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Emergency Department Inpatient Practice Medical Economics

It’s Time To Do Away With Observation Status

“Observation status” was originally conceived of as a way to watch patients presenting to the emergency department for a few hours in order to determine whether or not they needed to be admitted to the hospital. The purpose was to reduce unnecessary inpatient hospitalizations and thus reduce overall healthcare costs. But there has been a creep in the use of observation status as well as the healthcare bureaucracy to administrate it. The result is that observation status has now increased overall healthcare costs. It is time to consider eliminating observation status in the United States.

Summary Points:

  • In observation status, hospital admissions are considered to be outpatient rather than inpatient admissions
  • As an outpatient visit, patients are responsible for more of the hospital charges than they would be for an inpatient visit
  • Medicare will not pay for skilled nursing facility care for patients in observation status
  • Observation stays reduce Medicare costs by transferring costs to the individual patient
  • Overseeing observation status is expensive for hospitals
  • Overall per capita U.S. healthcare costs can be reduced by eliminating observation status

How did we get here?

Prior to 1960, emergency departments were staffed by residents and general practitioners. The doctor who saw you in the ER was generally the same doctor who took care of you in the hospital. Emergency medicine became a specialty in 1968 with the creation of the American College of Emergency Medicine. The first emergency medicine resident began training in 1970 and the first board examination in emergency medicine was offered in 1980. The result was that the doctor that took care of a patient in the ER was no longer the same doctor who took care of them once they were admitted to the hospital. In 1983, DRGs were first used to determine the amount of money that Medicare would pay hospitals for inpatient admissions for any given diagnosis. After the introduction of DRGs, it became immediately clear that there needed to be some way of determining which patients were sick enough to warrant admission to the hospital from the emergency room, otherwise, the hospitals would be incentivized to admit as many people as possible, even if they were not very sick.

Initially, that determination was left to the emergency room physician. But that ER doctor needed to find an inpatient physician who would agree to admit the patient. During my residency, we had a designated “medical admitting resident” each day who would make the decision about which patients were sick enough to require admission. Some residents got the reputation of being “sieves”, meaning that they would admit everyone that the ER physician called them about whereas other residents got the reputation of being “walls”, meaning that they would block admissions from the ER unless the patients were at death’s door. You always wanted to be on-call at night with a resident who was a “wall” because that meant you would have to do fewer history and physical exams, your inpatient service census would be lower, and you might actually get a few hours of sleep that night.

In order to provide some rules for which patients warranted inpatient admission, Medicare directed that patients who could be sent home within 24 hours should be observed in the ER rather than admitted to the hospital. However, keeping a lot of patients in ER beds for 24 hours was impractical so hospitals started putting those observation patients in regular hospital beds to avoid congestion in the emergency department. The unintended consequence was that this simply led to keeping patients in the hospital for longer than 24 hours, just so they could be classified as inpatients. This was especially a problem with outpatient procedures when many hospitals kept patients overnight for procedural recovery and then billed Medicare for both the outpatient procedure plus an inpatient hospital admission. Medicare countered in 2002 by agreeing to pay hospitals specifically for observation stays in order to provide an alternative to inpatient admission for those patients who were only mildly ill or who needed extra time to recover from an outpatient procedure. Initially, the only diagnoses that could be billed as observation stays were heart failure, chest pain, and asthma. In 2008, Medicare began paying for observation stays for all diagnoses.

In parallel with the development of reimbursement policies for observation stays, Medicare began policing hospital admissions by using the RAC (recovery audit contractors). RAC auditors would review the charts of patients who had been admitted to the hospital and if the auditor determined that there was not sufficient documentation in the chart to justify inpatient admission, Medicare would collect penalties from the hospital for overpayment. By 2014, the RAC program had collected $2.3 billion from hospital overpayments. One of the most common reasons by RAC auditors when denying an inpatient admission was that “…the patient could have safely and effectively been treated as an outpatient.” The auditors were often incentivized to deny admissions since more denials often led to bigger bonuses for the auditors. As a result, the denials were frequently capricious and arbitrary. 25 years ago, a coder for a commercial insurance company confided in me that her supervisors told her to randomly deny every 10th hospital admission because hospitals usually found that it was too expensive to contest denials. Fear of RAC audits resulted in physicians and hospitals increasing the use of observation status in order to avoid the risk of being penalized for an unnecessary inpatient admission.

A second strategy employed by Medicare was to create a list of surgical procedures that were classified as “Medicare Inpatient-Only Procedures”, meaning that those operations required an inpatient admission. Any surgical procedure not on the list was to be classified as an outpatient procedure unless there were extenuating circumstances that uniquely required a patient to be admitted to the hospital. Medicare pays much more if a surgery is performed as an inpatient (Medicare Part A) than if it is performed as an outpatient (Medicare Part B). Over time, the Medicare Inpatient-Only list shrank as more and more surgical procedures were reclassified as being appropriately done as outpatient and not requiring of hospital admission. Thus, knee and hip replacement surgeries were initially considered to require inpatient admission  but are now considered to be outpatient procedures.

Medicare also changed its definition of observation stays to be any condition that requires the patient to be in the hospital for “less than 2 midnights”. Although it could be argued that this gave hospitals longer than 24 hours to treat an observation status patient and send them home, the 2-midnight definition was somewhat arbitrary. For example, a patient presenting to the emergency department at 11:00 PM would spend 25 hours in the hospital before crossing 2 midnights but a patient presenting at 1:00 AM would spend 47 hours in the hospital before meeting the 2-midnight definition. However it is not how many midnights a patient actually spent in the hospital that Medicare auditors used when deciding whether to deny a hospital admission. Instead, it is whether the auditor believed that had the patient been managed appropriately, that patient could have been sent home before 2 midnights have elapsed. For example, if a patient came to the emergency department on Saturday evening with chest pain but the hospital could not do a cardiac stress test until Monday morning (2 midnights later), the auditor would still deny an inpatient admission since if the hospital offered 7-day a week stress tests, they could have sent the patient home on Sunday (after 1 midnight).

The observation vs. inpatient status bureaucracy

 

In order to avoid losing money from admission denials, hospitals started to go to great lengths to insure that the medical record contained sufficient documentation to justify every hospital admission. This was greatly facilitated by the development of electronic medical records that permitted realtime review of each patient’s hospital stay to ensure that the patient’s chart had appropriate documentation to meet Medicare’s requirements to bill that hospital stay as an inpatient admission. Some of the measures that hospitals now take in order to oversee their hospital admission practices include:

  1. Physician training. When a patient is admitted to the hospital from the emergency room, the admitting physician has to enter an order directing that the patient is an “inpatient” or “observation” admission. This means that the physician has to estimate how long the patient will need to be in the hospital at the very beginning of the hospital stay and that estimated length of time dictates whether a patient will be inpatient or observation status. We now train residents in how to correctly estimate length of stay. For example, patients admitted for chest pain, syncope, and dehydration are generally observation status unless there are extenuating circumstances.
  2. Nurse admission reviwers. Hospitals will generally hire a group of nurses or other healthcare workers to review every patient’s chart on a daily basis to determine if the medical record documentation justifies inpatient admission. These nurses get special training in the Medicare inpatient admission requirements. If the patient’s chart does not contain the proper documentation, the nurse’s first step is usually to contact the physician since frequently, all that is needed is an extra sentence or two in the medical record describing how sick the patient actually is. If that does not resolve the issue, the next step is to contact a physician admission advisor.
  3. Physician admission advisors. Many times, the admitting physician is uncertain whether or not a patient’s illness justifies an inpatient admission order. Or the nurse reviewer’s determination is different from the physician’s admitting order for observation vs. inpatient status. For this reason, hospitals employ physicians whose main job is to arbitrate inpatient and observation orders. Often, this will be a private physician review company where the physician reviewers can access patient charts on a daily basis. Larger hospitals usually do this internally by hiring some of its own emergency medicine physicians or hospitalists to dedicate a certain number of hours per day reviewing admissions.
  4. Hospital medical directors. When another layer of physician review of how to classify a patient’s admission is required, it then goes to the hospital medical director. Even for a small hospital, this is usually several charts to review every week. It takes about 15-20 minutes to do one of these reviews and then contact the admitting physicians to try to talk them into changing an admission order from inpatient to observation or vice-versa. Frequently, it requires the medical director to either enter an administrative note in the electronic medical record or to send the hospital utilization review office a letter so that the hospital has a documentation  paper trail in the event of a Medicare denial. More often, the medical director is sent charts for patients who had an inpatient admission order but were discharged before 2 midnights had elapsed. This is a red flag for Medicare auditors. We then have to provide written documentation for why the patient should be billed as an inpatient. Sometimes, this is easy, for example, when a patient dies from their condition in the hospital before 2 midnights elapse. But more frequently, it is because the admitting physician legitimately believed that the patient would need to be in the hospital for at least 2 midnights when that patient first arrived at the hospital. Several years ago, I attended a Medicare seminar and one of the medical administrators from Medicare told us that when this happens, we should use the phrase “The patient had an unexpectedly rapid recovery and was able to be discharged after less than 2 midnights”. Pretty much every time a patient in inpatient status was discharged before 2 midnights, one of our hospital medical directors would review that chart and send the billing office a letter using that phrase.
  5. Pre-admission testing consultation. Patients who are planned to undergo a surgical procedure will frequently be sent for pre-operative medical consultation by an internist, family physician, or specially trained advance practice provider. Although designed to identify medical co-morbidities that could increase the risk of complications during surgery, these consultations are increasingly being used to determine whether or not a given patient’s surgery should be classified as an inpatient or an outpatient surgery. And most importantly, these consultations ensure that there is sufficient documentation in the electronic medical record to justify an inpatient procedure. For example, most knee replacement surgeries are now considered outpatient procedures. But if the chart documents that the patient has sleep apnea requiring CPAP, brittle diabetes, COPD requiring supplemental oxygen, and a history of vomiting after anesthesia, then that patient’s knee replacement can be done as an inpatient and the hospital gets paid considerably more. Surgeons are trained to be experts in surgery but are not trained in the nuances of co-morbid medical illnesses that they do not normally manage. Consequently, the surgeon’s outpatient notes often do not contain documentation of the significance of those medical co-morbidities and whether they are severe enough to warrant an inpatient admission for the surgery. That is why the pre-op medical consultation is so highly valued. If the surgeon admits the patient as an inpatient to do the surgery and then discharges that patient before 2 midnights pass, the chart once again gets sent to the medical director so that a letter containing the phrase “The patient had an unexpectedly rapid recovery and was able to be discharged after less than 2 midnights” is sent to the utilization review and billing offices for a documentation paper trail in the event of an admission denial by Medicare.
  6. Utilization review staff. Every hospital employs a large number of personnel devoted solely to coding, billing, and utilization review. Before a bill goes out to Medicare or a commercial insurance company, these staff will do a final review to ensure that all of the proper documentation justifying an inpatient admission is present in the chart, including physician admission advisor notes and hospital medical director correspondence.There will also usually be personnel whose only job is to work denials when Medicare or an insurance company denies an inpatient admission. These personnel will then prepare and submit documentation contesting that denial in hopes of overturning the denial and getting paid for the hospital stay.
  7. Attorneys and peer reviewers. When Medicare or an insurance company refuses to overturn an admission denial after the billing staff contest the denial, the next step is to turn to the legal system. This usually starts by paying an independent physician reviewer to opine whether the patient’s hospital stay should be classified as inpatient or observation. Next, hospital attorneys get involved by contacting Medicare attorneys about the denial. Sometimes, contested denials require adjudication, requiring more attorney time.
  8. Medicare staff. On the other side of the bill, Medicare and commercial insurance companies employ large numbers of staff to review charts to decide whether they think that hospitalizations should be inpatient or outpatient.

