enrollees to find a doctor in a particular specialty, it reduced the chances that the enrollee would eventually see a specialist and thus avoided having to pay for expensive services or procedures. A recent class action lawsuit has resulted in Medicare Advantage Plans now being required to ensure that their lists of in-network physicians is current.
Favorable selection. Since Medicare Part B pays the Medicare Advantage Plan commercial insurance company on a per-enrollee basis, the more healthy enrollees the insurance company can attract, the less that insurance company will have to pay for healthcare services and procedures. The average amount paid by Medicare Part B this year is $9,739 per beneficiary. If a commercial insurance company can attract a group of enrollees that will on average generate less than $9,739 in healthcare expenses per year, then the insurance company stands to make a profit. There are several tactics that insurance companies use to preferentially attract healthier patients. Zero premium Medicare Advantage Plans often appeal to healthier seniors who do not require frequent, costly healthcare. Perks such as gym memberships attract more active, healthier seniors. Targeted advertising can reach seniors who are likely to have lower healthcare costs – this could include targeting geographic areas or demographic groups that are likely to have lower healthcare requirements. Provider network design can emphasize primary care providers with limited access to specialists, thus selectively appealing to seniors with no medical conditions requiring specialist care. The bottom line is that the more healthy people a Medicare Advantage Plan can enroll, the more profitable that plan will be for the commercial insurance company.
Upcoding. Medicare pays commercial insurance companies administrating Medicare Advantage Plans based on the number of enrollees and how medically complex those enrollees are. The more medical problems an enrollee has, the more Medicare will pay the commercial insurance company for that particular enrollee. Therefore, the insurance companies are incentivized to exaggerate the number and severity of medical illnesses for every enrollee. When I first enrolled in a Medicare Advantage Plan, the insurance company kept wanting to send out a nurse to my home to do a “wellness visit”. That nurse’s real job was to find and document as many medical conditions as possible. If the nurse finds that the enrollee’s blood pressure is 1 mm Hg above normal, the insurance company can claim that the enrollee has hypertension and charge Medicare more. If the nurse weighs the enrollee with all of their clothes and shoes on and the enrollee’s weight is 1 pound above the threshold for morbid obesity, then the insurance company can document morbid obesity and charge Medicare more. Needless to say, I refused the wellness visits.
Medicare Advantage Plans overcharge Medicare
On March 10, 2026, the Joint Economic Committee of the U.S. Congress issued a brief stating that Medicare Advantage Plans are overpaid, resulting in an increase in Medicare premiums for all Medicare beneficiaries. The original intention of the Medicare Advantage Plans was to decrease cost of care by reducing unnecessary medical services and procedures and by substituting private insurance company efficiency for Medicare government bureaucratic inefficiency. The original projection was that Medicare Advantage would cost 95% of what traditional Medicare costs per beneficiary. The reality is that Medicare Advantage costs 120% of what traditional Medicare costs per beneficiary. In other words, rather than saving money, Medicare Advantage Plans are costing Americans more money. MedPAC estimates that this year, commercial insurance companies will be over-charging Medicare by $76 billion because of upcoding. This ends up costing Medicare beneficiaries more in Part B premiums and costing American taxpayers more in income taxes.
Medicare Part B covers outpatient healthcare services and doctors’ charges. By statute, 25% of Medicare Part B is covered by monthly Medicare premiums charged to all Medicare enrollees (both traditional Medicare and Medicare Advantage Plan enrollees). The annual Medicare Part B premiums are based on income with $2,435 per year for most Medicare enrollees. Higher income enrollees pay as much as $8,279 per year. The other 75% of the cost of Medicare Part B is covered by income taxes paid by working Americans. Because Medicare Part B pays the Medicare Advantage Plan insurance companies on a per-enrollee basis, the more the insurance companies charge per-enrollee, the more Medicare Part B has to pay. This increases the overall cost of Medicare Part B and that increase in cost results in higher Medicare Part B premiums for enrollees and more money from federal income taxes.
Over the next 9 years, Medicare Part B premiums are projected to double to approximately $5,000 per year in 2035 for most Americans. Of this amount, $450 will result from Medicare Advantage Plan overpayments. Commercial health insurance companies are for-profit corporations and as such, they are incentivized to charge as much money as possible – because the Medicare Advantage Plans are paid by Medicare, they are incentivized to charge Medicare (i.e., the federal government) as much money as possible. The temptation to upcode is just too great.
Aetna’s recent $117 million penalty
Aetna is owned by CVS Health and has the 4th largest number of Medicare Advantage Plan enrollees (after UnitedHealthcare, Humana, and Blue Cross/Blue Shield affiliates). The U.S. Attorney’s office in Philadelphia announced last week that Aetna agreed to pay $117.7 million to settle federal charges of false claims of billing. The allegation is that Aetna added diagnosis codes in an attempt to upcode Medicare Advantage Plan enrollees to make them appear to be sicker than they actually are. $11.5 million of the penalty went to a whistleblower who alleged that Aetna added inaccurate diagnosis codes for morbid obesity.
Forced disenrollments from Medicare Advantage Plans
A study published in JAMA last week found that 10% of Americans enrolled in Medicare Advantage Plans were forcibly disenrolled in 2026. Disenrollment happens when a commercial insurance company stops offering its Medicare Advantage Plan in a certain geographic location. The main reason that a Medicare Advantage Plan leaves a local market is financial – they lose money in that particular market area. Prior to 2025, the annual disenrollement was less than 1% per year. In 2025, disenrollment increased to 6.9% and in 2026, increased further to 10.0%.
Disenrollees were more likely to have been in smaller Medicare Advantage Plans, in plans with a lower Medicare star rating, and in rural areas. Seven states had very high disenrollment rates (>40%): Vermont, New Hampshire, Maryland, North Dakota, South Dakota, Wyoming, and Idaho. Vermont is particularly notable with 92.2% of Medicare Advantage Plan enrollees in Vermont being disenrolled in 2006.
The good news is that most of these Medicare Advantage Plan enrollees were able to switch to a different Medicare Advantage Plan insurance company. However, this often results in patients needing to switch doctors when their previous doctor is not in-network for their new Medicare Advantage Plan. This can also affect hospitals that are not in-network for the new plan. Even for those doctors and hospitals that remain in-network for their patient’s new Medicare Advantage Plan, it can mean re-submitting prior authorization applications for upcoming services or procedures.
The recent uptick in Medicare Advantage Plan disenrollments is a sign that commercial insurance companies are finding some areas of the United States to be unprofitable. For disenrollees, the only option to enrolling in a different Medicare Advantage Plan is to go back to traditional Medicare. But switching to traditional Medicare can be fraught with hazard.
The problem with switching from a Medicare Advantage Plan to traditional Medicare.
When a person turns 65-years-old, that person can choose to either enroll in traditional Medicare or a Medicare Advantage Plan. For a Medicare beneficiary who is already enrolled in a Medicare Advantage Plan, there are two times each year that they can change back to traditional Medicare: either during the Medicare Open Enrollment period (October 15 – December 7) or during the Medicare Advantage Open Enrollment period (January 1 – March 31).
But there is a catch. Most people on traditional Medicare will also have a Medigap policy to cover the out of pocket healthcare expenses not covered by traditional Medicare. When you are 65 and first enroll in Medicare, commercial insurance companies offering Medigap policies have to accept everyone, regardless of pre-existing medical conditions. But once you are enrolled in a Medicare Advantage Plan, if you go back to traditional Medicare, the insurance company can deny you a Medigap policy if you have pre-existing conditions such as cancer, diabetes, or heart disease. In other words, if you have a significant pre-existing medical condition, once you go on a Medicare Advantage Plan, you realistically cannot go back to traditional Medicare because you won’t be able to get a Medigap policy. And if a Medicare Advantage Plan has upcoded diagnoses in your insurance record, you may find yourself ineligible for a Medigap policy because the number or severity of your medical problems was exaggerated by the Medicare Advantage Plan insurance company.
What should doctors and hospitals expect next?
With greater public awareness of the practice of upcoding by Medicare Advantage Plans, we can expect more whistleblowers and more prosecutions such as occurred last week with Aetna. If commercial insurance companies dial back their upcoding efforts, they will need to look to other ways of ensuring Medicare Advantage Plan profitability. That is likely to mean ramping up their prior authorization requirements, further restricting the number of in-network providers, and increasing denials.
In anticipation of this, doctors should ensure that their chart documentation is complete and accurate to reduce retrospective denials. We should be sure that the diagnoses associated with test and procedure orders are correct and complete to reduce prior authorization phone calls. And we should check every patient’s current insurance at every visit in order to avoid denials for being unexpectedly out-of-network.
Hospitals should ensure that their revenue cycle departments are fully staffed with personnel to handle prior authorizations and denials. There should be robust processes in place to distinguish observation hospital stays versus inpatient admissions. And patients’ current insurance should be checked at every visit since the prior authorization for an elective hip surgery obtained in March may not be honored when the surgery is actually performed in April if the patient had to switch to a different Medicare Advantage Plan in the interim.
We should have all seen this coming. The Medicare Advantage Plans were supposed to reduce healthcare costs by substituting the streamlined efficiency of private industry for the bloated inefficiency of the federal government’s Medicare operations. But it turns out that Medicare is actually more cost-effective than commercial insurance companies because unlike UnitedHealthcare for example, Medicare isn’t required to turn a profit each year, didn’t have to pay a CEO $26 million in salary last year, and didn’t have to pay shareholders $8 billion in dividends last year. When it comes to making a profit, businesses will always find a way. Even if that way results in higher Medicare Part B premiums to all seniors and increased income tax burden on all American taxpayers.
The Somali refugee population in Minnesota has received a lot of national attention recently because of a daycare fraud scandal. The twin cities of Minneapolis/St. Paul have the largest Somali population in the United States at approximately 80,000. Central Ohio has the second largest Somali refugee population at about 70,000. Most of these refugees came to the United States in the late 1990’s, fleeing Somalia’s Civil War. Approximately 82% of Central Ohio’s Somali population are either naturalized citizens or legal permanent residents (green card holders). However, some Somalis in Ohio are under federal temporary protected status, allowing them to live and work in the United States as refugees when return to their home country is unsafe due to war or environmental disaster. Last month, the Trump administration canceled temporary protected status for Somalis, requiring them to leave the country by March 17, 2026.
Twenty years ago Somali refugees accounted for a large percentage of our hospital’s housekeeping and janitorial staff. These are largely unskilled workers who often had limited education. Today, the children of those refugees now occupy skilled positions in our hospital as nurses, respiratory therapists, and physicians. From my own experience as our hospital’s medical director, it is difficult to fill unskilled positions, such as hospital housekeeping staff. U.S.-born citizens with U.S. educations are largely uninterested in cleaning soiled hospital bed linens, moping floors, or washing dishes in the hospital kitchen. We rely heavily on immigrants and especially refugees who are willing to take on any job as long as that job allows them to stay in America. Immigrants do the hospital jobs that no one else will do.
Our hospital is not unique. A study from the Kaiser Family Foundation found that 1 out of 6 hospital workers (16%) in the U.S. are immigrants. But there are significant geographic variations. For example, only 0.5% of hospital employees are immigrants in Wyoming but in California, 32.4% of hospital employees are immigrants.
For low-paying hospital jobs requiring less education, such as cleaning and maintenance jobs, nationwide, fully 29% are immigrants. More specifically, 17% are naturalized citizen immigrants and 12% are non-citizen immigrants. A recent study in JAMA found that 9% of hospital housekeeping and janitor workers are undocumented immigrants. These jobs are essential for our nation’s hospitals to function and we cannot fill all of these jobs with American-born workers.
Immigration pathways
The United States allowed approximately 1.2 million immigrants to enter the country in 2023 as lawful permanent residents. Of these, the largest percentage, 756,000, entered by being sponsored by an immediate family member, for example, a spouse, child, or parent of a U.S. citizen. Approximately 197,000 entered the U.S. as employment-based immigrants – mainly skilled workers on work visas. The annual diversity visa lottery accounts for about 55,000 immigrants each year – these visas are allotted to people from countries that have low rates of immigration to the U.S. such as Ghana, Nepal, and Armenia. Refugee status accounted for 125,000 immigrants.
Immigrants tend to be young and of working age. Data from the U.S. Citizenship and Immigration Services indicate that in 2024, 88.1% of all individuals becoming naturalized citizens that year were under age 65. Data from the U.S. Department of Homeland Security indicates that 88% of undocumented immigrants are under age 55 and 79% are between ages 18 – 55, indicating that the vast majority of undocumented immigrants are in prime working age.
In 2023, there was a total of 51.8 million immigrants living in the U.S. Of these, 23.8 million (46%) were naturalized U.S. citizens, 11.9 million (23%) were green card holders, 2.1 million (4%) were temporary lawful residents, and 14.0 million (27%) were unauthorized.