So, for any given patient’s hospitalization, there is an army of Medicare nurse reviewers, physician reviewers, utilization review staff, and attorneys that face off against an army of the hospital’s  nurse reviewers, physician reviewers, utilization review staff, and attorneys. In the end, more money is sometimes spent battling an admission denial than is actually paid to the hospital for the admission. Hospitals are willing to occasionally spend the excessive cost to contest a denial since it sends Medicare or the insurance company a signal that the hospital will not go down easily for future admission denials. It is kind of like a basketball coach throwing a tantrum about a penalty call in order to try to dissuade the referee from calling future penalties.

The net result of all of this is that the United States has created an enormous bureaucracy devoted to preventing and contesting hospital admission denials.  So, why don’t hospitals just classify more patients as being in observation status and avoid all of the expense of justifying inpatient status? The reason is money.

The finances of inpatient vs. observation status

The genesis of observation status was to reduce Medicare costs by eliminating unnecessary hospital admissions. For any given diagnosis, hospitals get paid much less if a patient is designated to be in observation status than if that same patient is designated to be in inpatient status. Overall, the reimbursement is about 1/3 less for observation stays. In other words, Medicare can reduce overall Medicare costs by pressuring hospitals to put more patients in observation status. The same holds for commercial insurance companies.

Until several years ago, Medicare also paid doctors less if patients were in observation status. However, it became clear to Medicare that this was incentivizing doctors to preferentially use inpatient status rather than observation status. And since doctors are the ones who write the admission orders, Medicare realized that it could reduce inpatient admissions by removing the physician financial incentive to put patients in inpatient status. Because the physician professional fees are much, much less than the hospital fees, by paying physicians the same whether a patient was in observation or inpatient status, Medicare would pay a little more to the doctors but would pay a whole lot less to the hospitals.

But the biggest savings to Medicare in observation status is that it transfers much of the cost of the hospital stay from Medicare to individual patients. This is because Medicare considers observation stays as outpatient visits. Outpatient services are billed to Medicare Part B but inpatient services are billed to Medicare Part A. This is hugely important to patients because patients have much higher co-pays and deductibles for their Part B charges than their Part A charges.

  • Medicare Part A covers inpatient admissions including a semi-private room, nursing care, medications, meals, and tests done during inpatient admissions. Part A also covers skilled nursing facility care, home health care, and hospice care. Medicare Part A is free to Americans over age 65 who have previously worked at least 10 years (or have a spouse who worked 10 years). There are no monthly premiums and no annual deductible. The amount that Medicare covers depends on the length of stay of the hospital admission:
    • $1,600 deductible per admission
    • Days 1-60: Part A covers in full
    • Days 61-90: patients are responsible for $400 per day co-pay, either by co-insurance or out of pocket if the patient lacks co-insurance
    • Days 91-lifetime reserve limit days: patients are responsible for $800 per day co-pay, either by co-insurance or out of pocket if the patient lacks co-insurance
    • After lifetime reserve limit days (total of 60 over the entire lifetime): Part A pays nothing and patients (or their co-insurance) are responsible for the entire costs
  • Medicare Part B covers hospital outpatient charges and physician professional charges. Unlike Part A, there is a monthly premium for Part B of $165/month with higher premiums for those with higher incomes. There is an annual deductible amount of $226. Patients also have additional deductibles and co-pays that are either paid by secondary insurance or out of pocket if there is either no secondary insurance or the insurance policy has limited benefits:
    • 20% co-pay for all physician charges
    • 20% co-pay for hospital outpatient charges (hospital room, nursing care, meals)
    • 20% co-pay for x-rays and procedures
    • Part B does not cover medications so the patient (or their Part D insurance) is responsible for medication charges during observation stays

The net result of these differences is that the patient will have greater out of pocket expenses for an observation stay than for an inpatient admission. This is especially true for the 7.5% of Americans over age 65 who are enrolled in Medicare Part A only and do not enroll in Medicare Part B – these patients pay the entire cost of their observation stay out of pocket.

Another financial implication of observation vs. inpatient stays is in skilled nursing facility (SNF) coverage. Medicare Part A pays for 100% of SNF charges for up to 20 days (there is a $200/day co-pay for days 21-100). However, Medicare will only pay for SNF care if a person first has an inpatient hospital stay of at least 3 days. Medicare will not pay for SNF care after an observation stay. If a patient is in observation status (or has an inpatient stay of < 3 days) and gets transferred to a SNF, the patient is responsible for all of the SNF charges.

Why observation status is really, really dumb

CMS absolutely loves observation status. It reduces Medicare costs by paying the hospitals less for any given diagnosis and it also reduces Medicare costs by transferring much of the costs directly to the patient. This allows CMS officials to report to Congress that they are reducing federal spending on healthcare. Congressional representatives can then report to voters that they are reducing government spending. But there is no such thing as free healthcare… the cost of healthcare does not go away, it just gets transferred to the patient. The individual American ends up with more out of pocket costs for co-pays, medication charges, and SNF costs that would have otherwise been covered by Medicare Part A had their hospital stay been inpatient status as opposed to observation status. So, in the long run, the average American does not save any money by being in observation status.

Nationwide, 16% of all hospital stays are observation stays and 84% are inpatient stays. But this percentage can vary widely from hospital to hospital. A tertiary care referral hospital will usually have a lower percentage of observation stays since its patients tend to be sicker with more complex medical problems. On the other hand, a community hospital, especially one that cares for underserved patients, will have a higher percentage of observation stays, typically 25% or more. About the best a hospital can hope for is to break even on observation patients – most hospitals actually lose money on observation stays.

It’s bad enough that observation status does not really save money by transferring the cost of care to the individual patient rather than Medicare. The worst part about observation status is that it actually increases U.S. healthcare expenses. Not only do hospitals have to spend an enormous amount of money justifying inpatient admissions and working inpatient denials, but Medicare spends an enormous amount of money paying staff who police admissions in order to deny inpatient admission charges.

The net result is that observation status represents the epitome of U.S. healthcare dysfunction. It has led to an enormous bureaucracy devoted entirely to deciding whether Medicare or individual patients should pay for hospital care. And that bureaucracy is enormously expensive.

How can we fix this?

Americans pay way more for healthcare than people in any other country. In 2021, the average per capita healthcare cost in the U.S. was $12,914. It will undoubtedly be much higher in 2023. One of the contributors to this is too much of the healthcare costs go into trying to decide whether Medicare or the individual American will be responsible for paying for healthcare. Getting rid of the observation status designation can reduce U.S. per capita healthcare costs. Here is how to do it:

  1. Create low-acuity DRGs. For conditions that are currently commonly managed by observation status (chest pain, syncope, dehydration, etc.), CMS can create inpatient DRGs that pay the hospital less, thus simulating the amount that CMS would have paid for an observation stay.
  2. Require a modest Part A co-pay for hospitalization. The biggest argument against eliminating observation status is that Medicare costs would go up since co-pay costs currently paid by patients would go back to Medicare. The solution to this would be to require a small co-pay for hospitalization days 1-60. The amount to keep Medicare’s annual budget neutral could be as little as $10 or $20 per day.
  3. Outpatient should mean outpatient. How in the world we ever got to the point that we define outpatient care as needing to be in the hospital for more than 2 midnights is baffling. Either a patient needs to be in the hospital or they don’t. I once had a admission denial for a patient in respiratory failure admitted from the ER to our ICU on a mechanical ventilator. The Medicare reviewer said that in his opinion, I should have been able to correct the respiratory failure, extubate the patient, and discharge her before 2 midnights passed. Really?
  4. Eliminate the SNF 3-day rule. The whole idea behind the 3-day rule was that Medicare wanted to see if a patient really needed SNF care before it would pay for it. But the unintended consequence is that if one of our patients needs to go to a SNF, we have to figure out a way to admit them to the hospital for at least 3 days first. This means that we have to wait until they fall at home and break their hip or wait until they get septic from an infected decubitus ulcer if they are unable to get out of bed. For patients undergoing surgery, such as a knee replacement, we have to keep them in the hospital for 3 days after their surgery before they can go to a SNF for rehabilitation, even if they live alone and cannot walk after their operation.
  5. Eliminate the observation industry. By eliminating observation status, hospitals would no longer have to spend money on nurse admission reviewers, physician admission advisors, and medical directors who laboriously review charts for inpatient justification. Hospitals could reduce their utilization management staff and Medicare could reduce its admission reviewer staff. Hospitals, patients, and Medicare would have less need for attorneys to contest admission denials. Yes, a lot of people would lose their jobs but the overall U.S. healthcare costs would drop.

Elimination of the observation status designation would make everyone happy. Patients would not be surprised by unexpectedly high hospital bills. Doctors would not have to spend time entering unnecessary documentation in their hospital notes to justify why a patient warrants an inpatient admission. Hospitals would not have to pay as much for staff to oversee admission determination. A fundamental concept of industrial engineering is that the more complex a process is, the more energy it takes to keep that process working. Observation status has created a terribly complex process. It is time to simplify the U.S. admission process.

January 22, 2023

Categories
Medical Economics Physician Finances

Inflation Is Like A Disease – Here Is The Cure

As a physician, I have spent decades diagnosing diseases and then prescribing treatments. For many diseases, there is more than one single cause and there are more than one possible treatment. Sometimes the treatment is easy but sometimes the treatment is worse than the disease. Inflation is no different. Here is how to fix inflation from a physician’s vantage point, when we look at inflation the way we look at a disease.

What causes inflation?

In 1976, my college macroeconomics professor said that understanding inflation at its basic level is simple – it is too many dollars chasing too few goods and services. 46 years later, that central tenet is still true: inflation occurs when demand exceeds supply. In this sense, inflation is similar to a medical condition like respiratory failure. In respiratory failure, the patient gets short of breath when the body’s demand for oxygen exceeds the supply of oxygen that the lungs can deliver. The treatment of respiratory failure is to either increase the supply of oxygen being delivered to the body’s tissues or reduce the demand for oxygen by the body’s tissues. Preferably, you do both.

Like respiratory failure, there is usually not just one simple cause of inflation but instead there are several alterations in the things that cause demand for goods and services as well as the things that affect the supply of goods and services. Although demand can be affected by changes in what consumers want to purchase, it is more often caused by the amount of money consumers have in their hands to make purchases. In our nation’s current bout of inflation, there are contributions from both the supply side and the demand side. In addition, there is an effect of the national psychology attendant to inflation expectations.

  1. Alterations in demand for goods and services:

    1. Increased disposable income from COVID relief programs. When COVID surged, the U.S. unemployment rate spiked and the government response was to inject money into the economy in the form of COVID relief checks. This resulted in many Americans having cash on hand and no place to spend it during the COVID isolation period. In 2021 and 2022, when isolation restrictions eased up, many Americans started to spend these built up cash reserves and we all started to buy stuff.
    2. Exceptionally low interest rates to borrow money since 2010. Borrowing money has never been less expensive in the U.S. as it has been for the past 12 years. Low interest rates result in more people buying houses and cars. Low interest also result in companies borrowing more money to expand their business operations. As more people borrow money, there is more money circulating in the economy and that results in more money available to spend on goods and services.
    3. Historically low federal income tax rates enacted by the 2018 income tax cuts. The current U.S. income tax rates are among the lowest Americans have had in generations. This graph shows the effective income tax rates for all incomes in 2016 (before the 2018 tax cuts) and in 2020 (after the 2018 tax cuts). As a result of these tax cuts, all Americans had more money to spend on goods and services over the past year.
    4. Federal student loan forgiveness programs. In August 2022, President Biden authorized $10,000 per person federal student loan forgiveness ($20,000 for those with Pell grants). This week, former students can start to apply for those funds. The economic effect of this will not be felt until individuals get their forgiveness applications approved but many affected Americans have already changed their spending habits based on the expectation that they will have $10,000 or $20,000 more to spend on goods and services than they had budgeted for earlier this year.
    5. Increasing federal deficit spending since 2002. The U.S. government has a long habit of spending more money than it takes in each year. In fact, the only years that the government ran an annual surplus in recent memory were in 1998 – 2001 due to combined efforts by Democratic president Bill Clinton and Republican House Budgetary Chairman John Kasich. When the government spends money, it primarily goes to purchasing goods and services and puts more money in the hands of Americans that produce those goods and services.
  2. Alterations in supply of goods and services:

    1. COVID brought supply chain disruptions. These disruptions made it difficult to get foreign-produced products into the United States. These supply chain disruptions also made it difficult to get raw materials and production components into the U.S. resulting in decreased domestic production. As a result, products such as appliances made abroad and U.S.-manufactured cars that depend on foreign-made computer chips became suddenly scarce.
    2. Changes in consumer buying patterns during COVID. As a result of the pandemic, Americans wanted computers in order to work from home and wanted new suburban homes to work and live in. This resulted in heightened demand for houses and computers. There were also transient demand spikes for toilet paper and subscription video streaming services, like Netflix. During the pandemic, consumers could not spend money on services (like travel, restaurants, and concerts) and shifted their spending patterns to goods, like appliances, TVs, and furniture. Quite rapidly, the demand for these goods exceeded the supply of these goods.
    3. COVID rebound spending. As isolation practices eased, Americans started to act on their pent-up consumption appetite. We started eating out at restaurants again. We began planning vacations involving air travel and car rental. We started buying new clothes to wear as we returned to the office. But restaurants had just recently laid off staff, airlines had stopped replacing retired pilots, and car rental companies had sold off their rental car stocks. As a result, these industries were unable to meet the rebounded demand for their goods and services.
    4. War in Ukraine. The global disruption in gas and oil supply resulting from global sanctions on Russia after its invasion of Ukraine has been felt in most Western nations, including the United States. As a result, the worldwide supply of gasoline exceeded the supply and the price per gallon spiked.
    5. Foreign import tariffs. A tariff is a tax on imported goods. By making these goods more expensive, the demand for those goods drops and is replaced by demand for more expensive domestically-produced goods. In addition, tariffs can cause foreign manufacturers to redirect their sales to other countries that do not have tariffs in order to maximize their profits. As a result, the amount of foreign-produced goods falls and U.S. consumers pay more for a given item. Tariffs introduced by President Donald Trump resulted in a drop in supply of many foreign-produced goods.
    6. Low unemployment rates. The supply of services is often reflected in the unemployment rate. When the unemployment rate rises, there are too many workers competing for too few jobs and when the unemployment rate falls, there are too many jobs for too few workers causing employers to increase wages to attract workers. The pandemic resulted in many workers retiring early and also restricted the flow of immigrants and seasonal foreign workers into the United States thus shrinking the labor pool. Consequently, we now have too many job openings for too few workers, particularly for low wage jobs and farm workers.
  3. Alterations in the expectation of inflation:

    1. Worker expectations. When workers think inflation is getting worse, they proactively demand increased wages. This was evidenced recently but the increase in unionization over the past year with the assumption that by unionizing, they could use collective bargaining to get pay raises.
    2. Manufacturer and employer expectations. Forecasts of inflation also affects the costs of goods and services – when companies forecast inflation in the near future, they increase the price of their goods and services in anticipation of increased costs to produce those goods and services in the future.
    3. Consumer expectations. The psychology of inflation is often discussed in terms of worker and employer expectations but consumer psychology is just as important. When consumers hear that inflation is going up, they come to believe that they should be paying more for goods and services. This can result in a mentality of: “Well, normally I’d never pay $25 for a pizza but inflation is happening so I guess it is OK to spend that much”.

How do we cure inflation?

With disease, we often focus too often on treating the symptoms rather than treating the underlying cause. Symptom-based treatments can provide transient relief but do not cure the underlying disease. You can give a patient with sepsis Tylenol and make his fever go away but he’ll still die of sepsis. Similarly, a disease with multiple causes requires treating all of the underlying causes and not just one. When a trauma patient is bleeding from 5 different gunshot wounds and you only suture one of them up, the patient will still bleed to death. Treating inflation is no different – you have to treat the underlying causes. Some of these treatments are relatively easy but others can be too politically painful to realistically implement.

Treating alterations in demand for goods and services:

  1. Eliminate COVID relief spending. Much of this has already occurred but many state and local governments still have unspent federal COVID relief funds and they are looking for things to spend that money on. Unspent funds should be returned to the Federal government to prevent further cash injection into the economy.
  2. Increase interest rates. The Federal Reserve is already addressing this by progressively increasing the federal fund rate. The downstream effect is rising mortgage rates and car loan rates that in turn reduce demand for new house construction and automobiles.
  3. Raise income taxes. This is probably the single most effective way for the federal government to cool off inflation. It takes money out of worker’s pockets and thus reduces their demand for goods and services. However, increased taxes is viewed as a politically nuclear option and no elected official wants to go on record for voting for higher taxes. Even politicians who lean to the left usually only want to increase taxes on the wealthy. However, selectively increasing taxes on the wealthy can increase federal government revenues but has less effect on inflation. The wealthy tend to spend their extra income on investments and luxury goods but to really cool off inflation, one must decrease the demand for everyday goods. For that reason, for tax increases to be effective in reducing inflation, everyone would have to pay higher taxes, not just the wealthy.
  4. Eliminate loan forgiveness programs. Unfortunately, once you promise people money, it is exceptionally difficult to then take it away – it would be political suicide. Nevertheless, even lowering the income threshold for loan forgiveness eligibility would effectively take cash out of the economy.
  5. Decrease federal spending. Much of the huge spike in federal spending from 2020 – 2022 was on COVID programs such as vaccines, medications, and testing. The public health advocate in me wants to continue free access to vaccines and tests but to reduce inflation, it is better to start asking Americans to pay for these goods and services themselves. Belt-tightening inside the Washington Beltway is never popular but to fight inflation, federal spending should be limited to only those programs and federal departments that are vital to keep the country running safely.

Treating alterations in supply of goods and services:

  1. Improve supply chain disruptions. Many of the COVID supply chain issues have been resolving over the past year as the country has gotten back to work. However, transportation bottlenecks still exist in some areas and union strikes could cause additional transportation disruptions in the near future.
  2. Re-set consumer buying patterns. The free market is already doing this to an extent. Computer sales are falling as people return to the office after working from home. Netflix subscriptions are falling. Home sales are decreasing due to a combination of people no longer fleeing to the safety of the suburbs to avoid COVID, no longer needing more space to work from home, and no longer being able to buy houses with rock-bottom mortgage rates.
  3. Temper COVID rebound spending. The government can’t just tell people to stop buying stuff. But fortunately, the combination of a year of high inflation plus a year of spending down COVID-related household cash reserves has already tempered America’s recent buying spree.
  4. End the war in Ukraine. This one is not under the United States’ control but until the war ends, normalization of trade relations with Russia as well as resumption of Ukrainian agricultural and manufactured goods exports will continue to cause international inflationary pressure. In addition, Western countries, including the U.S., are spending much cash on military items with the downstream effect of that cash going into military production worker wages.
  5. Lift foreign import tariffs. There are compelling political reasons to continue some tariffs but from an economic standpoint, the more inexpensive goods we get into the country, the better from an inflation standpoint. First, increased imports reduce the cash supply by getting U.S. cash out of the country and thus out of circulation in the U.S. economy. Second, increased imports keep the cost of American-made goods lower by increasing competition.
  6. Increase the unemployment rate. It would be politically poisonous to simply eliminate jobs but if the unemployment rate increases, circulating cash is taken out of the economy as the supply of workers drops. In addition, employers would no longer have to keep increasing wages to attract workers. However, an alternative strategy could be more palatable, namely, increase the number of workers by increasing foreign immigration. We currently have too many foreigners trying to get into our country illegally in order to find employment and escape unsafe living conditions. By legalizing the presence of many of these undocumented foreigners, we can increase our workforce, particularly for lower wage jobs and farm work jobs. Our immigration problem and our low unemployment problem are the solutions to each other.

Treating alterations in inflation expectation:

  1. Politicians as psychologists. Changing the psychology of an entire country is hard, but not impossible. This is where the charisma of individual leaders can have an impact. Another ways by having agreement between the political parties. Getting Republicans and Democrats to come together on  anything is hard anytime but even more so in an election year. During election years, it is far too easy for both parties to point the blame for inflation on each other. It is far to easy for a political party to say “Elect us because the other guys are going to make inflation worse”. Nevertheless, consensus on legislation portrayed as being inflation-reducing can send a powerful psychological signal that can help Americans of both parties.
  2. Just do something. In medicine, doctors often prescribe antibiotics for bronchitis and sinusitis even though they know that the infection is most likely viral and the antibiotics won’t do anything. But it is the patients’ expectation that something is being done to cure their disease. If Americans see no-one doing anything to reduce inflation, their expectation will be that it is just going to keep on going until someone does something. Thus far, the public face on inflation control has been the Federal Reserve and to give the Fed credit, they have made aggressive interest rate increases. But ideally, there should also be executive branch action and legislative branch action to fight inflation so that our country’s perception is that war is being fought and will soon be won.