Of those 14 million unauthorized immigrants, 2.6 million were asylum applicants, 700,000 entered the U.S. legally after receiving parole (“parole” from an immigration definition is a person who has been granted legal authorization to remain in the U.S. because of humanitarian reasons or significant public benefit), 700,000 were authorized to be in the U.S. because of being victims of crime or violence, 650,000 had temporary protected status, 650,00 were brought to the U.S. illegally as children (DACA). Another 1 million had been apprehended by U.S. Border Patrol agents and released into the country with an order to appear in immigration court. Finally, 8 million of the unauthorized immigrants were undocumented; this is the group that the government has targeted for deportation. 50% of undocumented immigrants live in just three states: Texas, California, and Florida. The most common country of origin is Mexico:
When it comes to employment, 64% of immigrants in the U.S. are in the workforce. The majority of the rest are homemakers, children, or the elderly. Of the unauthorized immigrants, fully 71% are in the U.S. workforce. In contrast, only 44% of U.S. born citizens are currently in the U.S. workforce. In other words, a much higher percentage of immigrants are in the workforce than U.S. born citizens, reflecting the younger average age of immigrants compared to U.S. born citizens. In addition, undocumented immigrants have to work as they are not eligible for federal programs such as SNAP, ACA insurance, Social Security, Pell grants, Medicare, or Medicaid.
Hospital-based immigrant physicians and nurses
The United States is heavily dependent on immigrant physicians who account for 27% of all physicians in American hospitals. Of these 19% are naturalized U.S. citizens and 8% are noncitizen immigrants. Because of the rigorous training and licensure requirements for doctors, essentially no practicing physicians are unauthorized/undocumented immigrants. In other words, they are all here legally.
16% of U.S. hospital nurses are immigrants of which 13% are naturalized citizens and 3% are noncitizens. 22% of nursing assistants are immigrants of which 15% are naturalized citizens and 7% are non-citizens. Similar to physicians, nurses require training and licensure; as a result, essentially no practicing nurses are unauthorized/undocumented immigrants.
For home-based services, the U.S. relies even more on immigrants with 41% of home health aides being foreign born. As our nation’s population ages, home health will be increasingly important and without these immigrant workers, home health delivery would be unable to meet the country’s needs. Although many home health aides are employed through home health companies that require their employees to have documentation of legal immigrant status, many other home health aides are employed directly by families and often paid in cash. As a result, undocumented immigrants account for 3.8% of home health workers.
We need more immigrants
We have healthcare employment needs that cannot be fully met by U.S. born citizens. Currently, nearly half of U.S. nursing homes have limited admissions due to staffing shortages and only 19% meet the minimum staffing numbers required by 2029 as mandated by Medicare. Data from 2023 indicated that two-thirds of hospitals had to reduce inpatient capacity due to staffing shortages, a number that will be of no surprise to anyone who has had to wait in the emergency department for hours or days for an inpatient bed because no open beds were available.
Immigrants in the United States have always taken the jobs that no-one else wanted to do. Forced immigrants (the enslaved) were brought to America in the 1600’s and 1700’s to do farm labor that free Americans would not do. Following the Great Famine of 1845, Irish immigrants took unskilled jobs in American, such as building canals, working in textile mills, and working in mines. Chinese immigrants came to the U.S. in the 1860’s to work building railroads, a dangerous and low-paying job that railroad owners could not fill with American born workers. After the railroads were built, the Chinese went on to work in laundries, another job that could not be filled with American born workers. In the 1900’s, it was migrant farmworkers who were essential for much of the U.S. agricultural output. These also were physically demanding and low paying jobs that few U.S. citizens would take. Today, immigrants continue to do the jobs that cannot be completely filled with U.S. born workers: kitchen staff, farmworkers, day laborers, roofers, daycare workers, drywall installers, painters, etc.
In the U.S. healthcare system, immigrants perform many of the so-called entry-level jobs that require minimal skills and little training. While it is true that these jobs can frequently be filled by U.S. born citizens entering the workforce with only high school or less education, these least educated U.S. born citizens are often less motivated to work than immigrants and are more likely to move on to some other job after a short period of time. Quite simply, immigrants often make the best employees for unskilled jobs in healthcare – they are glad to have a job, work hard, and are less likely to quit after just a few weeks or months on the job.
The U.S. citizenry is aging and the U.S. birthrate is falling. As a result, we will have a large population of elderly Americans needing home healthcare, nursing home care, and hospital care over the next several decades. And at the same time, the low birth rate will result in fewer young Americans available and willing to take unskilled hospital jobs like home health aides, hospital kitchen workers, nursing aides, and hospital housekeeping staff.
So, what is the solution?
As with all too many things in life, politics gets in the way of pragmatism. The pragmatic solution to our current and soon to be worsening shortage of unskilled hospital workers is to bring in more legal immigrants who are of working age. The politics is that too many Americans feel threatened by immigrants – either because of fear that the immigrants are criminals, fear that the immigrants are going to take their jobs, or simply fear of people from a different culture.
The best way to reduce unauthorized/undocumented immigration is to allow more young immigrants who are motivated to come to the U.S. for jobs to enter legally. We need to allow hospitals and other healthcare employers to sponsor immigrants who agree to take those jobs that cannot be filled with U.S. born citizens. They can then do the work that is needed by our healthcare system, pay into the Social Security system (which is needed to prevent Social Security from running out of money), and avoid wasting money being spent to round up, detain, and deport those who can contribute to society.
Our nation’s hospitals’ immigration problem is that we need more immigrants.
The 2025 federal budget bill includes provisions that will reduce the number of Americans receiving Medicaid. As a result, hospitals and doctors will soon be seeing an increase in the number of uninsured patients. These “self-pay” patients are essentially “no-pay” patients because most of them are too poor to pay out of pocket and do not have access to employer-provided commercial health insurance plans.
Prior to Medicaid expansion, our hospital had a 13% self-pay rate, meaning that the hospital and the doctors had to essentially provide free care to 13% of the patients who were admitted to the hospital. In other words, we did not get paid for 1 out of every 7.6 patients that were admitted. These were not elective admissions, but were admissions that came through our emergency department who could not be turned away. If we were running a car dealership, we could refuse to give a car to someone who didn’t have money to pay the bill. But ethically (and legally) you cannot just say to a patient with multiple trauma after a car accident: “Too bad, you’ll just have to go home because we won’t take care of you if you can’t pay”. In 2014, Ohio joined Medicaid expansion and we immediately saw our hospital’s self-pay rate fall from 13% to 2.5%. Looking back to the days before Medicaid expansion, there are important financial lessons that can be learned and applied to the near future when Medicaid cuts go into effect.
What hospitals can do in an era of Medicaid cuts
If the number of Americans eligible for Medicaid is reduced, many hospitals in the U.S. will not survive and will be forced to close due to financial pressures – no amount of prudent management will save them. This is particularly true for small rural hospitals that tend to have a disproportionately high percentage of Medicaid patients. Most large urban hospitals and multi-hospital systems will survive. But there are many hospitals that fall in-between such as larger rural hospitals and smaller urban hospitals that are at risk of closing due to Medicaid cuts, but with smart management decisions, may be able to avoid closing. Here are some specific steps that these hospitals can make in order to keep their doors open.
Get a grant. The 2025 federal budget bill allocates $10 billion per year for 5 years to support rural hospitals (Section 71401 of H.R. 1). Individual states must apply for these funds and can then distribute them to rural hospitals. State applications must be submitted to the Centers for Medicare and Medicaid Services (CMS) by December 31, 2025. Rural hospitals should make sure that their state submits an application to CMS and then apply to their state for distributions to support operations.
Increase commercial insurance rates. One of the most common healthcare myths that the American public holds is that if you cut back Medicaid, it saves working taxpayers money. It doesn’t. It simply shifts the cost of healthcare for the poor from federal income tax receipts to commercial health insurance premiums. When uninsured patients are admitted to the hospital, that hospital and its doctors have to increase the amount that they charge paying patients. Because Medicare and Medicaid rates are fixed by the government, they are non-negotiable. So the only recourse hospitals and doctors have is to increase the rates they charge to commercial insurance companies which is much higher than what Medicare and Medicaid pays. So, ultimately, working Americans will still pay for healthcare for the uninsured, it is just that they pay by increased health insurance premiums rather than increased income taxes.
Increase services and procedures utilized by commercially insured patients. When our hospital had a 13% uninsured rate, we balanced our budget by specializing in sports medicine surgeries and orthopedic surgeries. At that time, most of these surgeries for the entire medical center were located at our hospital. The majority of sports medicine surgeries are elective and performed on patients younger than age 65. This translates to patients with commercial health insurance. Joint replacement surgeries are also elective and can be limited to those patients with either commercial or government insurance. Hospitals should start considering what elective services they can provide that would attract patients between the ages of 18 and 65 – these patients by and large are commercially insured and can help offset loses from uninsured patients. As elective services, the hospital can refuse to do them on uninsured patients unless they can pay out of pocket up front.
Eliminate unprofitable services. In every hospital, there are profitable service lines and unprofitable service lines. In order to provide comprehensive medical services to the community, hospitals use the profits from the profitable service lines to subsidize unprofitable services. But when faced with Medicaid cuts, the hospital (and the community) may not be able to afford to provide unprofitable services. Maybe you tell your surgeons that they can no longer implant vagus nerve stimulators because the hospital is losing money on those procedures. Maybe you cut back from a level II trauma center to a level I trauma center to eliminate the cost of keeping an operating room team and surgeon in the hospital at night. Maybe you limit palliative medicine to only available in the ICU. Maybe you close your low census maternity unit.
Delay large purchases. Can you make your MRI machine last another year? Maybe hold off on the intensive care unit renovation you had been planning? The hope is that America will become alarmed at the increase in the uninsured population and restore Medicaid or come up with some other healthcare solution in the future. If the hospital can weather the next several years, then those delayed purchases may be feasible in the future.
Optimize staffing. This may mean reducing the number of staff in some areas but may also mean increasing staff in other areas. The key to optimizing staffing numbers is not to down-size, rather it is to right-size. One of the dumbest decisions I saw a hospital make was to make across the board staffing cuts in all departments. The result was too few revenue cycle staff to get bills out on time and work denials – consequently, the hospital’s income from commercial insurance companies plummeted, making hospital finances even worse.
Provide free health screenings. This may sound counter intuitive since screenings cost the hospital money. But in the long-run, screenings can save more money than they cost. Most healthcare workers went into healthcare because they want to do good for their communities and it is fairly easy to get doctors, nurses, pharmacists, physical therapists, and others to volunteer their time for a weekend community health fair. The cost to the hospital is minimal: supplies, security, electricity, and registration. But by identifying members of the community with undiagnosed hypertension and diabetes, the hospital can refer them to free clinics and other resources to get them treated before they develop complications that require a trip to the emergency room and a hospital admission.
Advertise free community services. Every uninsured patient who leaves the emergency room should leave with a printout that lists free clinics, charity pharmacies, vaccination clinics and other services provided by the local public health department. Also include how to use cost-saving apps such as GoodRx for prescription drugs. By facilitating access to these free community resources, hospitals can keep patients out of the ER.
Direct donors to free clinics and free pharmacies. This is also counterintuitive because the hospital’s development staff have as their prime directive to convince donors to contribute to build a new hospital wing or create an inpatient hospice unit. It might seem like heresy to direct potential donors to donate money to some other organization but by keeping the local free clinic and charitable pharmacy open, the hospital will not have to provide free care in the ER for every uninsured patient with a cold.
Help uninsured patients apply for Medicaid. Many uninsured Americans actually qualify for Medicaid but don’t realize it or don’t know how to apply. Every uninsured patient admitted to the hospital should be screened for Medicaid eligibility by the registration staff or the revenue cycle staff. Those that are eligible should be assisted by these staff to apply for Medicaid. Similarly, uninsured outpatients who frequently use the emergency department should be screened and then assisted with Medicaid applications.
Don’t waste money on stuff you won’t get paid for. Hospitals spend a huge amount of money on personnel who determine which patients should be in observation or inpatient status and which patients have complications or co-morbidities that will increase the value of their DRG. Don’t waste time doing this on uninsured patients since the hospital is not going to get paid for that admission anyway. Well-intentioned hospitalists often order diagnostic tests on uninsured inpatients that would normally be done in the outpatient setting because they figure that is the only way a patient is going to get those tests done. While well-meaning, these hospitalists should instead work on lining uninsured patients up with free clinics and other community resources where these patients can get outpatient testing. When it comes to ordering diagnostic tests on uninsured patients, distinguish between nice-to-know versus need-to-know tests.
Be prepared to pay your doctors more. Not only does the hospital not get paid for providing care for uninsured patients, neither do the doctors. When the percentage of uninsured inpatients rises, the doctors are going to demand financial support from the hospital since the doctors will not get paid to treat them. The margin on physician professional revenue is even narrower than the margin on hospital revenue and the doctors simply cannot afford to not get paid for 13% of the inpatients that they must take care of.
Develop a plan for managing undocumented foreign nationals. Whether you call them undocumented migrants or illegal aliens, patients without legal status in the U.S. pose a unique problem for most hospitals. If they show up in the ER, you have to provide basic emergency care but there is virtually zero chance that you will ever get paid for it. In our hospital, this was a particular problem with patients who required dialysis for kidney failure. All U.S. citizens with kidney failure requiring dialysis automatically qualify for Medicare so outpatient dialysis centers will accept them knowing that they will get paid. But non-citizens are not eligible for Medicare and dialysis centers will not accept them since it commits that dialysis center to providing free care for the rest of the patient’s life. As a result, these non-citizens keep showing up in the emergency department whenever they feel lousy enough that they need dialysis. Develop a low-cost, streamlined process for managing these patients that requires the least amount of diagnostic testing and physician effort every time one of these patients shows up in the ER needing dialysis. Same goes for patients requiring long-term intravenous antibiotics or cancer treatment. To make matters worse, hospitals and doctors are required by law to provide a translator for those patents who do not speak English, adding to the cost to care for most non-citizens. The hospital may find that it is cheaper in the long run to buy the patient a ticket to fly back to their home country. Privacy laws prohibit hospitals or doctors from reporting non-citizens to Immigration and Customs Enforcement.
Strategically double-book uninsured outpatients. When a patient is discharged from the hospital or the ER, they are usually set up to see a physician or advanced practice provider in an outpatient clinic or office. Frequently, these are clinics owned and run by the hospital. These hospital follow-up visits are essential to prevent patients from being re-admitted to the hospital. Uninsured patients have a particularly high no-show rate in outpatient offices and you don’t want your doctors or nurse practitioners sitting around doing nothing when an uninsured patient hospital follow-up does not show up for their appointment. Determine the no-show rate for your uninsured patients for every office practice and then double book those patients accordingly. For example, if you know that your uninsured hospital follow up no-show rate is 33%, then double book every other uninsured patient to minimize idle time.
Negotiate payment plans with uninsured patients. Although uninsured patients are usually poor, many can afford to pay at least something. Give your revenue cycle staff the authority to negotiate payments. This can be an income-based charge reduction or an installment payment plan. This may require the patient to provide proof of income, such as a copy of their tax returns. Not all uninsured patients are poor – I had an uninsured patient asked for waiver of their charges for outpatient care only to drive up to the clinic in a new Cadillac. Another uninsured patient showed us his tax returns demonstrating a low income to try to get his hospital bill waived but he owned several hundred acres of investment property worth millions of dollars.
Develop volunteer positions. One of the provisions of of the 2025 budget bill is to require Medicaid recipients between ages 19 – 64 in Medicaid expansion states to either work, go to school, or volunteer – for at least 80 hours per month. The goal of this provision is to encourage Medicaid recipients to obtain employment that would lead to employer-provided commercial health insurance and get them off of Medicaid. Not all Medicaid recipients are able to work or get job training – many are physically disabled, uneducated, mentally ill, or intellectually disabled. But many of these individuals can perform community service duties for 10 hours a week. Hospitals should develop lists of organizations in the community that have volunteer positions in order to help Medicaid recipients remain enrolled. Some of these volunteer positions may be within the hospital itself.
Consider outside consults. Are you confident that your registration department is operating efficiently? How about your revenue cycle department – is it capturing all charges and getting fully paid for those charges? Are commercial insurance companies paying you as much as they pay other hospitals? Getting an outside consultant to review hospital operations can often improve operational efficiency and improve the hospital’s financial margin. When I was the treasurer of our Department of Internal Medicine, I often did outside consulting for other hospitals and other departments within our own hospital to help them improve physician charge capture, outpatient scheduling, and other aspects of physician practice. These consultations inevitably resulted in both cost savings and increased revenue.
Join a larger hospital system. Americans love independent things. We love our independent bookstores, independent coffee shops, and independent appliance stores. But independence usually comes with higher costs. By joining large hospital groups, smaller hospitals can reap the benefits of economies of scale when it comes to commercial health insurance company contract negotiations, to the revenue cycle department operations, to 24-hour radiology image interpretation services, and to cybersecurity. In return, the larger hospital system gets a patient referral pipeline for lucrative tertiary care procedures and specialized clinical services. Before being acquired by the Ohio State University in 1999, Park Hospital in Columbus was a failing independent urban hospital with a patient demographic that was disproportionately low-income compared to the other hospitals in Central Ohio. It would surely have gone out of business if the Ohio State University Medical Center had not acquired it and renamed it Ohio State East Hospital, where I practiced for 20 years. That acquisition turned out to be a big win for the hospital, the university, and the community.
Reducing the number of Americans on Medicaid doesn’t really save money
Many politicians believe that if we tighten the eligibility requirements for Medicaid, then it will encourage more low-income Americans to either go back to work or find a higher paying job in order to afford to buy commercial health insurance. Although this sounds good on the campaign trail and might even be true for a small minority of Medicaid recipients, the majority of low income people on Medicaid either cannot work due to disability or lack the skills and ability to maintain a full-time high-paying job that provides commercial health insurance.
When you take Medicaid away from these low income Americans, they don’t just stop getting sick. Instead, hospitals and doctors have to provide free medical care every time they show up in the ER because they cannot afford a primary care physician. Hospitals and doctors then have to increase the amount that they charge everyone else in order to stay in business. One way or another, we all pay for healthcare for the poor, with or without Medicaid.
The hospitals most vulnerable to closure are those with the highest percentages of Medicaid patients and the lowest percentages of commercially insured patients. When Medicaid patients are converted to uninsured patients, these hospitals just do not have enough commercially insured patients to balance out for the losses incurred by providing healthcare services to patients who cannot pay for it. Rural hospitals typically have a patient demographic that is lower income and older. This translates to more Medicaid patients and fewer working-age patients with employer-provided commercial health insurance. It is currently estimated that 892 U.S. hospitals are in imminent danger of closing and for many of these hospitals, Medicaid reductions will be the proverbial straw that breaks the camel’s back.
The United States has the most complicated, expensive, and inefficient healthcare system in the world. If you were to design the ideal healthcare system for a new nation, the American healthcare system would be the last one you would consider. The U.S. is the only developed country in the world that does not have universal healthcare for all of its citizens. It is true that we do have universal healthcare for all Americans over age 65 through Medicare but for those younger than 65, Medicaid reductions will result in more uninsured Americans and higher healthcare costs for working Americans. This year, the annual cost of healthcare for the average American is $14,570 – more than any other country and roughly double the cost in most other developed countries. Reducing the number of people on Medicaid will cause some hospitals to close but it will not reduce the overall per-person cost of healthcare in the U.S.
U.S. healthcare policy is a pendulum that every few years swings from expanding government-provided health insurance to reducing government-provided health insurance. The consequence is a pendulum swing from fewer uninsured Americans to more uninsured Americans. We are entering a period of less government-provided health insurance and more uninsured Americans. Inevitably, in a few years, the political winds will shift yet again and favor Medicaid expansion in order to reduce the number of uninsured Americans. But in the meantime, many hospitals will have to close. Take action now to prevent your hospital from being one of them.
I had a hospital-employed physician ask me for a raise because he had an offer from a Florida hospital that would have paid him several thousand dollars more than his current salary with us in Central Ohio. The problem is that an equal salary in Florida buys you considerably less than in Ohio. When determining salaries for your hospital’s doctors and nurses, you have to consider your state’s specific cost of living. And there is a huge variation between different states.
Salary reports, such as the annual AAMC Faculty Salary Report, break down average physician salaries by geographic region in the country. To some degree, this accounts for differences in the cost of living in one region of the country versus another. But even within a single region, there can be significant differences in the cost of living from one state to another. In order to offer competitive salaries, hospitals must be aware of the cost of living in their state compared to other states. And hospitals must use that information to educate physicians and nurses during contract negotiations.
One of the best sources for state-specific cost of living data comes from the Missouri Economic Research and Information Center. They derive a cost of living index for each state by averaging the indices of cities and metropolitan areas that participate in the Council for Community & Economic Research (C2ER) survey. Individual indices of six groups of costs are considered: grocery, housing, utilities, transportation, health, and miscellaneous. From these six, a composite cost of living index is determined with 100 being the U.S. average. States with an index above 100 have a higher than average cost of living and states with an index below 100 have a lower cost of living. As an example, a state with a cost of living index of 125 indicates that the cost of living in that state is 25% higher than the national average. Importantly, this data is derived from cities and metropolitan areas and not rural areas – in general, the cost of living is lower in rural areas than nearby urban areas, primarily due to lower housing costs in rural areas. The C2ER maintains individual metropolitan area cost of living data available for purchase if you want data that is more granular than an entire state. This can be particularly useful if a cardiologist at your hospital in Indianapolis gets a job offer from a hospital in Philadelphia and you need to create a counter offer in order to keep him/her. The cost of living index for the fifty states, Puerto Rico, and the District of Columbia are show in the table below:
With a composite cost of living index of 186.9, the most expensive state is Hawaii due to a very expensive housing index (310.0) as well as high indices for all of the other groups of costs. At the other end of the spectrum is West Virginia with a composite cost of living index of 84.1, due primarily to very low housing cost index (59.9).
So, when the physician asked our hospital to match his salary offer from Florida, I could show him that the cost of living in Florida (index = 102.8) is 8.6% higher than the cost of living in Ohio (index = 94.2). That means that the same salary would buy him better housing, more groceries, more utilities, more healthcare, and more gasoline in Ohio than it would in Florida.
Becker’s Hospital Review recently published an analysis of registered nurse cost of living-adjusted hourly wages by state. They found that the average total annual R.N. salary is $93,390. The hourly cost of living-adjusted wage in most states is $43.65 per hour. But the state with the second highest total annual R.N. salary was Hawaii at $123,720 that paradoxically had the lowest cost of living-adjusted hourly wage at $31.82/hour. This is because Hawaii’s cost of living is so extremely high compared to the rest of the states. By contrast, in West Virginia, the average total annual salary for an R.N. is $80,650 but the cost of living-adjusted hourly wage is $46.10. The implication is that the annual salary in Hawaii is 50% higher than in West Virginia but that salary buys the nurse 50% less stuff than the salary of a nurse in West Virginia.
The reality is that most nurses in Hawaii are willing to accept a much lower cost of living-adjusted hourly wage than in any other state in the nation because of the non-monetary benefits of living in Hawaii (i.e., living in paradise). But when it comes to comparing states with similar non-monetary attractiveness, knowing the cost of living index is essential in salary contract negotiations. For example, Pennsylvania has an index of 95.1 compared to its bordering neighbor Maryland with an index of 115.3. A hospital in Pennsylvania can pay its doctors and nurses lower salaries than a hospital in Maryland but the purchasing power of those salaries will be equal to (or greater than) the purchasing power of the higher salaries in Maryland. Conversely, if a hospital in Maryland sets the salaries for its doctors equal to the salaries at a hospital in Pennsylvania, then the Pennsylvania hospital can recruit doctors from the Maryland hospital by showing them that thae same salary has 20% more purchasing power in Pennsylvania.
Obviously, there is more than just the local cost of living in salary determination. Productivity expectations, the robustness of the electronic medical record, collegiality of the medical staff, local recreational opportunities, the quality of local schools, the crime rate, etc. all affect how much a hospital has to pay a doctor or nurse. But cost of living is an important factor and using that information strategically can help a hospital’s recruitment efforts. This is especially true for hospital-based physicians such as hospitalists, anesthesiologists, radiologists, emergency medicine physicians, and critical care physicians. Unlike outpatient physicians who need to build a patient practice or develop a referral network, hospital-based physicians are very mobile and can more easily re-locate to a different city or state and still have a full schedule of patients on the first day of practice at a new hospital. Know your region’s cost of living index before you negotiate a contract with your hospitalist group or the nursing union.
Last month, the fall 2024 Leapfrog hospital safety grades were released, giving nearly 3,000 U. S. hospitals safety grades of A through F. I was very happy to see that my former hospital, Ohio State East Hospital, received an “A”, but I was surprised to see that another hospital just 2 miles away, that I know also provides great care, received an “D” grade. This is the 23rd year of the Leapfrog reports and it has evolved considerably over those years. Leapfrog’s goal is to answer the question “How safe is my hospital?“. With its first report in 2002, I had a lot of concerns about the validity of the scoring system used by Leapfrog. But has Leapfrog overcome those concerns?
Who rates hospitals?
Hospitals are graded by many different organizations. The big 3 are The Joint Commission, individual state departments of health, and CMS. In addition, there are a myriad of organizations that provide accreditation or certification for individual hospital services, for example, AACVPR certification for cardiac rehabilitation programs and the College of American Pathologists accreditation for hospital clinical labs.
The Joint Commission is a non-governmental organization that accredits U.S. healthcare organizations and programs. Participation is voluntary but many insurance companies use Joint Commission accreditation as a basis for determining in-network hospitals and in negotiating reimbursement rates. The Joint Commission accreditation hinges on unannounced site surveys that occur approximately every 3 years. Although there are alternatives organizations that accredit hospitals, The Joint Commission has the advantage of being approved by Medicare. Consequently, 70% of U.S. hospitals participate with the Joint Commission at a cost of an average of $46,000 per year.