It really is like a disease

Admittedly, I am neither an economist nor a politician. But as a doctor, I see so many similarities between inflation and disease. In fact, inflation can be seen as a disease of the country’s economy. And just like most diseases, you can’t just treat the symptoms and hope that it goes away on its own, you have to treat the causes of the disease, preferably all of the causes.

October 19, 2022

Categories
Medical Economics

What Is The Difference Between Medicare Parts A, B, C, & D?

If you want to understand Medicare, don’t ask your doctor. Medicare details are not taught in medical school and with most physicians now being employed by either hospitals or large group practices, physicians do not need to understand the intricacies of Medicare in order to run their medical practice. I am a physician who was formerly the treasurer of a $1.5 million physician group practice and formerly the medical director of a 200-bed hospital but it was not until I turned 64 and started to plan for Medicare that I realized how little I knew about it. As the annual Medicare open enrollment period begins, seniors are getting inundated with advertisements to join commercial insurance Medicare Advantage plans. But what are these plans and are they right for you or your patients?

Summary Points:

  • Medicare and Medicare-related insurance plans are incredibly complex.
  • Most Americans and most physicians do not fully understand the nuances of Medicare-related health insurance options for people over age 65.
  • Cheaper Part C and Part D plans are sometimes the most expensive option in the long run.

 

What is Medicare?

In simplest terms, Medicare is nationalized healthcare for Americans who are either over age 65 or who are disabled. There are additionally two medical conditions that qualify a person to be eligible for Medicare: kidney disease requiring dialysis and amyotrophic lateral sclerosis (ALS). Medicare is primarily funded in two ways: (1) federal payroll (FICA) taxes deducted from paychecks when Americans are employed and (2) Medicare monthly premiums after Americans turn age 65. The payroll taxes cover Medicare Part A and the monthly premiums pay for Medicare Parts B & D.

Medicaid is a different but related program that pays for healthcare for low-income individuals, low-income families, and disabled citizens. Unlike Medicare that is entirely funded through the federal government, Medicaid is funded by both the federal government and state governments. As a result, each state makes its own rules about Medicaid resulting in Medicaid eligibility and services varying widely from one state to another.

Medicare (Parts A & B) and Medicaid were created in 1965 by Title XVIII of the Social Security Act. Prior to that time, 40% of American seniors had no health insurance and had no way of paying for healthcare. Since 1965, Congress has passed additional laws expanding or clarifying Medicare coverage including the creation of Medicare Part C in 1997 and Medicare Part D in 2006.

Currently, according to the most recent CMS data, 18.4% of Americans are covered by Medicare and 17.8% are covered by Medicaid. However, because most healthcare costs occur in elderly people, Medicare accounts for a disproportionately higher percentage of total U.S. healthcare expenditures at 21.1%. Although not shown in the graph below, the percentage of healthcare costs paid by Medicare fell in 2020 because of federal COVID programs that are included in the “Other Third Party Payers and Programs” (maroon line).

The components of Medicare include Parts A, B, C, and D. In addition, there are Medigap plans that can supplement Parts A & B.

Medicare Part A

Medicare Parts A and B are often called “traditional Medicare” or “original Medicare” since these were the components when Medicare was originally created in 1965. Medicare Part A covers hospital charges for inpatient admissions and also covers skilled nursing facility charges. Once a person turns age 65, Medicare Part A is free if that person (or their spouse) has been employed and paid payroll taxes for at least 10 years. You do not get Medicare Part A automatically, you must sign up for it, preferably 3 months before your 65th birthday. If a person (or their spouse) has not been previously employed and paid payroll taxes for 10 years, then they can purchase Medicare Part A at a cost of either $274 or $499 each month, depending on the total number of years that person or their spouse did pay payroll taxes.

Medicare Part A does not cover all hospital charges, however. There is an annual $1,556 deductible that the individual must first pay. After paying the deductible, the portion of hospital charges that Medicare Part A covers depends on the duration of hospitalization:

  • Days 1-60: $0 after the Part A deductible.
  • Days 61-90: $389 copayment each day.
  • Days 91-150: $778 copayment each day while using the 60 lifetime reserve days
  • After day 150: all hospital charges paid by the individual

There is a similar payment scale for skilled nursing facilities with Medicare Part A covering all costs for the first 20 days. For days 21-100, there is a  $194.50 co-payment per day. After 100 days, the individual is responsible for all daily charges.

Medicare Part B

Medicare Part B covers physician charges (both inpatient and outpatient) as well as office visits, outpatient hospital charges, chemotherapy, and many intravenous drugs administered in a physician office. Unlike Medicare Part A, a person must pay monthly premiums in order to receive Medicare Part B, starting at age 65. It is important to sign up within 3 months of turning 65 because failure to sign up in time will result in a 10% monthly penalty (in addition to the monthly premium). The monthly premium depends on the person’s annual income. This is based on the modified adjusted gross income (MAGI) reported to the IRS two years ago (thus, your 2022 Medicare Part B premiums are based on your 2020 income tax forms. The MAGI includes income such as employment wages, pensions, 401(k)/403(b)/457 withdrawals, interest, dividends, and social security payments.

Medicare Part B has an annual $233 deductible and a 20% co-pay for most charges. Notably, “observation status” admissions to the hospital are considered outpatient visits and are thus covered by Medicare Part B and not Part A. Part A only covers “inpatient status” admissions which generally require a patient to have a hospital stay of greater than 2 midnights. Overall, about 20% of hospitalizations are considered to be observation status but for some hospitals, that number can be as high as 50%. As a result, many patients face unexpected 20% co-pays for hospitalizations.

Medigap. These are health insurance policies that can cover Part A deductibles, Parts A & B co-pays, and foreign travel health costs. There are 10 different Medigap plans, 8 of which are open to new enrollees. Each plan has different degrees of extended coverage. They are sold by commercial insurance companies and the monthly premiums vary but average about $155 per month. There are a number of rules pertaining to Medigap plans:

  1. You must have Medicare Parts A & B
  2. You cannot have a Medicare Advantage Plan
  3. Medigap plans do not cover medications
  4. If you sign up for a Medigap plan more than 3 months after turning 65, you will pay a penalty and insurance companies can refuse to sell you a Medigap plan

Medicare with other group insurance. Many people over age 65 receive health insurance through their employer, their union, or their retirement system. In this case, healthcare coverage is provided by both Medicare and the commercial group health insurance. There are rules that dictate whether Medicare pays first or the group health insurance pays first. These are sometimes called primary and secondary payers. In general, the group health insurance will provide the same types of coverage that a Medigap plan and a Part D prescription drug plan covers and thus these individuals should not sign up for a Medigap or Part D plan. These group health plans are often more expensive than Medicare Advantage Plans but usually have more comprehensive coverage with lower deductibles and co-pays.

Medicare Part C

Medicare Part C (also known as Medicare Advantage Plans) can best be thought of as privatized versions of Medicare Parts A & B combined with a Medigap policy and a Part D prescription drug plan. Under these plans, commercial health insurance companies are paid each month by Medicare to outsource your healthcare coverage. In return, the commercial insurance companies pay the services normally covered by Medicare Parts A & B. Medicare Advantage plans also pay for charges that would otherwise be covered by a Medigap policy and usually cover prescription drug costs as well. These plans sometimes provide additional services not covered by traditional Medicare Parts A & B such as fitness programs, dental insurance, and vision insurance. Overall, 45% of new Medicare enrollees chose to enroll in Medicare Part C rather than traditional Medicare.

To enroll in a Medicare Advantage Plan, a person must first be enrolled in Medicare Parts A & B. New Medicare enrollees can sign up for a Medicare Advantage Plan at the time of enrollment in Medicare (age 65). People currently on traditional Medicare Parts A & B can also change to a Medicare Advantage Plan during the regular open enrollment period: October 15 – December 7. People currently on a Medicare Advantage Plan can switch to a different Medicare Advantage Plan either during the regular open enrollment period or during the Medicare Advantage Plan open enrollment period: January 1 – March 31.

When a person enrolls in a Medicare Advantage Plan, he/she continues to pay regular monthly Medicare Part B premiums to Medicare and additionally pays the Medicare Advantage Plan monthly premiums to the commercial insurance company. These latter premiums can vary widely from as little as $0 to more than $200 per month. A recent study found that 69% of Medicare Advantage Plans in 2022 had no additional premium and the average Medicare Advantage Plan premium that includes prescription drug coverage is $58 per month. On the surface, the Medicare Advantage Plans appear to be a great deal – for the same price or just a few dollars more than Medicare Part B, you can also get prescription drug coverage, lower co-pays, lower deductible limits, dental care, and vision care. However, like most things in life, you get what you pay for and there are features of Medicare Advantage Plans that can make them less desirable than traditional Medicare to some people:

  1. Restrictions in which physicians you can see. With traditional Medicare, you can see any physician in the country who accepts Medicare; only 1% of non-pediatric physicians have opted out of Medicare which means that a person with traditional Medicare can see any of 99% of U.S. physicians who treat adults. With Medicare Advantage plans, enrollees are limited to only those physicians who in network for that particular commercial insurance plan. A Kaiser Family Foundation study found that the average Medicare Advantage  Plan only covers care by 46% of physicians in any given county. Medicare Advantage Plans generally fall into one of two categories: (1) HMOs that restrict enrollees to seeing only physicians who are members of that HMO and (2) PPOs that have a lower cost for in-network physicians and a higher cost for out-of-network physicians. These restrictions work fine for most healthy people but those requiring specialized care for chronic diseases or those who need elective surgeries can find themselves unable to be treated by specialists of their choice. For example, I specialized in interstitial lung diseases and for many years was the only pulmonologist in Columbus who specialized in these diseases. Patients belonging to a Medicare Advantage Plan sponsored by one of the other health systems in Columbus were not able to see me unless they paid for their office visits themselves, out of pocket.
  2. Restrictions on which skilled nursing facilities you can use. Each Medicare Advantage Plan will also have a group of in-network skilled nursing facilities. A study published last month found that enrollees in traditional medicare had access to more of the top-rated skilled nursing facilities than enrollees in Medicare Advantage Plans.
  3. Prior authorization requirements. Medicare Advantage Plans almost always require prior authorization before a patient can see a specialist or undergo a procedure. Prior authorization is quite laborious for physicians and office staff and frequently, physicians will just not order a consult or a test because it takes too much time. As an example, many Medicare Advantage Plans require prior authorization when a physician orders a CT scan. The chest CT scan is a standard part of the work-up of every patient with interstitial lung disease. My office staff would typically complete the initial prior authorization forms but after the insurance company does its preliminary review, it would frequently require a “peer-to-peer” review that would require me to speak directly to another physician who works for the insurance company. This would require me to first call the insurance company myself to schedule a day and time for their physician to call me back. Then the physician would call me and almost always approve the CT scan. I would then need to contact the radiology department with the approval number. Not only would this require a minimum of 4 phone calls but I would often be put on hold when calling myself – once I was kept on hold for 45 minutes just to get a routine chest CT approved! As a result of prior authorization, many patients are either unable to get a recommended specialist consult, procedure, or test or there is a delay in getting the consult, procedure, or test.
  4. Long hospitalizations are more expensive. A recent study found that the average Medicare Advantage plan has lower out-of-pocket costs to enrollees for hospitalizations of 6 days or shorter than traditional Medicare. However, for hospital stays longer than 6 days, the out-of-pocket costs are higher for the average Medicare Advantage Plan than for traditional Medicare.
  5. Variable deductibles and co-pays. The degree that each Medicare Advantage Plan covers deductibles and co-pays varies considerably and many of the low cost plans can be more expensive than traditional Medicare in the long run. It is essential that seniors look at the fine print of each Medicare Advantage Plan that they are considering enrolling in.
  6. Variable prescription drug coverage. Each Medicare Advantage Plan covers prescription drugs differently and just because a plan advertises prescription drug coverage does not necessarily mean that the enrollee will save money on the drugs that they take. Plans often restrict enrollees to purchase medications from a specific pharmacy. Co-pays and deductibles for prescribed medications can vary considerably from plan to plan. And perhaps most importantly, each plan will have a different drug formulary listing which drugs the plan will actually cover. There are only 2 drugs approved to treat idiopathic pulmonary fibrosis and each cost about $100,000 per year. Many of my patients who switched to lower cost Medicare Advantage Plans found that these drugs were not on the new plan’s formulary or had co-pays of as much as $40,000 per year. These patients had to either pay out of pocket or stop taking the medication.

Because it would seem that the Medicare Advantage Plans offered by commercial insurance companies provide much more comprehensive medical care at a lower cost than traditional Medicare plus a Medigap policy, many pundits have suggested that all of Medicare should be privatized. However, there is a dark side of the Medicare Advantage Plans. First, they bill Medicare for each senior that they enroll. However, they get paid by Medicare based on how sick each enrollee is. For that reason, the plans have gone to great lengths to document every medical condition that each enrollee has and in many cases, they have exaggerated these conditions by inflating enrollees’ “risk scores”. A report by the Kaiser Family Foundation found that Medicare Advantage Plans overcharged the federal government by $106 billion between 2010-2019. The problem seems to be accelerating as $34 billion of these overcharges were in 2018-2019 alone. There is a bright side to this, however. Because insurance companies are incentivized to document every medical condition that each enrollee has in order to increase patients’ risk scores, the insurance companies are incentivized to get their enrollees screened for as many diseases as possible. This resultant emphasis on screening has led to many Medicare Advantage Plans out-performing traditional Medicare when it comes to disease screening and routine wellness visits.

A second dark side of the Medicare Advantage Plans is that they use prior authorization denial and payment denial in order to avoid paying for costly procedures and tests. An April 2022 report by the U.S. Office of the Inspector General found that 13% of prior authorizations that were denied by Medicare Advantage Plans actually met regular Medicare approval criteria. Furthermore, the OIG found that of services that were performed but that Medicare Advantage Plans later denied payment for, 18% of denials met Medicare criteria and should have been paid. These denials are a strategy used to increase the profits of Medicare Advantage Plans and is potentially dangerous for patients.

A third dark side of the Medicare Advantage Plans is that although they are great for people when they are reasonably healthy, they often limit coverage for people once they become ill. The U.S. Office of the Inspector General found that sicker people who are in Medicare Advantage Plans were more likely to disenroll and return to traditional Medicare than healthy people. This is especially true for seniors who develop cancer and find that cancer specialists or cancer hospitals that they want to utilize are not in the Medicare Advantage Plan’s network.

Medicare Part D

A Medicare Part D plan is a prescription drug insurance policy sold by a commercial insurance company approved by Medicare. It is required that enrollees have Medicare Part A and/or Part B. Having a Medigap plan is permitted but not required. Seniors can enroll in a Part D plan either when they turn 65 and enroll in Medicare Parts A & B or during the open enrollment period between October 15 – December 7 each year. However, if you do not enroll in a Part D plan when you are first eligible to enroll in Medicare, then you will have to pay a 12% annual penalty if you enroll in a Part D plan at a later date. If you are enrolled in a Medicare Advantage Plan (Medicare Part C), you cannot enroll in a Medicare Part D plan.

The cost of Medicare Part D depends on both the cost of the specific Part D plan and the modified gross annual income of the enrollee. Each Part D plan has different costs, depending on drug coverage. The average Part D base premium is $33.37. Similar to Medicare Part B, there is an additional add-on cost to the base premium for those people with higher modified annual gross income:

Part D plan costs do not stop with monthly premiums, however. In addition, there is an annual deductible that can vary from $0 to more than $480, depending on the individual Part D plan. There are also co-pays on each drug each month. The co-pay amount varies from plan to plan and can vary depending on specific drugs within a plan. A person’s costs also change during the coverage gap (also known as the “donut hole”). Each year, the coverage gap begins when a person has spent $4,430 in out-of-pocket expenses in their Part D plan (for deductible and co-pay amounts). When in the coverage gap, there is a limit that Part D will cover for drugs and the enrollee pays up to 25% of the cost of a drug out-of-pocket. Once a person’s annual out-of-pocket drug expenses reach $7,050, the coverage gap ends and “catastrophic coverage” begins resulting in the individual only having to pay a 5% co-pay for prescribed drugs for the rest of the year.

As with Medicare Advantage plans, each Medicare Part D plan has its own formulary of covered drugs and the drugs on the formulary can change each year. For this reason, it is important that seniors considering a Part D plan look carefully at the plan’s formulary to confirm that their current prescription drugs will actually be covered.

Sign-up recommendations

In my opinion, there are really only three realistic options: (1) Sign up for a Medicare Advantage Plan. (2) Sign up for a combination of traditional Medicare + a Medigap plan + a Part D plan. (3) Sign up for Medicare Parts A & B and continue your group health insurance plan through your employer, union, or retirement system. Relying on traditional Medicare alone is risky because Medicare Parts A & B deductibles and co-pays can be financially devastating if you do not have a Medigap policy. Prescription drug costs can be financially devastating without a Part D plan.

Part A. If you or your spouse has previously worked for at least 10 years, Medicare Part A is free – never turn down free healthcare. Sign up 3 months before you turn 65. You sign up through Social Security (on-line or in person).

Part B. Sign up the same time you sign up for Medicare Part A. If you continue to work past age 65 and get comprehensive health insurance through your employer, then sign up when you retire (although some employers will require you to sign up for Medicare Parts A & B at age 65 even if you are continuing to receive employer-provided group health insurance). You sign up through Social Security (on-line or in person).

Medigap. Sign up at the same time you sign up for Medicare Parts A & B. You should only buy a Medigap policy if you are enrolling in traditional Medicare (Parts A & B) and you should not buy a Medigap policy if you intend to sign up for a Medicare Part C Advantage Plan. If you have group health insurance through your employer, union, or retirement system, you do not need a Medigap policy. You sign up through a commercial insurance company.

Part C (Medicare Advantage Plans). Sign up as soon as you have signed up for Medicare Parts A & B and have your Medicare number. Medicare Advantage Plans are usually preferable to traditional Medicare + a Medigap policy + a Part D plan for people who are relatively healthy. People with serious diseases, such as cancer, need to be careful when signing up for a Medicare Advantage Plan since traditional Medicare + a Medigap policy + a Part D plan may be less expensive in the log run and may allow more choices in physician specialists and specialty hospitals. If you have group health insurance through your employer, union, or retirement system, you do not need a Part C plan. You sign up through a commercial insurance company.

Part D. Sign up as soon as you have signed up for Medicare Parts A & B. Only sign-up for a Part D plan if you intend to enroll in traditional Medicare and not in a Medicare Advantage Plan. If you have group health insurance through your employer, union, or retirement system, you do not need a Part D plan. You sign up through a commercial insurance company.

This all seems really, really complicated

When first enacted, the U.S. Federal income tax system was very simple. Since that time, there have been dozens of new tax laws passed that have resulted in the tax code becoming extraordinarily complicated. The same thing has happened with Medicare – when first enacted, it was simple. But since then, numerous pieces of legislation have added, modified, or deleted parts of Medicare coverage resulting in Medicare now becoming so complex that most people need help navigating all of the decisions they must make when signing up for Medicare. It is important to carefully consider factors such as in-network providers, deductibles, co-pays, and medication formularies when selecting among Medicare options. Like most things in life, when it comes to Medicare options, you get what you pay for and often the cheapest option in the short-run can end up being the most expensive option in the long-run.

October 17, 2022

Categories
Medical Economics

Understanding Hospital Ratings (and how hospitals can game those ratings)

Consumers use ratings in everything that they buy. Amazon rates merchandise, Consumer Reports rates cars and appliances, Trip Advisor rates hotels, Yelp rates restaurants, and Google rates about everything. There are also rating systems for hospitals. But are these rating systems a reflection of the actual quality of care in the hospital or a reflection of the patient population served by the hospital? And if the latter, do hospitals attempt to choose their patients in order to improve their ratings?

The main four hospital rating systems are published by U.S. News & World Report, CMS’s Hospital Compare, Healthgrades, and Leapfrog. In an 2019 article in NEJM Catalyst, the authors rated the rating systems and found that all of the rating systems had flaws. In the article, each rating system was given a letter grade and none received an “A”.

  • U.S. News & World Report: B
  • CMS Hospital Quality Star Ratings: C
  • Leapfrog Safety Score: C-
  • Healthgrades: D+

Each of these rating systems uses different measures to determine hospital ratings. In order to understand what the rating really means, you need to first understand how the ratings were made.

U.S. News & World Report

The highest rated system was U.S. News & World Report’s annual hospital ranking. Each year, U.S. News & World Report updates their methodology in order to continually improve on its accuracy and relevancy. This process of annual methodology revision has resulted in the U.S. News & World Report ratings becoming more accurate each year. This year, the rankings are determined by four elements that are each weighted differently in determining the overall hospital rank:

  1. Patient outcomes (37.5%) – measured by the number of Medicare patients who died within 30 days of being admitted to the hospital in 2018, 2019, & 2020. The measure was adjusted to factor in each patient’s age & gender, the type of care received, co-morbidities, and whether patients were on Medicaid as well as Medicare. The Medicaid adjustment is important because it is a marker of low-income Medicare patients. A criticism of this measure is that the survival data is 3-5 years old and may not reflect the hospital’s current survival data.
  2. Patient experience (5%) – measured by the HCAHPS patient satisfaction surveys
  3. Other care-related indicators (30%) – measured by nurse staffing, patient volume, certain clinically proven technologies and professional & specialty-specific recognition
  4. Expert opinion (27.5%) – measured by an annual survey to board-certified physicians about which 5 hospitals they consider to be the best for their particular specialty.