State departments of health license hospitals to operate. These departments generally perform periodic surveys and inspections for hospitals to maintain licensure. However, in most cases, there is not a state department of health grade associated with licensure, only a yes/no designation of whether or not the hospital has a license to operate.
The Centers for Medicare and Medicaid Services (CMS) operates a website that grades hospitals on a one to five star scale based on data derived from Medicare bills as well as hospital self-reported data for metrics such as ER wait times and the percentage of healthcare workers who are up to date on COVID and influenza vaccines. The star rating system was first implemented in 2007. CMS also provides a separate star grade based on satisfaction surveys sent to patients after hospitalization.
The Leapfrog Group
In 1999, the Institute of Medicine issued a report titled “To Err is Human” that claimed that 98,000 Americans died each year due to medical errors occurring in hospitals. The implication was that 1 out of 25 people die from a medical error in a hospital. In response to this report, the Leapfrog Group was started by a group of business leaders in 2001. At the time, the CMS hospital star ratings did not exist. Large companies wanted to be sure that they were getting good value for the healthcare insurance premiums that they were paying to insurance companies and did not want to pay insurance companies to send employees to hospitals where those employees had a high risk of complications that could delay or prevent their return to work. At issue was that insurance companies were primarily motivated to provide the lowest cost of healthcare whereas the employers were additionally motivated by the desire to keep employees healthy enough to be able to stay in the workforce.
The first Leapfrog survey was very simple and looked at 3 things: (1) whether hospitals had computerized physician order entry, (2) whether ICUs were staffed appropriately with intensivists, and (3) whether hospitals had high surgical volumes for certain high-risk procedures. Beginning in 2012, Leapfrog began assigning letter grades based on its annual surveys. In the first years, the Leapfrog Group surveys were heavily criticized as being well-intentioned but inaccurate and misleading. Since that time, the survey has expanded to cover more items and require more documentation in an effort to improve its relevance. The current survey is 330 pages long and covers 22 different measures of patient safety. Each measure requires answering a number of questions. Each question additionally requires hospitals to submit documentation to back up the answers to those questions.
Leapfrog does not survey all hospitals. For example, pediatric hospitals, critical access hospitals, VA hospitals, and specialty hospitals are not included. Of the approximately 3,000 hospitals that Leapfrog invited to submit surveys, 2,200 actually responded this year. In the previous report (spring of 2024), 30% of hospitals received an “A”, 26% received a “B”, 37% received a “C”, 7% received a “D”, and <1% received an “F”.
The problems with the Leapfrog Survey
Completing the survey is onerous. Realistically, it will take one person a couple of weeks working full-time to complete the survey. For example, for the single question of whether the physicians covering the ICU are board certified in critical care, the hospital has to provide the physician call schedule for the ICU for every day for the last 3 months and provide a copy of each physician’s current board certification in critical care. For a large hospital, with multiple different ICUs, this can involve dozens of physicians who have variably obtained critical care board certification from either the American Board of Internal Medicine, Anesthesiology, Pediatrics, or Surgery. Ask any administrative staff member who has been responsible for compiling Leapfrog survey materials and he or she will tell you that it is a confusing, complicated, time-consuming, and all-around unpleasant process.
It penalizes hospitals that do not submit surveys. The Leapfrog Group will give your hospital a letter grade whether or not you respond to a survey. If you do not respond, Leapfrog obtains as much information as possible from public sources, such as the CMS website. Leapfrog states: “If a hospital performs well on certain measures on the Leapfrog Hospital Survey, they have the opportunity to earn more points in their Hospital Safety Grade for those certain measures than they would if they did not report to the Leapfrog Hospital Survey.” Currently, about three-quarters of eligible hospitals submit surveys. For some hospitals, this can feel like extortion – by not filling out the survey, you risk getting a lower publicly reported grade than you would have if you filled out the survey.
It focuses on hospital processes and not on outcomes. The Leapfrog survey centers around workforce staffing, specific hospital policies, use of electronic medical records, and volume of surgical procedures performed. These are variables that in the literature have been shown to be associated with better patient outcomes. However, the Leapfrog survey does not tell you much about actual patient outcomes at specific hospitals.
It is heavily weighted on surgery and ICU care. Since the beginning, Leapfrog has been all about ICU staffing and surgical volume. These are two areas that were of particular concern to the companies that founded Leapfrog because the ICU and the operating room were targeted in the Institute of Medicine’s 1999 report “To Err is Human”. These companies wanted to be sure that their employees who underwent elective surgeries or had catastrophic injuries or accidents resulting in ICU care were able to return to the job after their operation or ICU stay. The Leapfrog grade tells you relatively less about other types of care including non-ICU medical conditions, primary care, preventive medicine, etc.
There is a poor correlation between the Leapfrog grade and other rating systems. A 2017 study found that there was there was only a relatively weak association between the Leapfrog safety grade and compulsory Medicare outcomes and penalties. Since 2012, twelve hospitals have received “A” grades each year but only half of these received a 5/5 star rating from CMS. This is primarily because Leapfrog and CMS use different metrics and weight metrics differently when assigning a hospital its rating.
Leapfrog makes its money from the ratings. According to the most recent Leapfrog Annual Report, it had revenues of $6,974,962. Of this amount, 78% ($5,434,948) came from the sale of reports and licensing fees. Hospitals that want to use their annual Leapfrog grade in advertising must purchase a license agreement from the Leapfrog Group. For a 500-bed hospital, this costs $29,900.
So, should you care about your hospital’s Leapfrog grade?
At its inception, the Leapfrog rating provided ground-breaking data about individual hospital safety practices. Since that time, other organizations have created competing rating systems. There is still value in the Leapfrog Safety Grade, however. Other organizations, such as The Joint Commission, only give a yes/no accreditation. This is like getting a pass/fail grade for a class rather than a letter grade and it is impossible to know which is the best hospital among all of the hospitals accredited by The Joint Commission. In this regard, the Leapfrog letter grade is akin to the CMS star rating, allowing consumers to compare one hospital to another when making a choice of which hospital to utilize. However, the Leapfrog Safety Grade and the CMS star rating measure different things, so they should be viewed as complimentary rather than competitors.
A problem with all rating systems that give hospitals one single grade is that each hospital has different outcomes for different medical conditions. A single overall hospital grade can result in over-generalization of the care of different conditions. For example, assume two hospitals have identical Leapfrog grades but one hospital may have great orthopedic surgery care and the other has terrible orthopedic care but a great obstetric unit. A pregnant patient would be well-advised to choose a hospital based on its obstetric care rather than its hip replacement surgery outcomes.
In the ideal world…
I spent far too much of my life compiling various accreditation and certification surveys, preparing for site surveys by The Joint Commission, and generating quality reports for an endless number of organizations and agencies that rate, review, license, accredit, certify, or otherwise judge hospital care. The Leapfrog Safety Grade survey has grown from something that I could do myself in just a matter of minutes to a behemoth that now takes a whole department of administrative staff days or weeks to complete.
Hospitals are straining at the time and expense to complete all of the various surveys for organizations that rate them. Given the similarities between the CMS star rating and the Leapfrog safety grade, it would be ideal to combine the two. Those who advocate for less government might argue to outsource a single rating system to the private sector (i.e., Leapfrog). However, a considerable component of the Leapfrog grade is based on Medicare data derived from protected personal information on individual patients – I personally do not want my entire medical history, social security number, address, etc. being exported from Medicare to a private company. It would be preferable for CMS to adopt the good things about Leapfrog and incorporate them into the CMS star rating. Having two hospital rating systems with so much overlap creates too much hospital administrative costs that then get passed on to consumers. It’s time to improve hospital administrative efficiency.
America’s rural hospitals are in peril and are closing at an alarming rate. The result is a widening in the divide between rural and urban health care. It results in patients having to travel farther for hospital services and forces doctors who perform those services to relocate to communities that still have a hospital. For physicians just completing their training and entering the medical workforce, joining a practice at a rural hospital can be a risky career move.
What is a rural hospital?
Rural hospitals tend to be smaller than urban hospitals. 48% of rural hospitals have fewer than 25 beds and an additional 18% have only 26-50 beds. Most rural hospitals are non-profit (56%) and 34% are owned by state or local governments. Critical access hospitals are a category of rural hospitals that have fewer than 25 beds and are at least 35 miles from the next nearest hospital. One way of improving the viability of a rural hospital is to affiliate with a larger health system. Currently, 56% of rural hospitals are affiliated and this number is growing every year.
On average, rural residents are older, poorer, and have more chronic conditions than urban residents. In addition, rural populations have a higher prevalence of cigarette smoking, obesity, and teen pregnancies. Rural hospitals tend to serve a population with a higher percentage of Medicare and Medicaid than urban hospitals. This payer mix gives rural hospitals an inherent disadvantage compared to their urban peers since hospitals lose money on Medicaid patients and at best break-even on Medicare patients. In states that do not participate in Medicaid expansion, rural hospitals generally have a much higher percentage of uninsured patients, leading to even greater financial stress.
Rural areas have fewer physicians per population than urban areas. For example, rural communities have 46 primary care physicians per 100,000 population versus urban communities that have 62 primary care physicians per 100,000 population. For medical specialty physicians, the difference is even more striking – 5 physicians per 100,000 in rural areas versus 30 physicians per 100,000 population in urban areas. The result of this is that rural primary care physicians often have to work outside of their comfort zone and treat complex medical conditions that would normally be managed by specialists in urban areas.
Together, these factors can make recruitment of physicians by rural hospitals difficult. The high percentage of Medicaid and uninsured patients can result in lower physician income. The lower density of physicians results in more frequent night call and difficulties arranging coverage for vacations and medical education conferences. The relative paucity of medical and surgical specialists results in primary care physicians frequently having to manage medical conditions that they are not comfortable with or trained to manage.
Rural hospitals are closing
The Sheps Center at the University of North Carolina monitors the health of our nation’s rural hospital system. Since 2005, there have been 192 rural hospitals in the U.S. that have either closed completely (105) or converted to only providing limited outpatient services (87). States with the most hospital closures in the past 20 years include Texas (25), Tennessee (15), North Carolina (12), Kansas (10), Missouri (10), California (9), Florida (8), Oklahoma (8), Alabama (7), and Georgia (7).
The Center for Healthcare Quality and Payment Reform reports that 700 more rural hospitals are in danger of closing due to financial pressures. This represents 30% of all U.S. rural hospitals. Leading the nation is Texas with 80 hospitals at closure risk, representing 50% of the rural hospitals in Texas. Of the rural hospitals at risk, half are at immediate risk of closure due to the severity of their financial problems.
To address the large number of rural hospitals that are closing, CMS began providing grants to vulnerable hospitals to shut down their inpatient units while preserving their emergency departments. In the past year and a half, 29 rural hospitals have converted to rural emergency hospital status. 6 of these are located in Mississippi, 5 in Texas, and 4 in Arkansas. This preserves emergency room care to rural areas but patients requiring inpatient admission must be transferred to a full-service hospital.
There are several reasons why rural hospitals are at higher risk of closure than urban hospitals.
Lower reimbursement from commercial insurance. This is the most important obstacle that rural hospitals face. Each hospital gets paid a standard amount from Medicare but independently negotiates rates from commercial insurance companies. A large urban hospital can afford to dedicate several staff members to contract negotiation whereas small rural hospitals generally cannot afford to maintain a payer contract department to research and effectively negotiate with the dozens of different insurance companies. Furthermore, large hospitals can leverage specialized services such as trauma center designation, cancer care, critical care services, and surgical specialties in order to get higher payment rates than small rural hospitals offering only general medical and surgical care. The net result of these factors is that rural hospitals get paid less than urban hospitals to manage similar patients.
Medicare Advantage Plans. The mantra of Medicare Advantage Plans (Medicare Part C) is “Just say no“. Medicare Advantage is a privatized version of Medicare where commercial insurance companies administrate Medicare benefits. One of the main ways that these companies are able to make a profit margin is by denying services and procedures. These can be prospective denials, for example, when a doctor asks the insurance company permission to obtain an outpatient CT scan. Or, they can be retrospective denials, for example, when a patient is admitted for a COPD exacerbation and the insurance company denies payment for the admission after the fact. Large urban hospitals (such as the Ohio State University Medical Center where I practiced) have entire teams of staff dedicated to appealing denials but small rural hospitals often lack the staff to do these appeals. As a result, small rural hospitals often do not get paid for medically necessary services that they perform.
Higher costs to deliver care. When it comes to delivering health care, there is an economy of scale. For example, a large urban hospital can run its CT machine constantly all day long whereas a small rural hospital may only use its CT machine for 2 or 3 patients per day. Considering the cost of equipment and personnel to run the equipment, this increases overhead cost.