CMS Hospital Quality Star Ratings

The current (2022) year CMS Hospital Quality Star Rating is based on five elements:

  1. Mortality (22%) – measured by the number of Medicare patients with specific diseases who died within 30 days of admission in 2017, 2018, and 2019. The diseases include: myocardial infarction, coronary artery bypass & graft surgery, COPD, heart failure, pneumonia, stroke, and surgical patients.
  2. Patient safety (22%) – measured by eight different safety measures obtained from 2017 to 2020. Some of the measures include central line infections, C. difficile infections, and surgical site infections.
  3. Readmission (22%) – measured by the number of patients with 11 specific diagnoses who required readmission within 30 days of discharge from the hospital. Data are from 2017, 2018, and 2019.
  4. Patient experience (22%) – measured by the HCAHPS patient satisfaction surveys from 2019.
  5. Timely and effective care (12%) – measured by 13 different elements from 2019 and 2020. Some of the measurements include percent of staff vaccinated for influenza, ER length of stay times, percent of ER patients who left without being seen, appropriate follow-up interval for routine screening colonoscopy, and number of patients with low back pain who got an MRI without first getting physical therapy.

Leapfrog Safety Score

The Leapfrog Group was founded in 2001 by a group of large employers who wanted to have objective quality metrics in order to change the way that these companies purchased healthcare for their employees. They give hospitals a grade of A through F based exclusively on patient safety. Leapfrog uses data from CMS and from their own survey. A criticism of Leapfrog is that only about half of U.S. hospitals return the Leapfrog survey. In addition, there is no audit process in place to validate the self-reported survey responses, creating opportunities for falsifying survey responses in order to appear more favorable. The Leapfrog grade is based on two elements:

  1. Process measures (50%) – these are 12 different measures of how healthcare is delivered by the hospital such as whether there is computer order entry, how the ICU is staffed by physicians, and how frequently staff practice hand hygiene. The measures are assessed on data from 2020 to 2021.
  2. Outcome measures (50%) – these are 10 different measures such as: frequency of MRSA infection, frequency of patient falls, and frequency of air embolism. The measures are assessed on data from 2018 to 2021.

Half of the Leapfrog Safety Score is based on process measures that only indicate whether the hospital has those specific processes in place and does not indicate whether those processes actually improve patient care in that particular hospital. Another criticism of the Leapfrog Safety Score is that it does not incorporate mortality, which can be argued is one of the more important measures of the effectiveness of hospital care.

Healthgrades

Healthgrades bases its rating on outcomes for 33 medical conditions and procedures. The data for hospitals in 34 states is derived only from Medicare reported data. In the other 16 states, data is derived from both Medicare reports and all-payer reports. Outcomes are adjusted for a large number of co-morbidities. However, there are a large number of exclusions, for example, any Medicare patient under age 65. The elements of the rating are:

  1. Mortality cohorts – these measures are based on the number of patients with 17 different diagnoses who die within 30 days of admission. The diagnoses include conditions such as bowel obstruction, cranial neurosurgery, and pancreatitis.
  2. In-hospital complication cohorts – these measures are based on whether complications occurred in patients undergoing 15 different surgical procedures such as appendectomy, prostatectomy, and hip replacement. In addition, complications occurring during one medical condition (diabetic emergencies) is included.

The problems with the rating systems

All four of the hospital rating systems have flaws. One of the most important flaws is that they rely heavily on Medicare data. This data is quite robust for assessing the outcomes of Medicare patients. However, the only patients in the Medicare database are those who either are over age 65, are receiving dialysis for kidney failure, or are disabled. Currently, only 18.4% of the U.S. population is on Medicare so there is no hospital outcome data for the majority of Americans. Because hospital ratings drive hospital quality improvement processes, American hospitals have been more strongly motivated to improve care to patients older than age 65 with less attention given to improving care to younger patients.

A second flaw is that most of the outcome data is based on information that is several years old. In the case of U.S. News & World Report, the data is up to 4 years old and in the case of CMS, the data is up to 5 years old. Hospitals are constantly improving their patient care practices and most hospitals have made changes in those practices over the past 5 years. As a result, the data from which the ratings are derived can be significantly out of date and not reflective of current hospital practices.

A third flaw is that the rating systems rely on surveys. The HCAHPS survey data is used by the U.S. News & World Report rating and by the CMS Hospital Quality Star rating. Nationwide, on average only 26.7% of patients respond to the HCAHPS survey and there is wide variation with many hospitals having significantly lower response rates. A 2019 study in the Patient Experience Journal found that the higher a hospital’s HCAHPS survey response rate, the higher that hospital’s average HCAHPS score was from those surveys. The implication is that patients are more likely to fill out a survey if they were unhappy with their care so that the sample of patients responding to the survey is not representative of the total hospital patient population. Those hospitals that can convince more patients to fill out surveys will thus have higher HCAHPS scores.

Leapfrog sends surveys to hospitals to fill out but only about half of U.S. hospitals respond to their survey. Those Leapfrog surveys are typically filled out the the hospital’s quality staff who can have a conflict of interest in their survey responses since those staff generally also have their job performance evaluations based on the reported quality outcomes. As a result, the Leapfrog surveys can portray the hospital as performing better than it actually is. For hospitals that do not respond to their survey, Leapfrog obtains surrogate data from other sources. It is not clear if data from those other sources is equivalent to the survey data so it is uncertain if valid comparisons can be made between those hospitals that do fill out Leapfrog surveys and those hospitals that do not return surveys.

A fourth flaw in the ratings is that only a limited number of medical conditions are evaluated. U.S. News & World Report’s rating is based on overall mortality with the result that not much is known about the quality of care for patients who do not die. The CMS Hospital Quality Star rating also uses mortality but only for 7 specific conditions. CMS readmission data is limited to patients with 11 specific diagnoses and its patient safety data is based on only 8 complication diagnoses. The Leapfrog rating does not incorporate mortality data and only incorporates a very limited number of complication diagnoses. The Healthgrades rating is disproportionately based on surgical outcomes and incorporates very little outcome data on non-surgical patients.

The problem of healthcare gerrymandering

In politics, gerrymandering is when politicians set district boundaries in order to choose their voters to win elections. In medicine, the equivalent of elections are annual hospital ratings. Medical gerrymandering is when hospitals choose their patients in order to improve their ratings. After years of having to explain low hospital ratings to hospital CEOs, Deans, and hospital board members, I’ve come to realize that it easy for hospitals to game the rating systems. Here are some of the specific ways that hospitals can improve how they look on the various surveys. Some are legitimate but others are quite nefarious.

Diagnosis selection. It might seem like a patient’s diagnosis is pretty straightforward but this is not always the case. For example, pneumonia is typically defined as a respiratory infection accompanied by an infiltrate on a chest x-ray. But what if the x-ray is normal and the infiltrate is only seen on a chest CT scan? Or what if the x-ray is normal but the doctor believes that the patient has pneumonia based on physical exam? These pneumonia patients tend to be less sick and therefore less likely to either die or be readmitted. Consequently, by being liberal with diagnosis definitions in less ill patients, the hospital can reduce the death rate and readmission rate by including more patients who have mild illness. Often, the diagnosis that is submitted to CMS or other rating organizations is based on the DRG diagnosis that is selected for a given patient’s admission. The DRG diagnosis is usually chosen by the hospital’s coding department staff and if there are 2 possible diagnoses that they can chose from, they will usually chose the DRG diagnosis that pays more. For over a year, I reviewed the charts of all patients who died in our hospital and found that in some, the DRG diagnosis did not really match the patient’s actually clinical diagnosis. By changing the DRG diagnosis, the patients were sometimes re-classified with a diagnosis that was not included in the rating data.

Co-morbidity selection. As a general rule, the more co-morbidities that a patient has, the more likely they are to die or be readmitted to the hospital. Once again, these co-morbidities are generally selected by the coding staff. When I reviewed the inpatient charts of those patients who died in the hospital, I was often able to find co=morbidities that the coding staff overlooked. Because the U.S. News & World Report rating system takes into account these co-morbidities, the more you can list, the better your overall rating will be.

Classify dying patients as being in observation status. Hospitals usually lose money on those patients who are kept in observation status. Observation patients are considered to be outpatients so they have more co-pays and the hospital cannot charge the insurance company for a lucrative inpatient DRG. As a general rule, patients who are anticipated at the time of admission to require a hospital stay of “less than 2 midnights” are considered to be in observation and are not considered to be inpatient admissions. This turns out to be very important in hospital rankings because the mortality rates are only based on those patients who have an inpatient admission. In other words, patients in observation status who die are not included in the mortality calculations for hospital rankings. It is very common to have patients admitted to the intensive care unit after an out-of-hospital cardiac arrest or some other catastrophic medical event and those patients die in the ICU a few hours later. The hospital finance department will want those patients to be classified as inpatients (since they have a medical condition that would have required a stay of greater than 2 midnights if they had lived). However, I trained our admitting physicians to put those patients (who were anticipated to die within 24 hours) in observation status when first admitted to the ICU. If they died within the first day of their ICU stay, they would die in observation status and not be included in our inpatient mortality data. If they survived for more than a day in the ICU, the physician would change their admission level of care order from observation to inpatient admission so that the hospital got paid for the admission. Because inpatient mortality is based on Medicare patients, some hospitals further game the system by only classifying Medicare patients with impending death as being in observation status and leaving commercially-insured patient who are not on Medicare as being inpatient status.

Keep “frequent flyers” in observation status. Similar to mortality rates, only patients with an inpatient admission are included in readmission rate calculations. There are some patients who you know are likely to return to the hospital within 30 days. If you keep them in observation status rather than admit them as inpatients, they won’t count against the hospital’s 30-day readmission rate.

Enroll dying patients in hospice. Medicare does not include patients who are enrolled in hospice in mortality data. However, patients must either already be enrolled in hospice prior to an inpatient admission or become enrolled in hospice during their first hospital day. Identifying those patients who have ultimately terminal diseases and getting them enrolled in hospice early not only helps serve the patients’ palliative care needs but also eliminates those patients from counting toward the hospital’s mortality rate if they die within 30 days of an inpatient admission.

HCAHPS survey response rates. As described in the last section, the patients who do not fill out HCAHPS surveys tend to be those who were more happy with their care. Hospitals that have tactics in place to get more patients to fill out their HCAHPS surveys will get a higher average score on their surveys. Therefore, hospitals that put resources into getting as many patients as possible to respond to the HCAHPS survey will have higher ratings than hospitals with a low survey response rate.

Flood U.S. News and World Report with expert opinion surveys from your own physicians. Americans in 2022 have survey fatigue. We are constantly receiving phone surveys, mail surveys, and email surveys. There are just too many surveys so we don’t bother to fill most of them out. Physicians are no different and many (or most) physicians who receive a U.S. News & World Report expert opinion survey just toss it in the trash. But if a hospital can convince all of its doctors to respond to the expert opinion survey (and rank the hospital in their top 5), then it can move up in the overall ratings. With expert opinion accounting for 27.5% of the overall U.S. News & World Report rating, this strategy is low-hanging fruit for hospitals, especially for hospitals with a large medical staff.