Inability to bill for the highest paying DRGs. Hospitals are paid by Medicare and commercial insurance companies based on a patient’s diagnosis (DRG), not the actual hospital costs incurred during a hospital stay. The DRGs that pay the most to hospitals are typically specialized inpatient surgeries such as spine surgeries, organ transplants, and joint replacements. These are surgical specialties that most rural hospitals cannot provide since there are generally insufficient numbers of patients in their geographic area to fill a specialty surgeon’s clinical practice. As a consequence, rural hospitals are left with the lowest paying DRGs and end up transferring the patients with the highest paying DRGs to secondary and tertiary care hospitals in urban areas.
Rural hospitals are losing maternity care
Fewer and fewer rural hospitals have labor and delivery units. The result is that pregnant women in rural areas have to travel much further for their pre-natal visits and for the actual delivery of their babies. At urban hospitals, more than 70% of women live within 20 minutes of the hospital that they will deliver at. However at rural hospitals, more than 95% of pregnant women have to drive more than 20 minutes to reach their delivery hospital and 40% have to drive more than 40 minutes to reach the hospital.
Leading the nation in rural hospitals that no longer provide maternity care is Florida where 91% of rural hospitals do not provide maternity care, followed by North Dakota (79%) and Louisiana (75%). As with hospital closures, there are several reasons why rural hospitals are abandoning maternity care:
Lower reimbursement from commercial insurance. Once again, rural hospitals do not have the resources or leverage to negotiate as high of rates as larger urban hospitals. Furthermore, the higher percentage of patients with Medicaid in rural areas translates to poor overall reimbursement for maternity services.
Higher costs to deliver care. Maternity units also benefit by an economy of scale. A rural hospital that only does 100 deliveries per year still has to employ several full-time obstetric nurses and has to provide call pay for an anesthesiologist and pediatrician in addition to the obstetrician, family physician, or midwife who will perform the actual delivery. When the labor and delivery unit is empty, these staff still must be paid.
The need for a critical mass of obstetricians at any given hospital. Babies come at all hours of the day and night and someone has to be on-call to deliver them. In urban areas, obstetricians are usually member of large group practices and thus only have to take call one night a week or even less often. Small rural hospitals usually cannot support having multiple obstetricians on staff and consequently, rural obstetricians are on-call far more frequently than urban obstetricians. Even if a midwife or family physician takes call for the normal vaginal deliveries, there must be an obstetrician on back- up call to perform emergency C-sections when necessary. For these reasons, rural hospital practice is unattractive to many obstetricians.
Malpractice insurance. Obstetricians pay some of the highest premiums for medical malpractice insurance, especially in states such as Florida where premiums for obstetricians can be more than $200,000 per year. Whereas the statute of limitations for malpractice events is 1 to 5 years from the discovery of injury, for obstetricians, injury may not become apparent until later in the child’s life, resulting in malpractice suits that can be filed many years after delivery. Family physicians in rural areas often deliver babies but when they do, their malpractice insurance premiums can skyrocket, making it cost-prohibitive to obtain malpractice insurance just to perform 5 or 10 deliveries per year.
The U.S. has one of the highest infant and maternal mortality rates of all developed countries. The crisis in maternity care at our country’s rural hospitals contributes to these high rates. The CDC reports that the infant mortality rate is higher in rural counties (6.55 infant deaths per 1,000 live births) than urban counties (5.44 infant deaths per 1,000 live births). A recent study found that in 2019, maternal mortality is nearly twice as high in rural areas (82 deaths per 100,000 live births) than in urban areas (42 deaths per 100,000 live births).
What can a rural physician do?
The thing is that despite all of the doom and gloom about rural hospitals, we really, really need rural physicians. There are already significant health disparities between rural populations and urban populations. The elimination of maternity care at rural hospitals and the closures of rural hospitals will only exacerbate these disparities. Our nation’s rural physicians, and in particular rural primary care physicians, are the last defense against further worsening of health disparities experienced by rural populations. For physicians considering taking a job with a rural hospital, there are certain considerations that do not necessarily apply for jobs at urban hospitals.
Ask to see the hospital’s financial statements. Given the large number of rural hospitals that are closing because of financial reasons, you do not want to take a job at a hospital only to have that hospital announce it is closing 6 months later because it cannot meet payroll. If you don’t know how to analyze a financial statement, hire an accountant to decipher it for you.
Who manages prior authorizations and denials? If the hospital expects that you (the physician) will be responsible for doing all of your own prior authorizations and will have to appeal denials, then this is going to add considerably to your paperwork burden and uncompensated time.
Have a full understanding of what services and procedures you will be expected to do. Are you going to have to intubate patients? place chest tubes? place central venous catheters? If so, get training before you start the job.
Know what the back-up plans are. If there is a snowstorm and the medical evacuation helicopter can’t fly, what is the plan for managing a patient with a myocardial infarction? a stroke? a woman in labor with a breech baby? Telemedicine contracts with tertiary care hospitals can help provide specialized care when patient transportation services are not possible.
Get the call schedule details. If you are a general internist and the hospital tells you that you’ll be on call every 6th night, that may sound pretty good but if the other people sharing call with you are 3 nurse practitioners and 2 family physicians and you are the only one who knows how to do a thoracentesis, do a lumbar puncture, or manage a ventilator, then you are really on call every night. If you are the only pediatrician in the county, who is going to cover your patients when you are on vacation?
Does the state participate in Medicaid expansion? It is bad enough that rural populations have a higher percentage of Medicaid patients than urban populations but if you are being recruited by a rural hospital in a state that did not agree to Medicaid expansion, then you will be facing a potentially financially unsustainable uninsured patient population. States that do not participate in Medicaid expansion include Wisconsin, Wyoming, Kansas, Texas, Tennessee, Mississippi, Alabama, Georgia, South Carolina, and Florida. Not surprisingly, these are the states that have some of the largest numbers of rural hospital closures.
The crisis in rural hospitals is a symptom
Quick, what does the United States have in common with South Africa, Iran, Egypt, Nigeria, Pakistan, Afghanistan, Yemen, and Syria? The answer is that the U.S. is one of a small number of countries that does not offer universal health care. In fact, the U.S. is the largest country to not have universal health care and the only developed country to lack it. For sure, there are problems with universal health care but our system of dozens of different private health insurance companies that each independently negotiate rates with every hospital and every physician group in the country results in health care disparities and enormous administrative overhead costs.
These disparities and overhead expenses are glaringly obvious when it comes to our rural hospitals. These hospitals and the physicians who practice at them are facing an uphill battle that many of them will ultimately lose. It will take new and innovative health care funding systems to stop the bleeding of rural hospitals.
Physicians and hospitals get paid from many different sources including commercial insurance, Medicare, Medicaid, self-pay patients, etc. The percentage of payments from each of these sources is called the payer mix and can vary widely between different physicians and different hospitals. Payer mix is the single most important factor in determining income for physicians and financial well-being for hospitals. Knowing your payer mix and understanding the factors that affect payer mix is essential for anyone managing healthcare operations. Note: “payer” mix and “payor” mix are both correct spellings and can be used interchangeably; in this post, “payer” will be used.
How is payer mix defined?
Broadly speaking, the payer mix is the percentage of various payers in a hospital or physician practice. In most practices, the main payers are Medicare, Medicaid, a variety of commercial insurance companies, and self-pay patients. Depending on the physician practice or the hospital, less common payers can include worker’s compensation, CHIP, the Department of Veterans Affairs, the Department of Defense, the Department of Indian Affairs, vocational rehabilitation, research grants, disability-granting entities, etc.
There are several ways that these percentages can be expressed and it is critical to know the method being used when analyzing a practice’s payer mix. Each method has advantages and disadvantages so it is best to use more than one when analyzing the business operations of a physician practice or a hospital.
Payer mix based on the population of patients in the practice. In this method, the total number of patients in the practice is determined and the payer mix is expressed as the percentage of patients in the practice with each type of payer. If there are 1,000 patients in the practice and 450 of them have commercial insurance, 300 have Medicare, 150 have Medicaid, and 100 are uninsured, then the payer mix would be 45% commercial, 30% Medicare, 15% Medicaid, and 10% self-pay. This is a very simple way to express payer mix but it suffers from a serious flaw. Because not all groups of patients receive the same types of medical services, it does not tell you much about income or physician effort. For example, because Medicare patients are by definition either disabled or over age 65, they have more physician office visits per year, more hospitalizations, and undergo more surgeries than younger patients covered by commercial insurance. Similarly, uninsured patents are less likely to undergo expensive elective surgeries such as joint replacement or spine surgery.
Payer mix based on receipts. In this method, the total annual income for the practice is determined and the payer mix is expressed as the percentage that each type of payer contributes to the practice’s income. For example, if the same practice’s total annual receipts from billing for clinical services is $100,000 with $50,000 from commercial insurance, $30,00 from Medicare, $19,000 from Medicaid, and $1,000 from self-pay patients then the payer mix would be 50% commercial, 30% Medicare, 19% Medicaid, and 1% self-pay. The advantage of this method is that it tells you where your money is actually coming from. However, it does not give accurate information about the time, effort, and expense it takes to care for patients since some payers pay considerably less than others and self pay patients pay little or nothing at all for healthcare. It also does not help you when trying to determine write-offs for charity care.
Payer mix based on charges. In this method, the total amount of charges is used in the denominator and the percentage of those charges allocated to each type of payer is calculated. The major criticism of this method is the charges are generally based on the practice’s listed price for every service and procedure and no one actually pays the list price. Every hospital and physician sets their list prices for some amount higher than the amount that their best-paying payer will pay them to perform that service or procedure. That way, the practice never leaves money on the table. No matter what the listed price is, Medicare will only pay the physician the standard Medicare physician fee schedule – the same goes for Medicaid. Similarly for hospitals, Medicare will only pay the hospital the Medicare standard reimbursement for the DRG diagnosis of the patient, regardless of the hospital’s listed price per diagnosis or per hospital day. The majority of self-pay patients are too poor to afford health insurance and those bills are either written off as charity care or reduced to some nominal amount based on the patient’s income.
Payer mix based on patient days. This method applies to hospitals and not to physician practices. The hospital first determines the daily census (usually defined as the number of patients in the hospital at midnight) and then looks at the payer for each patient in the hospital that day. This is repeated for every day of the year and the payer mix is expressed as the number of total patient-days for each payer over the course of the year. This method will generally show a higher percentage of Medicare and a lower percentage of Medicaid and commercial insurance in the payer mix than other methods because Medicare patients are older with more complex medical conditions that result in longer hospital stays than younger patients. As a result, nationally, 18.9% of hospital revenue comes from Medicare but 35.6% of patient days are attributed to Medicare. On the other hand, 13.5% of hospital revenue comes from Medicaid but Medicaid only accounts for 9.4% of hospital days due to Medicaid patients tending to be younger with fewer chronic medical conditions.
Payer mix based on RVUs. For physicians, this method can provide important information. It tells you what the payer mix is for the actual time and effort that the physician is practicing medicine. For example, if a physician generates 4,000 wRVU in a given year and 1,600 were billed to commercial insurance, 1,200 billed to Medicare, 800 billed to Medicaid, and 400 billed to self-pay patients, then the payer mix would be 40% commercial, 30% Medicare, 20% Medicaid, and 10% self-pay. On the surface, it might seem using RVUs would give similar results as using charges. But charges do not necessarily correlate with actual physician effort. For example, a multi-specialty physician group might set their charge for an hour of critical care at 250% of Medicare reimbursement and set their charge for a new outpatient primary care visit at 150% of what Medicare would reimburse. For this reason, payer mix based on RVUs provides different information than payer mix based on charges for physician services.
What is the average payer mix?
To understand the financial health of a practice, you must be able to benchmark its payer mix to some regional or national standard to know whether the practice has a healthy payer mix. If the payer mix is better than the benchmark, then the practice is likely to be financially sustainable. On the other hand, if the payer mix is substantially worse than the benchmark, then the practice is likely to be unsustainable without other sources of financial support. Once again, there are several methods to determining the benchmark.
Payer mix based on insurance coverage of large populations.
In this method, the payer sources for a large population of people is determined, for example, the payer sources for all Americans. This can be a reasonable benchmark for a practice that cares for a broad demographic of patients, for example, a family medicine practice that cares for all ages of patients. However, this benchmark is irrelevant to a pediatric practice that would be expected to have no patients over age 65 and thus no Medicare patients. Similarly, a geriatric medicine practice would be expected to have few or no patients under age 65 and thus would have no patients with CHIP coverage and few (if any) uninsured patients or patients with commercial insurance as primary coverage. One of the best estimates of payer mix for the entire United States comes from table HIC-4_ACS on the U.S. Census website and is summarized in the graph below.