Choosing your patients. The best way to improve the hospital’s rating (and most immoral) is for the hospital to select the patients that it admits. Whether a patient dies within 30 days of being admitted and whether a patient is readmitted within 30 days of discharge is only partially dependent on the medical care delivered while that patient was admitted to the hospital. Socioeconomic factors that the hospital cannot control are at least as important. Age, income level, employment status, housing status, health insurance status, access to transportation, level of education, smoking status, primary language spoken, marital status, alcohol use, drug use, psychiatric co-morbidity, and race can also have a profound impact on disease outcomes, particularly after discharge. Hospitals that care for a larger percentage of older, low-income, unemployed, homeless, uninsured, smoking, low education level, foreign born, or racial minority patients will inevitably have worse mortality and readmission rates than hospitals that mainly care for patients coming from a high socioeconomic group. There are several ways that a hospital can alter their inpatient population in order to improve their overall outcomes and thus their ratings.

    • Location, location location. By building a hospital (or a satellite hospital facility) in an affluent suburban area, that hospital will naturally attract a more affluent patient population. For hospitals that own primary care practices, by locating those physician offices in affluent suburban areas, it can ensure more affluent patients being admitted to the hospital.
    • Nurture referring physician relations. One of the most important reasons that patients choose to go to a particular hospital is whether their physician recommends that particular hospital. If the hospital fosters relations with private practice primary care physicians who are located in affluent neighborhoods, it can improve the average socioeconomic status of that hospital’s inpatients and by doing so, improve the hospital’s rating.
    • Nurture referral hospital relations. For those hospitals that receive a relatively large number of hospital transfers, by fostering referrals from smaller hospitals that are located in affluent communities, the hospital can skew its inpatient population to a patient group that is more likely to have better readmission and mortality rates.
    • Discourage unfavorable patients. In large cities, patients usually have a choice of emergency departments and hospitals to utilize. When patients have a bad experience at one hospital, they will tend to go to another hospital in the future. Cab vouchers and free meals in the emergency department can encourage low income patients to come to the hospital. On the other hand, liberal use of collection agencies for unpaid bills can discourage those patients. Hospitals have ways to tacitly discourage low income patients, minorities, smokers, and foreign-born patients from coming back. If the outpatient physicians affiliated with the hospital do not accept Medicaid or require up-front full payment from uninsured patients, then those patients will migrate to other health systems. This is the ugly side of American healthcare but unfortunately, ugly exists in every state and every large city.
    • Encourage favorable patients. Hospitals cannot get away with giving something tangible to one group of patients and withholding that something from another group. At the worst, it may be against the law and at best, it results in bad publicity. However, there are subtle ways to attract patients who are more likely to have better mortality and readmission outcomes. Since these outcomes are based on Medicare data, the trick is to attract “favorable” patients over age 65. Adding extra free wellness programs as part of commercial insurance contracts makes the hospital attractive to those seniors who can afford to purchase secondary health insurance. Similarly, free hospital-sponsored wellness programs in affluent neighborhoods can attract more affluent seniors. Hospital advertising campaigns that feature physically fit seniors hiking, swimming, and going on vacations to foreign countries will appeal to healthy, affluent Medicare enrollees.

I spent most of my career practicing in an urban hospital that served a patient population that would be considered “unfavorable” from a socioeconomic standpoint… and if I had to do it all over again, I would not change a thing. Idealism was one of the reasons I went into medicine in the first place. But for every hospital that is motivated by idealism, there is at least one hospital that is motivated by profit and fame. Unfortunately, our hospital rating systems reward the latter and not the former.

September 16, 2022

Categories
Medical Economics

The Medical Economics Of Firearm Injuries

Several years ago, our medical center’s chief of trauma surgery asked me “Why don’t we make your hospital a level III trauma center?” At the time, I was the medical director of a 175 bed urban/community hospital component of our larger university medical center. In order to keep the hospital open, I was always looking for ways to improve our finances and that meant looking for new income sources.

I researched the economics of trauma and called the medical directors of all of the other level III trauma hospitals in Ohio to get a feel for the most common trauma injuries that we would see and the hospital resources that would be required. I ran the numbers and it turned out that becoming a level III trauma center made financial sense.  I projected that we would primarily see an increase in geriatric fall-related fractures. The demographics indicated that most of these patients would be over age 65 and thus have insurance through Medicare. Inpatient hip, and leg fracture admissions are quite lucrative for hospitals and since we would not need to have 24-hour in-hospital surgeons and anesthesiologists (unlike the requirements of a level II trauma center), the costs would not be very high. From an academic standpoint, it would improve the exposure of our emergency medicine and orthopedic surgery residents to fractures and fracture management.

I presented our plan to the medical center’s leadership and got the green light to proceed. But during the various meetings prior to approval, one of the department chairs said “Yeah, and we can make a lot of money off of gunshot injuries”. But do hospitals really make money from firearm injuries? To answer that question, we must first look at the statistics on firearm injuries.

Firearm injury statistics

It turns out that we know a lot less about firearm injuries than other causes of injury and death. A major reason is the Dickey Amendment, named after U.S. Representative James Dickey of Arkansas. In the 1996 Omnibus bill, he added an amendment stating “…none of the funds made available for injury prevention and control at the Centers for Disease Control may be used to advocate or promote gun control.” The amendment was strongly lobbied for by the National Rifle Association and effectively stopped all research by the CDC into gun-related deaths and injuries. It was not until 2018 that Congress passed a law allowing the CDC to report data on firearm injuries and not until 2020 that Congress allowed funding for firearm injury research by the CDC.

The most widely available firearm statistics from the CDC and the FBI are the number of deaths by firearms. For example, in 2020, there were 45,222 firearm-related deaths in the United States. Of these, 54% were death by suicide, 43% were homicide, and 3% were accidental. Guns are America’s weapon of choice for homicide and account for 79% of homicides. When a gun is used for homicide, 64% of the time it is a handgun. Although semiautomatic rifles get a lot of public attention, rifles (including assault weapons) only accounted for 364 gun-related homicides in 2019 (in 32% of gun-related homicides, the type of gun was not reported). Guns are also America’s method of choice for suicide and account for 53% of all suicides. These numbers are important for public policy but really have minimal impact on hospital finances because most firearm-related homicides and nearly all firearm-related suicides are pronounced dead at the scene and never get transported to the hospital. Therefore, the cold reality is that firearm-related deaths are relatively inexpensive from a healthcare cost standpoint. Instead, the costs are incurred by the survivors of firearm injuries.

There is no single national data system that provides complete and reliable data on non-fatal firearm injuries. The U.S. Department of Justice reported that in 2018, there were 34 times as many non-fatal crimes in which a firearm was used as there were firearm-related homicides. A 2015 study reported that there were just over 2 non-fatal firearm-related injuries for every 1 firearm-related death in the U.S. Most firearm-related injuries are from assault: 85% of the time a firearm is used in suicide it results in fatality whereas only 19% of the time a firearm is used in assault does it result in homicide. For this reason, far more assault-related firearm injury victims survive long enough to make it to the hospital than persons attempting suicide by firearm. Firearm-related accidents are even less fatal with death occurring in only 5% of incidents.

One of the most complete datasets available is a report on firearm injury healthcare service needs and costs compiled by the United States Government Accountability Office (GAO) at the request of Congress in June 2021. The GAO found that the hospitalization costs of firearm injuries are just over $1 billion per year with an additional $75 million for patients seen in the emergency department but not admitted to the hospital. These hospitalizations and ED visits are expensive and cost more than twice the amount of other hospitalizations and ED visits.

In addition to hospital charges, physician professional charges add an additional 20% to these numbers. When combined, the total annual initial healthcare cost of firearm-related injuries is $1.3 billion. There are major differences in the anatomic location of injuries among those patients admitted to the hospital and those patients seen and released from the emergency department. 48% of inpatient stay costs are incurred by persons injured in multiple regions of the body where as 60% of ED-only costs are incurred by external-only (skin-only) injuries.

Most victims who arrive at the hospital survive with only 8% of inpatients and 10% of ED patients dying. Inpatient deaths account for 8% of hospital firearm injury costs and ED deaths account for 19% of ED-related firearm injury costs. There are additional post-hospital healthcare costs for survivors with 20% of inpatients requiring discharge to skilled nursing facilities or home healthcare.

There is a significant difference in payer mix among inpatients with firearm injuries versus those seen and released from the emergency department. In the ED, 37% of patients are self-pay. Most of these patients have low incomes and little financial resources. Although they are frequently sent to collection agencies, little money is ever collected on them. Consequently, the majority of self-pay charges in the ED are written off. When ED patients are insured, the most common coverage is by Medicaid (30%) followed by private commercial health insurance (20%). Only 5% of ED-only patients are covered by Medicare and this reflects the typical younger age of firearm injury victims. The average cost to the hospital for an ED-only firearm injury was $1,478 with the most costly being no-charge patients ($1,697) and the least costly being Medicare patients ($1,256). The graph below shows actual cost of care to the hospitals and not what the payers ultimately paid for ED visits.

Patients requiring inpatient hospitalization have a strikingly different payer mix with 52% of patients covered by Medicaid. This is largely because hospital billing departments work these patients rigorously to get as many self-pay inpatients to apply for Medicaid while they are in the hospital. These “Medicaid pending” cases are usually paid retroactively to the date of application once the patient’s Medicaid coverage is approved. The hospital costs per admission are highest for those patients with Medicaid ($35,862) and lowest for self-pay patients ($22,735). The graph below shows actual cost of care to the hospitals and not what the payers ultimately paid for hospitalizations.

Inpatients with firearm injuries have a different demographic than the the U.S. population as a whole. They are more likely to be male (88%), between age 15 – 44 (80%), and Black (52%). There is not data on the annual income of patients with firearm-related injuries however more than half of patients reside in zip codes where the median household income is less than $44,000 per year.

There are also differences in inpatient firearm injury rates between different geographical locations in the country. The Southern United States accounts for the largest percentage of firearm injuries (48%) but only has 38% of the total U.S. population. The average cost per firearm-related hospitalization was considerably higher in the West ($40,465) than in Northeast ($29,624), South ($28,176), or Midwest ($27,817).

There are enormous differences in firearm injuries between different states. The Rand corporation reports that annual firearm-related hospitalizations ranged from a low of 0.19 per 100,000 population in Hawaii to a high of 2.42 per 100,000 population in Louisiana, a 13-fold difference. The rate for the District of Columbia was not included in this report.

Patients admitted to the hospital with firearm-related injuries are likely to require readmission to the hospital after discharge. A 2019 study found that 12.5% of patients discharged after a firearm injury hospitalization required readmission within 6 months of discharge. Many of these patients required more than one readmission – patients who required readmission had an average of 1.7 readmissions each. About 1/2 of the readmissions occurred within the first 30 days of the initial admission. The average cost per readmission is $10,108 or about one-third the average cost of the initial hospitalization.