Note that because some Americans have health insurance from more than one source (for example, both Medicare and Medicaid), the total number of all of the percentages exceeds 100%. Overall, 67% of Americans are covered by commercial health insurance, either from an employer, by direct purchase, or through TRICARE. 37% of Americans are covered by publicly funded health insurance, either Medicaid, Medicare, or Veterans Affairs. 8% of Americans were uninsured in 2022. There are notable geographic differences within the U.S. that can arise due to differences in the percentage of retired individuals in a state, whether the state participated in Medicaid expansion, the poverty level of the state, and state-specific universal health plans. For example, the percent of uninsured state residents varies from a low of 2.4% in Massachusetts to a high of 16.6% in Texas. Table HIC-4_ACS from the U.S. Census also reports healthcare coverage for each state in the U.S. and is summarized later in this post.
The problem with using population at-large as a benchmark is that not all groups of people utilize healthcare equally. For example, patients with Medicare coverage are by definition older and consequently have more medical problems, see doctors more often, and are hospitalized more than younger patients who are insured by commercial insurance. On the other hand, uninsured patients often avoid routine outpatient healthcare because many physician practices require advance payment by uninsured patients before they are seen in the practice and most uninsured persons cannot afford to pay out-of-pocket. Commercially insured persons are predominately working adults younger than 65 and their children; these individuals are generally the healthiest Americans and utilize healthcare services much less than Americans on Medicare.
Payer mix based on healthcare expenditures of large populations.
In this method, the total U.S. healthcare expenditures in a year are calculated and then broken down by who paid for these expenditures. This gives a better assessment of the payer mix of Americans who actually utilize healthcare and also more accurately assesses those Americans who disproportionately utilize healthcare more frequently (such as those over age 65). CMS reports annual U.S. healthcare expenditures on its website. In 2022, Americans spent a total of $4.46 trillion on healthcare. Of this, $1.35 trillion was spent on hospital care and $0.88 trillion ($880 billion) was spent on physician services. The remaining $2.23 trillion was spent on a variety of expenditures including prescription drugs, nursing homes, dental care, non-physician professional services, home health care, medical equipment, etc. If we drill down on the hospital and physician services expenditures, we see that private health insurance accounts for the largest percentage of U.S. healthcare expenditures, followed by Medicare and Medicaid (graph below). However, when all federal and state government programs are considered together, 47% of physician services and 55% of hospital services are paid for by government sources.
Reimbursement varies by payer
If everyone in the U.S. paid the same amount for a given medical service, then there would be no need to look at a practice’s payer mix. But the reality is hospitals and physicians charge different groups of patients different amounts for the same service or procedure. If you have ever looked at a medical bill, you will generally see something like “Hospital Charges“. Consider this to be the sticker price. Below that will be an amount for something like “Insurance Contractual“. This is what the insurance company has negotiated with the hospital or physician to be paid for the service or procedure. Next will be an amount for “Current Balance” or something similarly phrased. This is your co-pay for the service or procedure, that is, the amount you pay out-of-pocket and will determined by the terms of your health insurance policy. Last, there will be an amount for “Adjustments” or something similar. This is the difference between the hospital charges (sticker price) and the amount that you and the insurance company actually pay.
No one actually pays the sticker price.
In the past 10 years, there has been a consumer movement to require hospitals to publicly report their charges for various procedures and services. The problem with this is that no one actually pays these hospital charges. If a patient has Medicare, Medicaid, or some other government source, it doesn’t matter what the hospital’s sticker price is – Medicare will only pay a standardized amount and the patient will only be held to their usual Medicare co-pay. In other words, for a Medicare or Medicaid patient, the sticker price is totally meaningless.
Commercial insurance works similarly. Every insurance company negotiates payment rates with every hospital and every physician in the country. These negotiated rates are NOT publicly available and are considered trade secrets by the insurance companies. The reason for this is simple – insurance companies pay different hospitals different amounts to do the same thing depending on how well a hospital can negotiate for higher rates. The same goes for physicians – one insurance company will pay different doctors different amounts to perform the same service or procedure. In a future post, I will delve into the factors that affect commercial health insurance reimbursement for hospital and physician services. But to simplify, the more an insurance company wants a particular hospital or physician to be included in the insurance company’s in-network list, the more that insurance company will be willing to pay that particular hospital or physician. In the case of commercial insurance, the “Insurance Contractual” amount on a patient’s medical bill is the amount that the insurance company has contracted with the hospital or physician for that particular service or procedure and the “Adjustments” amount will be the sticker price minus the contractual amount.
Every hospital and every physician negotiates in secret with every insurance company individually. As a physician, I don’t want Aetna to know how much I get paid to do a bronchoscopy by Medical Mutual. Otherwise, when I negotiate rates with Aetna, they will demand the same or a lower rate as Medical Mutual. It is sort of like not showing the other guy your cards when you are playing poker. Hospitals and physicians cannot negotiate rates with insurance companies that are higher than their sticker prices. For that reason, hospitals and physicians always set their charges (sticker prices) higher than the amount that their best-paying commercial insurance company will pay. If a patient gets medical care from an out-of-network doctor or hospital, their heath insurance will cover less of the charges than for an in-network doctor or hospital. This can result in the patient paying a much larger co-pay or in some situations, be responsible for the entire charge.
The only group of patients that are actually charged the sticker price are uninsured patients. In rare cases, a wealthy patient will be uninsured and will have to actually pay the sticker price (for example, a Saudi billionaire coming to the U.S. for heart surgery). But far, far more commonly, uninsured patients are poor and do not have the financial resources to pay their medical bills. The majority of the nation’s hospitals and physicians will make allowances for this with substantially reduced charges if patients can provide documentation of having a low income. The bottom line is that practically no one pays the sticker price.
From a payer mix standpoint, hospitals and physicians strive to keep the percentage of self-pay patients as low as possible. Physicians consider a self-pay patient to equate to a no-pay patient. Strategies to keep the percentage of self-pay patients in the payer mix as low as possible include not accepting self-pay patients into outpatient physician practices, encouraging self-pay patients with moderate incomes to obtain direct purchase commercial insurance through the the Insurance Marketplace at the Healthcare.gov website, and assisting low-income patients to sign up for Medicaid coverage.
Medicaid rates.
Medicaid reimbursement as a percent of Medicare reimbursement for all medical services for all states
Medicaid is government health insurance for low-income Americans. In most states, Medicaid pays doctors less than Medicare for any given service or procedure. Because it is funded partly by the federal government and partly by individual state governments, the amount that Medicaid pays to hospitals and doctors varies from state to state. Overall, the U.S. average for Medicaid reimbursement for all medical services is 72% of what Medicare pays. However, this varies by specialty – Medicaid reimbursement for primary care services is 67% of Medicare reimbursement whereas Medicaid reimbursement for obstetric care is 80% of Medicare reimbursement. The average Medicaid reimbursement for all medical services compared to Medicare reimbursement for each state is listed in the table to the right (click on the table to enlarge).
Because Medicaid reimbursement is so low, many physicians do not accept any patient with Medicaid in their practice and other physicians limit the total number of Medicaid patients. Currently, about 1/3 of U.S. physicians do not accept Medicaid patients. From a payer mix standpoint, a lower percentage of Medicaid patients is better from a financial standpoint in most states.
Commercial insurance rates.
It turns out to be difficult to get information about commercial health insurance reimbursement since both insurance companies and hospitals consider their negotiated rates to be trade secrets. However, there have been a few published studies in the literature that shed light. In general, hospitals get paid more by commercial insurance companies than by Medicare. Indeed, most hospitals lose money on Medicare and Medicaid patients and then make up those losses by charging commercial insurance companies higher rates. This can be seen in the following graph from the Congressional Budget Office:
In 2018, Medicare reimbursement only covered 86.6% of the cost for hospitals to provide services whereas commercial insurance reimbursement covered 144.8% of hospitals’ costs to provide the same services. According to the Milliman consulting firm, currently, on average, commercial insurance pays about 148% of what Medicare pays for professional services. Therefore, the larger the percentage of commercially insured patients in a hospital’s payer mix, the better off that hospital will be financially.
Physicians are similarly dependent on higher reimbursement from commercial insurance to make up for losses from self-pay patients. In a previous post, I outlined how Medicare reimbursement to physicians has not kept up with inflation and in fact, when adjusted for annual inflation, physicians are currently being paid only 1/3 as much per RVU as they were in 1992. For this reason, most physicians cannot sustain a clinical practice from Medicare patients alone. Since Medicaid pays physicians even less than Medicare, high commercial insurance rates are necessary for a physician to stay in business. Like hospitals, the larger the percentage of commercially insured patients in the physician’s payer mix, the better off that physician’s practice will be financially. However, because these commercial rates are negotiated individually with each physician group, smaller physician groups with less bargaining power often end up with commercial insurance rates that are similar or even less than Medicare rates.
Payer mix varies by hospital size
In general, the larger a hospital, the higher the percentage of commercial insurance and Medicaid is in the payer mix. The graph below shows payer mix in small versus large hospitals based on the 2023 Medicare Cost Report. Note that in this report, commercial insurance is combined with self-pay patients. In this graph, payer mix is expressed as hospital patient-days.
Hospital size also affects the payer mix for physician practices. Physicians who practice in a smaller hospital will be expected to have a payer mix that mirrors the small hospital payer mix and physicians who practice in larger hospitals will have a payer mix similar to the large hospital payer mix.
Payer mix varies by type of hospital
Different types of hospitals care for different populations of patients and these populations can vary by age, income, and the degree of chronic medical conditions. The graph below shows payer mix expressed as hospital patient-days.
Once again, the type of hospital a physician practices in affects that physician’s own payer mix. Consequently, physicians practicing at a psychiatric hospital tend to have a relatively high percentage of commercially-insured patients and a low percentage of Medicare patients due to a younger age of hospitalized psychiatric patients (averaging 42 years of age). Physicians practicing in a critical access hospital will have a high percentage of Medicare patients and lower percentage of commercially-insured patients in their payer mix.
In the graph above, pediatric hospitals are not listed separately but would be expected to have a very low percentage of Medicare in the payer mix and a higher percentage of Medicaid, CHIP, and commercially-insured patients. Pediatric hospitals (and pediatricians) should have a very low percentage of self-pay patients since most families that earn too much to qualify for Medicaid but not enough to afford commercial insurance will qualify for CHIP to provide healthcare for their children.
Payer mix varies by geography
Click on table to enlarge and open in a separate window
Every state has a different payer mix determined by the age of the state’s population, the presence of military installations, the poverty level, employment opportunities, and whether or not the state participates in Medicaid expansion. Because these population subgroups have different healthcare coverage, the overall population payer mix of the state will be affected. Consequently, a state with a high percentage of retirees over age 65 will have a high percentage of Medicare patients whereas a state that people tend to leave after retiring will have a lower percentage of Medicare patients. For example, 23% of Florida residents are on Medicare but only 12% of Vermont residents are on Medicare. Similarly, states with a lot of military bases will have a high percentage of the population covered by TRICARE. For example, 8% of Hawaii’s residents are covered by TRICARE due to its numerous military installations whereas only 1% of Michigan’s residents are covered by TRICARE. The table to the right shows population health coverage data from CMS for 2022 (note that some persons have coverage from more than one payer source so the percentages add up to >100%).
The ideal payer mix
We have now seen that different methods for expressing payer mix provides different types of information. We have also seen that commercial insurance usually pays better than Medicare, Medicare pays better than Medicaid, and Medicaid pays better than self-pay. The ideal payer mix would be 100% commercial insurance. However this is not achievable for a variety of reasons. Non-profit hospitals and non-profit physician practices are required to provide some amount of charity care to maintain their tax-exempt status and thus must have some percentage of self-pay and/or Medicaid patients (for-profit hospitals and physician practices do not have this requirement and can refuse self-pay and Medicaid patients). Only a very few hospitals in the U.S. do not accept Medicare and the EMTALA law requires hospitals participating in Medicare to provide emergency care to any patient, regardless of payer source. Furthermore, most physicians and hospitals have a sense of obligation to the communities that they serve and would be uncomfortable limiting their care to only commercially insured patients.
So, for the hospital or physician practice that is attempting to balance the need to serve the entire community with the financial pressures to maintain a large number of commercially insured patients, there are ways to optimize payer mix but must first determine what that optimal payer mix should realistically be.
First, look at how the population in your area is covered for healthcare. The table above showing population coverage by state is a good starting point.
Next, adjust that population coverage based on the type of patients you care for. If you do not provide care for veterans or military personnel, then you can eliminate percentages of VA and TRICARE from your desired payer mix.
Next, look at the age range of the type of patients you care for and adjust payer percentages accordingly. For example, a geriatric medicine practice should have nearly all patients who are on Medicare with some also having commercial insurance. There should be no self-pay patients in a geriatric practice except for low-income non-U.S. citizens who are not eligible for Medicare.
Next, adjust each payer group based on the size and type of hospital you practice in using the graphs shown above. Smaller hospitals and critical access should have a higher percentage of Medicare patients than larger hospitals. Larger hospitals and psychiatric hospitals should have a higher percentage of commercially-insured patients than smaller hospitals.
The result will give you rough idea of what the average hospital or physician practice’s payer mix should look like based on the state’s patient population.
You can then compare your actual payer mix to this average payer mix to determine how your payer mix compares to your peers. If your payer mix is worse than the average for your peers, then you need to take steps to improve your payer mix.
Improving your payer mix
It is hard to change your payer mix once you have an established practice. Hospitals are generally tied to the demographic characteristics in their local community. It is difficult for physicians to just stop providing care for patients already in their practice. However, there are some tactics that can improve payer mix in certain situations.
If the percentage of self-pay patients in your practice or at your hospital is too high, devote administrative resources to assist eligible low-income patients to enroll in Medicaid and assist higher-income patients to enroll in the Insurance Marketplace at healthcare.gov during the annual open enrollment period from November 1 through January 15. When Ohio began participating in Medicaid expansion, by using this tactic, our hospital self-pay percentage fell from 13.5% to 3%.
For self-pay patients who do not qualify for Medicaid or direct-purchase commercial insurance, set up an income-based reduced payment plan and require advance payment for non-emergency services.
If these measures are unsuccessful, determine whether it is possible to limit new self-pay and Medicaid patients in the physician practice.
An option for some physician practices with large numbers of Medicaid patients is to apply for supplemental payments through the Medicaid Upper Payment Limit Program. The UPL programs are state-specific and allow certain physicians (often state-employed physicians) to be paid commercial insurance rates for seeing Medicaid patients. I was one of several physicians who went to our statehouse 15 years ago and lobbied our state legislature to allow physicians employed by the Ohio State University to be eligible for UPL payments. We were successful and our payer mix improved dramatically overnight.
If the percentage of commercially-insured patients is low, expand the type of medical services offered by the hospital or physician group that attracts patients younger than age 65. These can include breast cancer screening programs, colon cancer screening programs, psychiatric services, bariatric & weight loss programs, and transplant programs.
Offering free wellness programs directed toward members of the community who are younger than 65 can attract commercially-insured patients into the practice.
It is essential that there is adequate access for new primary care patients since these are often young adults new to the area who once captured into the practice, can be a source of commercial insurance for decades in the future.
Advertising that is directed to consumers under age 65 can result in new commercially-insured patients. Liaising with employers and trade unions can also help to recruit more commercially-insured patients.
Because educated, working adults are more savvy with information technology than uninsured patients, enhancing the practice’s IT experience including a robust patient portal within the electronic medical record, ability to schedule on-line, and a digital payment system can draw commercially-insured patients.
Negotiate favorable contracts with commercial insurance companies. In a future post, I will outline this in more detail but suffice it to say that every contract needs to be approached as a bargaining session and the key to being in a more favorable bargaining position is to know your hospital’s or practice’s strengths and capitalize on them. Contract negotiation is a skill and in most practices, only a few individuals possess sufficient skill and experience to negotiate successfully. Try not to settle for the insurance company’s “standard fee schedule” which is often lower than Medicare’s physician fee schedule.
It takes money to make money
Monitoring, analyzing, and improving payer mix requires a lot of resources including administrative staff time, advertising, IT upgrades, and contract negotiation. And those resources cost a lot of money. Larger physician practices and hospitals are better able to invest in payer mix management and the effect on reimbursement can make the difference between a thriving practice and a struggling practice.
Innovations in technology have given us better and more powerful medical equipment but have also increased the cost of those devices. A reader recently asked when is it better to purchase medical equipment outright as opposed to pay-per-use financing? As always, the answer is… it depends.
When purchasing a high-cost piece of equipment outright, the hospital (or medical practice) either pays for the entire cost upfront or pays for it in installments. It is like buying a new car – you can either pay cash at the time of purchase or you can finance it over a period of a few years. A second method of acquiring that same piece of high-cost medical equipment is by a pay-per-use contract. In this acquisition model, the manufacturer lends the hospital the equipment for free and instead charges the hospital each time that equipment is used. There are situations when outright purchase is better and there are other situations when pay-per-use is better. For this post, I’ll use the example of a surgical robot but the principles apply to any high-cost piece of medical equipment. The total cost of a surgical robot system varies depending on model, price negotiation, and types of robotic arms used. But we’ll assume a fairly typical $2 million purchase price, $2,000 per operation consumables (eg, robotic arms), and $180,000 annual service contract.
First, create a pro forma
In hospital financing, a pro forma is a document that projects the total costs and total revenue from a proposed new service or piece of equipment purchase over time. Because of the high cost of a surgical robot, no hospital will purchase one just because a surgeon goes to the CEO and says the justification is “Because I want one“. Instead, the hospital is going to want to know whether in the long run the hospital is going to make money or lose money on the surgical robot. However, when I look at a pro forma, it is not just the dollars and cents that are important. There can be non-monetary benefits that can justify purchase of a surgical robot, even if the hospital is not going to make money on the robotic procedures. For example, shortened time in the operating room per surgical procedure, shorter patient recovery vs. non-robotic surgery, fewer surgical complications, improved patient satisfaction, attraction of new patients who prefer to have robotic surgery, etc.
When drafting a pro forma for outright purchase of a medical device such as a surgical robot, you need to look at all of the costs. This includes the purchase price of the equipment, the cost of consumables (such as the surgical arms that can only be used for a fixed number of surgeries), the cost of a service contract, and the cost of personnel. When possible, convert non-monetary factors into dollar-equivalents – for example, determine the cost per hour of an operating room and then include cost savings of a shorter OR procedure time with a robotic versus non-robotic operation. Conversely, if the robotic surgery will take longer than a non-robotic surgery, include this as a cost rather than a cost savings. The type of physicians and the types of procedures will need to be estimated. For example, if the surgical robot will be used by general surgeons, colorectal surgeons, gynecologists, urologists, and ENT surgeons then the relative costs of each of these different types of robotic surgeries needs to be included. Other costs to be factored in can include the cost of any building renovation required to accommodate the new equipment, the cost of training personnel to use the new equipment, the cost of insuring the new equipment, the cost of advertising the availability of the new equipment, etc. The service contract costs must be factored in as well. If a surgical robot is used 18 times per year and the service contract is $180,00 per year, then that works out to an expense of $10,00 per case. On the other hand, if the surgical robot is used 500 times a year, the expense is only $360 per case.
The revenue from a surgical robot will require an estimation of the volume of surgeries performed each year and the expected reimbursement. Reimbursement needs to be stratified by all of the different procedures that will be performed, for example, a robotic cholecystectomy vs. a prostatectomy vs. a hysterectomy. This can be pretty complicated because the reimbursement for an operation such as a cholecystectomy can vary depending on whether it is being paid for by Medicare, commercial insurance, Medicaid, or self-pay (note: self-pay usually translates to no-pay).
Central to a pro forma is the concept of depreciation. This is the expected number of years of life of that piece of equipment before you have to buy a new one. Medical equipment is often depreciated over 5 years. For example, a surgical robot that costs $2 million to purchase and is expected to last 5 years can be depreciated over those 5 years at $400,000 per year. In this example, the pro forma should include tables for each of the 5 years of depreciation. If the hospital projects doing 500 robotic cases per year, then the capital equipment costs would be $800 per case ($400,000 per year ÷ 500 cases per year).
Once you create a pro forma for outright purchase, you then need to create a pro forma for pay-per-use financing. Include all of the costs and revenues you used with the outright purchase pro forma but instead of equipment cost depreciated over the depreciation period (eg, 5 years), include the total annual pay-per-use costs over those 5 years. It is essential to clarify whether servicing the equipment is included in the pay-per-use contract. Usually it is but if the hospital is required to purchase a separate $180,000 per year service contract, then the financial advantages of pay-per-use acquisition can disappear.
Hospitals are unique environments compared to business and manufacturing. Proposals for capital equipment purchases should not be finalized until they have been evaluated and approved by the biomedical engineering department, the infection control department, the staff responsible for structural engineering, radiation safety personnel, etc.
Variables affecting the decision to purchase outright vs. pay-per-use
The decision of whether to buy a piece of medical equipment or pay-per-use is much more complex for a hospital than the decision of whether to acquire a piece of manufacturing equipment by outright purchase or pay-per-use for a factory. There are variables that are inherent in healthcare that do not exist in manufacturing and these variables can have a profound effect on how to pay for a new medical device. Here are some of the variables that the hospital must factor in to the decision-making process.
The number of physicians who will use it. If only one surgeon or one physician group will use a piece of equipment, then there is the risk that if that surgeon or group leaves the hospital to practice elsewhere, then the hospital could be stuck with an expensive device that just gathers dust in a closet. Just like it is risky to put your entire retirement investment portfolio in a single stock (as opposed to a mutual fund), it is risky to base the entire pro forma on the equipment’s use by just one physician.
The number of specialties that will use it. In the example of a surgical robot, it is far better to buy a robot that will be used by general surgeons, cardiothoracic surgeons, urologists, ENT surgeons, and gynecologists rather than just one of these specialties alone. This ensures that the device can be used every day, Monday through Friday, all year. This overcomes specialist slow downs due to medical conferences, outpatient clinic days, procedure seasonality, etc.
The hospital’s cash flow and budget. A $2 million purchase for a surgical robot can wipe out most of a small hospital’s annual new equipment budget. If the hospital lacks sufficient cash to purchase an expensive piece of equipment, then a pay-per-use model may be preferable since there will be an immediate return on investment. Otherwise, it could take several years of use to generate enough revenue to cover the cost of outright purchase.
Anticipated volume. If you anticipate a relatively low procedure volume each year, then it could take many years before you recoup your return on investment for the purchase and you’d be better off with the pay-per-use model. The more procedures you can do, the more likely you will be better off purchasing equipment outright.
Expectation of a new model in the near future. Medical equipment manufacturers usually keep dates of release of new models of their equipment secret until the last minute (sort of like Apple staying mum about new iPhone models until they are ready to be released). Nevertheless, a little detective work can give you an idea of whether a new version is on the future horizon. If so, you are often better off with pay-per-use initially and holding off on purchasing until the new model comes out. This also holds if you would be happy with the older (current) model since manufacturers will generally discount them to clear out their inventory once a new model comes out. The surgical robot model costing $2 million this year might drop to $1.5 million next year when the next model is released.
Commitment by the physicians. I got burned several years ago when our gastroenterologists insisted that we needed to start doing endoscopic ultrasound pancreatic biopsies. We spent a half million dollars on new endoscopic equipment that could only be used for those procedures and also invested in cytology telemedicine so that cytopathologists at another hospital could read the needle aspirates real-time during the procedure. Five years later, the gastroenterologists had not done a single endoscopic ultrasound procedure at our hospital and we basically wasted the money. If there is any uncertainty about whether the doctors will use the equipment, then a per-use model (at least at first) is preferable until the doctors prove that they will actually use it.
Procedure payer mix. A manufacturing company can determine the price it will charge for a product and base it’s pro forma on just one sales price. In medicine, however, the hospital gets paid different amounts by different payers for doing any given procedure or service. This means that creation of an accurate pro forma requires the hospital to not only project the total annual volume of procedures to be performed with a new device but also the projected payer mix for those procedures and the financial margin for each payer. Reimbursement from Medicare and Medicaid is fairly easy to project since they are fixed by CMS. However, each commercial insurance company will reimburse different amounts for any given procedure, depending on the hospital’s negotiated contract with that insurance company. Imagine the complexity of a manufacturer who projects that by installing new factory equipment, it can make and sell widgets. But sales contracts dictate that 30% of customers pay $10 per widget, 15% of customers pay $5 per widget, 25% of customers pay $18 per widget, 15% of customers pay $27 per widget, and 15% of customers don’t pay anything and get their widgets for free. In general, per-procedure hospital reimbursement is highest for commercial insurance, a bit lower for Medicare, lower still for Medicaid, and negligible for self-pay. We once had a surgeon who specialized in surgically implanting very expensive medical devices. When we did the initial pro forma, it looked like the hospital would net a small profit each year on the procedures. But after a couple of years, we noticed we were losing tens of thousands of dollars. It turned out that the surgeon was performing implants on commercially insured patients at a private hospital in town and only operating on Medicaid and self-pay patients at our hospital.
Non-monetary benefits. The decision of whether to purchase a piece of equipment outright or utilize a pay-per-use financing should not depend solely on the expense vs revenue columns on a pro forma. There can be non-monetary benefits that the hospital may value, even if the new equipment does not increase revenue. These can include attraction of new patients, improved patient satisfaction scores, reduced mortality, reduced complication rates, shortened operative times, etc. It is also important to keep the doctors happy because if the physicians really want to use a new piece of medical equipment and the hospital won’t buy it, those physicians will leave to go practice at another hospital that will buy the equipment. In this case, a pay-per-use acquisition model may allow the hospital to keep the doctors happy while eliminating or at least minimizing financial loses.
Connectivity. In an increasingly electronically interconnected world, the ability of medical equipment to connect to the monitors, electronic medical record, scheduling software, and billing software is essential. If there is concern about electronic compatibility, then pay-per-use might be a better option until optimized connectivity issues can be resolved.
The bottom line: its complicated
All too often in hospitals, the person who is the most eloquent, loud, or otherwise persuasive is the one who most heavily influences purchasing decisions. And this person is usually a powerful, silver-tongued physician. The hospital’s best defense against undue influence is the requirement to create a pro forma. This can guide the hospital about whether it is better in both the short-term and the long-term to purchase an expensive piece of equipment outright or utilize a pay-per-use acquisition model. One hospital may find that outright purchase is preferable whereas another hospital in the same town may find that pay-per-use is preferable. An accurate and well thought out pro forma is like a vaccination against future regret. No big-ticket equipment purchase should be put on the hospital’s final annual budget without one.
Health care sharing ministries are an alternative to regular health insurance but they are a poor substitute for most patients and an annoyance (at best) for most hospitals and physicians. The basic idea is that people of similar religious beliefs pool their money in order to help each other pay for their medical bills. The concept arose from Amish and Mennonite communities that do not normally participate in programs like health insurance.
As an example, a number of years ago, I was the attending physician in our medical intensive care unit when a young Amish man was transferred from a rural hospital with a cardiac sarcoma, a rare malignant tumor of the heart muscle that is usually incurable and fatal. He lived on a mechanical ventilator for a couple of weeks before dying and in the process, generated a huge medical bill. Like most Ohio Amish at the time, he did not have health insurance. A few months after his death, an older Amish man walked into the MICU carrying a bundle of cash and handed it to the unit clerk. Their community had taken up collections to pay for his hospital charges. This was their normal practice to pay for medical bills.
About 30 years ago, this concept expanded to other Christian communities in the United States and became known as health care sharing ministries (HCSMs). When the Affordable Care Act was passed in 2010, it was estimated that about 100,000 Americans participated in HCSMs but that number has grown to now more than 1.7 million Americans. Participants are attracted by the like-minded religious beliefs of other members and by the lower monthly costs compared to regular health insurance.
Any time the word “ministries” is included as an attributive noun, it implies that the other noun that it is describing is virtuous, righteous, and morally principled; however, all too often, HCSMs are anything but. Instead, HCSMs can limit patient access to healthcare, burden patients with unexpected healthcare costs, and leave physicians unpaid.
What is a health care sharing ministry?
There are currently 107 HCSMs certified by the U.S. Department of Health and Human Services. HCSMs are registered as 501(c)(3) non-profit charity organizations. Rather than paying monthly health insurance premiums, participants pay monthly membership fees. These fees are usually less expensive than health insurance premiums. Membership is limited to people who share a common religious faith and often must attest to regular attendance at a specific church. Because they are not considered to be regular health insurance companies, HCSMs are not regulated by state insurance commissioners in most states. When participants incur medical bills, they then submit those bills to the HCSM for payment.
There are a number of coverage restrictions. HCSMs can decide what conditions they will and will not cover and frequently do not cover healthcare expenses for conditions that they find morally objectionable, such as abortions, out-of-wedlock maternity expenses, contraception, sexually-transmitted diseases, obesity-related conditions, or smoking-related diseases. HCSMs are also not required to cover pre-existing conditions or cap out-of-pocket costs.
The problem with health care sharing ministries
On the surface, HCSMs sound like a fabulous idea – it is like getting health insurance without having to pay for all of the bureaucratic overhead costs. Furthermore, it eliminates having to pay for other members’ healthcare costs that are incurred by “immoral” behavior. But there is a dark side of HCSMs that can be financially ruinous to patients. Here are some of the specific problems with HCSMs:
They do not have to cover pre-existing conditions. Most HCSMs will have definitions of pre-existing conditions such as any disease that you have had to be treated for anytime in the past 3-5 years. As a result, participants tend to be young, otherwise healthy individuals whereas older people who are more likely to have diabetes, hypertension, or high cholesterol can be denied. Some HCSMs will cover the care of certain pre-existing conditions (such as hypertension) but those participants are charged a higher monthly fee.
Many conditions are not covered. Each HCSM can decide what conditions will and will not be covered. Some of the common uncovered conditions include those that result from tobacco use, drug abuse, alcohol use, obesity, or “non-Biblical lifestyles”. Most HCSMs do not cover mental health expenses. Durable medical equipment is often not covered. Most HCSMs will have a limit on the number of months any new medical condition will be covered – for example, only covering the first 3 months of prescription medications for newly diagnosed diabetes.
Maternity care is often limited. Pregnancy is considered a pre-existing condition by most HCSMs and so they will not pay maternity expenses for the first 10 months of a participant’s membership. In addition, maternity costs are often only covered for married women. Abortions are generally not covered, with no exception for rape.
Preventive care is generally not covered. This can include regular physical exams, check-ups, health screenings, cancer screenings, well-child visits, and vaccinations.
Provider network restrictions. Some HCSMs will only cover expenses from in-network physicians and hospitals. These are usually very limited in number, making it difficult for participants to find a participating doctor. This is especially true if the participant requires hospitalization and may not have a choice in their ER physician, surgeon, hospitalist, anesthesiologist, radiologist, or pathologist. Other HCSMs will allow participants to see any physician and then the HCSM will attempt to negotiate fees with the physician or hospital after the fact.
Participants get charged “standard charges”. Every hospital and every physician group has publicized standard charges for every service and procedure. The thing is that the only people who have to pay standard charges are those who are uninsured – patients with health insurance always pay less. The reason is that every health insurance company will negotiate contracts with every hospital and every physician group and those contracts will include an agreement for the maximum amount that the insurance company will pay for every service and procedure. If the hospital’s “standard charge” is less than the insurance company’s contractual limit, then the patient and the insurance company only has to pay the standard charge. However if the standard charge is higher than the contractual limit, then the patient and the insurance company only have to pay the amount of the contractual limit. Because of this, every hospital and every physician group in the country sets their “standard charge” higher than the most that they can get from their highest-paying insurance company contract. To put this in perspective, most hospitals and physician groups set their standard charges at several times higher than the maximum amount that Medicare will pay. In other words, no one with health insurance pays the sticker price – only the uninsured pay the sticker price. HCSM participants are considered to be uninsured so they have to pay the standard charge amounts. The result is that HCSM members get charged a lot more for any given service or procedure than people with health insurance are charged.
No guarantee of payment. The HCSMs are not legally obligated to pay for medical bills. In months when the member fees are less than the members’ health expenses, the members may only receive a prorated amount of the funds to cover their healthcare bill. As a result, the members never know up front how much of their medical bill will be covered by the HCSM and how much they will be responsible for themselves.
The maximum coverage amount is usually capped. Most HCSMs will have a maximum amount that will be paid for any given participant’s healthcare costs – for example, a $50,000 per year and $1,000,000 lifetime limit. Any healthcare costs above these limits are the responsibility of the individual participant. When being billed “standard charges” by the hospital and the physicians, few patients can get through an ICU admission for less than $50,000.
HCSMs are bad for doctors and hospitals
One of the most basic metrics in healthcare finance is the number of days in accounts receivable (AR). This is how many days it takes to get paid after a bill is sent out and generally ranges between between 30 – 70 days. If your average days in AR is greater than 50 days, it is a sign of problems in your revenue cycle department. As the treasurer of our Department of Internal Medicine, I would monitor our days in AR every month. For insured Americans, the hospital (or doctor) first sends the bill to the insurance company (or Medicare) and then bills the patient for the amount of their co-pay or deductible. Medicare and insurance companies are generally pretty quick in getting those bills paid. But with HCSMs, the patient gets billed and not the HCSM. The patient then submits their bill to the HCSM to have the their bill “shared” with the other HCSM participants. This process can take months and as a result, days in AR can skyrocket.
The patient is responsible for the doctor bill or hospital bill and will be charged the amount of the “standard charges”. This is often tens of thousands of dollars that most people do not have sitting in their checking accounts. HCSMs will often advise their members to request that the bill get written off as charity care or to set up a payment plan with the doctor or hospital rather than pay the full amount of the bill. That way, the member does not have to pay the full amount of the standard charges all at once and can spread out payments until the HCSM determines whether it will cover the bill and if so, how much of the bill it will cover. If the patient does not initially pay their medical bill on time with out-of-pocket funds, then the hospital or physician group typically sends that bill out to a collection agency which takes a percentage out of whatever money it collects on that bill, reducing the amount that the doctor or hospital ultimately gets paid. If the patient sets up a monthly payment plan, then the hospital or physician group’s cash flow suffers since payment may be spread out over a year or longer. In addition, the hospital or physician group has to pay someone to send out the monthly payment plan bills to the patient and monitor whether or not the patient actually pays those bills – this adds additional overhead expenses in the revenue cycle department.
For catastrophic illnesses, the HCSM will have a limit on the amount that it will cover, for example, $50,000.Once that limit is exceeded, the patient becomes responsible for everything over that amount. This can often be considerably more than patients have in savings with the result that they have to sell some of their assets in order to pay their medical bills. This can result in very late payment to the hospital or physician group and can result in legal fees incurred by the hospital or physician group. As an example, I had a patient who was a healthy farmer in his 40’s that decided to go without health insurance. He unexpectedly developed pancreatitis complicated by respiratory failure and was in the ICU for several weeks. If he had health insurance, the negotiated charges would have been about $300,000 and he would have had out-of-pocket co-pay expenses of a few thousand dollars. But since he was uninsured, we legally had to bill him the hospital’s standard charges which totaled more $1 million. He eventually had to sell the farm that had been in his family for generations in order to pay his medical bills and it took the hospital 2 years to finally get paid.
Many HCSMs will negotiate fees on behalf of their members, but only after the member submits their medical bills. This can result in a lot of frustrating haggling between the HCSM and the hospital or doctor. It would be like trying to run a restaurant and having the customers trying to negotiate a lower price for their meal after they have finished eating. Any business prefers to negotiate the price of a service before they provide the service rather than several months after they provide that service; doctors and hospitals are no different.
HCSM lessons from Ohio, Missouri, and Colorado
Liberty Healthshares is an HCSM based out of Ohio. It served 70,000 Christian faith families between 2014 and 2020. It had an annual budget of $56 million and employed 470 workers. Members sued Liberty alleging failure to pay for medical bills and that Liberty funneled money to the company’s founders. The State Attorney General additionally reached a settlement agreement with Liberty agreeing to pay thousands of dollars in fines. Last year, ProPublica reported that the family that founded Liberty used tens of millions of dollars of members’ monthly fees to buy the family a marijuana farm, $20 million in real estate, and a private airline company. Since it was an HCSM, it was not subject to the regulatory oversight required of traditional insurance companies and as a result, it got away with misuse of funds for years.
Medical Cost Savings was an HCSM based out of Missouri. Last year, its founder pleaded guilty in federal court to an $8 million wire fraud conspiracy that cheated hundreds of members. Medical Cost Savings paid only 3.1% of healthcare claims and in some years paid none of its claims at all. The founder and his co-conspirators pocketed more than $5 million.
Colorado is unique among states in that it requires financial reporting by HCSMs operating in the state. In the most recent annual report by the Colorado Department of Regulatory Agencies, Colorado HCSMs collected $78 million in annual membership fees in 2022 and paid out $66 million to cover members’ medical bills. However, in that same year, members submitted $180 million in healthcare bills to these HCSMs. In other words, the HCSMs only paid 37% of submitted medical bills. In Colorado, HCSMs used advertising, social media, and “producers” (independent brokers) to recruit new participants. Four of the 16 HCSMs operating in Colorado reported the amount they paid these producers, totaling $1.8 million. HCSMs also reported marketing themselves to employers to offer to their employees. Some HCSMs required members to first request charity care and financial support from local governments and consumer support organizations in paying the member’s health care bills before the HCSM would consider paying those bills.
Caveat emptor
Let the buyer beware is nowhere more pertinent than health care sharing ministries. Operating outside of the insurance regulatory environment, they can pretty much cover whatever healthcare costs they choose to cover and are particularly susceptible to fraud and abuse of funds. Although most HCSMs are legitimate non-profit organizations run by well-meaning members of religious faiths, some are run by scammers who prey on the devout by appealing to their faith-based values.
So, are HCSMs appropriate for anyone? The only people who should even consider using an HCSM instead of health insurance are those who are young, have no medical conditions, take no medications, are not obese, do not have sex outside of marriage, are non-smokers, non-drinkers, and are willing to pay for their preventative healthcare out-of-pocket. Even then, if you are hospitalized for a serious injury, diagnosed with a chronic disease like cancer, or hospitalized with an unexpected serious infection then it could still cost you hundreds of thousands of dollars and result in financial ruin. Using an HCSM is better than being totally uninsured, but not by much.
For hospitals and physicians, taking care of patients who use HCSMs causes an additional overhead expense and often results in no payment at all. In the best of circumstances, the HCSM results in a delayed payment for services rendered that puts an added burden on the revenue cycle staff. As a doctor, I’ll take a patient with regular medical insurance over a patient with an HCSM any day. Even Medicaid beats an HCSM.