The GAO report does not reveal the entire impact on healthcare costs. It does not include the cost of outpatient treatment, skilled nursing facilities, or home healthcare. It also does not include the cost of mental healthcare after a firearm injury. Furthermore, the GAO report only examined hospital costs and not what payers actually paid.  A December 2020 study in the Annals of Internal Medicine looked at 2,019 firearm-related injuries in Blue Cross Blue Shield members from five U.S. states and measured the insurance company payment, plus any copayments, coinsurance, or deductible owed by the patient. The total payments for an ED-only firearm-related injury averaged $5,686 and for inpatient hospitalizations averaged $70,644 (hospitals are paid more by commercial insurance companies for any given service than they are paid by Medicare; these higher payments offset the amount hospitals lose on self-pay and Medicaid patients). The study found that in the 6-months after an ED-only firearm-related injury, total healthcare costs were $8,136 higher than in the 6-months before the ED visit ($12,120 versus $3,984). This indicates that most of the costs of a firearm injury are incurred after the patient leaves the emergency department. Similarly, in the 6-months after an inpatient hospitalization for a firearm-related injury, total healthcare costs were $17,389 higher than in the 6-months before the hospitalization ($21,507 versus $4,118). In addition, mental health claims increased by 106% after ED-only visits and by 319% after inpatient hospitalizations.

Are firearm injuries profitable for hospitals?

As a general rule, hospitals make money on commercial insurance patients, lose money on Medicare patients, lose more money on Medicaid patients, and lose the most on self-pay patients. The Medicare Payment Advisory Commission (MedPAC) reported to Congress that in 2022, the average hospital loses about 9% on each Medicare patient. This means that for a hospital to break even on any service it provides, there has to be a certain percentage of high-paying private commercial insurance admissions to counterbalance loses sustained from Medicare, Medicaid, and self-pay admissions. The ratio of these payment sources is called the payer mix. The average U.S. hospital revenue is composed of 21.8% Medicare, 12.8% Medicaid, and 66.5% private/self/other. The composition of the private/self/other component varies considerably from hospital to hospital and from state to state. For example, hospitals in Medicaid expansion states have a much lower self-pay percentage than hospitals in states that did not opt to expand Medicaid. The challenge for every hospital is to have enough commercially-insured patients to offset the losses sustained by all of the other patients in order to break even each year.

Given that only 19% of inpatients and 20% of ED-only patients with firearm-related injuries have commercial insurance, it is hard for any hospital to make firearm injuries profitable. Hospitals collect very little from the 15% of inpatients and 37% of ED-only patients that are self-pay and most of these charges are written off. These percentages are considerably higher than the population as a whole – the U.S. Census reported that in 2020, 8.6% of the U.S. population had no health insurance and 93.4% of the population had governmental or private health insurance. In short, the payer mix for firearm-injury patients is just plain bad.

To compound the problem, a physician cannot generate sufficient professional revenue to support a competitive income for themselves with this payer mix. Therefore, hospitals have to more heavily subsidize the emergency physicians and surgeons who care for firearm injuries if they want to keep those physicians on staff. This creates even more overhead costs for the hospitals.

How to reduce financial loss from firearm injury patients

Firearm injuries are classified as trauma cases and as such are preferentially directed to hospitals designated as trauma centers. These are in turn classified as level I, level II, and level III trauma centers. For a full explanation of the different levels of trauma centers, see my previous post. Level III centers are the most common and require the least hospital resources. Unlike level I and II centers, level III trauma centers are not required to have surgeons, anesthesiologists, and OR staff physically present in the hospital 24 hours a day. This greatly reduces the hospital overhead expenses of level III trauma centers compared to level I & II centers.

For all payers, surgical admissions are more lucrative than non-surgical admissions and so hospitals can often break-even or even make a profit on Medicare surgical admissions while losing money on Medicare non-surgical admissions. Therefore, for a hospital to make money on trauma admissions, it needs to attract as many patients who require a surgery sometime during their admission but preferably not in the middle of the night. This is why geriatric fall fractures are so desirable – most of them require an inpatient surgery but that surgery can usually be delayed until the following morning.  But as soon as a hospital holds itself out as a trauma center of any level, the EMS squads will bring firearm injury patients in addition to hip fracture patients. So, how does a hospital minimize financial losses from firearm-related injuries? Here are a few specific tactics:

  1. Convert self-pay to Medicaid. This is impractical for patients seen in the emergency department and released since the patients are in the ED for a short period of time. The hospital charges are not terribly high so the financial losses are not excessive. But for patients admitted to the hospital, there is enough time for the billing staff to get eligible patients signed up for Medicaid. Since Medicaid and Medicare will pay retroactive to the date of application, this can greatly reduce firearm injury admission write-offs.
  2. Develop transfer agreements with level I and II hospitals. For many level III trauma center hospitals, the costs to become a level II center is excessive, mainly from the need for 24-hour in-house surgeons, anesthesiologists, and OR staff. If the level III hospital can transfer many of its firearm-related trauma patients, then it can reduce losses, particularly from the self-pay and Medicaid patients that require surgery in the middle of the night.
  3. Reduce length of stay. Hospitals get paid by the diagnosis, not by the duration of hospitalization. By keeping the length of stay low, hospitals can reduce financial losses from firearm injury admissions. Significant length of stay reductions can even make these admissions profitable. The best measure is the “length of stay index” which is the actual length of stay divided by the national average length of stay for any given diagnosis. The length of stay index goal for firearm injury admissions should be less than 1.00 and ideally, less than 0.85.
  4. Utilize physicians who receive Upper Payment Limit funding. The Upper Payment Limit program allows certain physicians to be paid commercial insurance rates for Medicaid patients. These are largely state government-employed physicians at academic medical centers affiliated with public universities. This can result in the physicians having a payer mix equivalent to 71% private commercial insurance. This substantially improves the physician professional revenue payer mix resulting in less hospital subsidy and lower hospital overhead expenses.
  5. Convert ED-only self-pay firearm injury patients to Medicaid. As discussed earlier, most hospitals do not bother with self-pay firearm injury patients who are treated and released from the emergency department because the hospital charges are relatively low and the patients are there for a short time. However, since these patients have much higher healthcare costs in the 6-months after their ED visit than for the actual ED visit, it can be wise for the hospital to invest in staff to get these self-pay patients signed up for Medicaid while they are in the ED. That way, their subsequent outpatient care can be reimbursed.
  6. Ensure high quality post-hospital medical care. Given the 12.5% six month readmission rate, many self-pay and Medicaid patients will be readmitted to the hospital, thus magnifying hospital losses on these patients. Furthermore, since half of these readmissions occur in the first 30 days after discharge, they can count against the hospital’s readmission penalty from CMS. By developing strong medical care systems for firearm injury patients, these readmissions can be minimized. By utilizing physicians participating in Upper Payment Limit programs, outpatient physician care can break even or be profitable, even with a high self-pay population.
  7. Attend to mental health needs. The high number of mental health claims following ED visits and hospitalizations for firearm-related injuries is an indicator of the emotional trauma that accompanies the physical trauma in firearm injury patients. Although hospital subsidization of mental healthcare can be expensive, it can help reduce readmissions as well as improve patients’ quality of life.
  8. The best way to reduce financial losses from firearm injuries is to reduce the number of firearm injuries. This requires public policy decisions that go beyond the walls of our hospitals but physicians and hospitals can advocate for policies that reduce firearm injuries. However, current legislative measures and judicial decisions are moving toward policies that are resulting in increased firearm injuries.

Firearm injuries aren’t going away

Americans love guns. 39% of American men and 22% of American women own a gun and there is at least 1 gun in 40% of U.S. households. There is wide variation in gun ownership by state with 64% of households in Montana having a gun versus 8% of households in Hawaii and New Jersey having a gun. The U.S. is the only country in the world with more guns than people. We have 120 guns for every 100 residents – the next closest country is Yemen with 53 guns per 100 residents. Many states have recently passed legislation making guns even more accessible. Previously, 2016 held the record for gun sales in the U.S. with 16.7 million sold that year. In 2020, that record was shattered with 22.7 million guns sold. Also in 2020, firearm-related homicides increased 35% over 2019.

The commonly quoted slogan “Guns don’t kill people; people kill people” is only half right. The reality is that people with guns kill people. And people with guns cause firearm injuries. For hospitals, firearm injuries will be a growth business in the future but because of the payer mix of those injured, it is easy for hospitals to lose money caring for these patients. However, a few simple tactics can minimize these losses.

July 6, 2022

Categories
Medical Economics Medical Education

Are Unionized Doctors Coming To Your Hospital?

Overall, union membership in the United States has been steadily declining over the past 60 years. However, one of the consequences of the COVID-19 pandemic has been a resurgence of interest in doctor’s unions, especially among residents and fellows. In the past two months, residents at the Keck School of Medicine of USC, Stanford Health Care, and University of Vermont voted to unionize. Is a union in your hospital’s future?

Summary Points:

  • Overall, American physicians are less likely to belong to unions than other workers
  • Residents are far more likely to be unionized than attending physicians
  • Physician unions have limited ability to strike
  • Interest in unionization may increase in the future as more physicians become hospital-employed

 

The Bureau of Labor Statistics recently reported that in 2021, there were 14 million wage and salary workers in the United States who were members of a union. This equates to an overall union membership rate of 10.3%. Overall, union membership has dropped considerably over the past 70 years.

There are tremendous differences in the union membership rates for public sector workers (33.9%) versus private sector workers (6.1%). There are also profound geographic differences in union membership rates ranging from high rates in Hawaii (22.4%) and New York (22.2%) to low rates in South Carolina (1.7%) and North Carolina (2.6%). Physicians are less likely to be unionized than most other professions with approximately 5% of U.S. doctors belonging to a union. Residents and fellows comprise the largest group of physicians who are unionized and their numbers are growing.

The largest union of residents and fellows is the Committee of Interns and Residents (CIR), a part of the Service Employees International Union. In normal years, the CIR reports 1-2 hospitals have union organizing campaigns per year. However, with the COVID pandemic, that number has tripled. Currently, residents at about 60 hospitals nationwide are unionized with an estimated 15% of all U.S. residents belonging to unions.

Fewer attending physicians are unionized. The largest union is the Union of American Physicians and Dentists, an AFL-CIO affiliate. It is estimated that about 10,000 of the 700,000 U.S. attending physicians are unionized, slightly less than 1.5%. Historically, most attending physicians were in private practices, either as solo providers or as part of medical group practices. There was very little reason for these physicians to unionize because they were self-employed. This may change in the future as physicians become increasingly hospital-employed.

The pros and cons of resident unions

The effect of resident unionization has not been well-studied. A 2021 study published in JAMA Network Open of 5,701 U.S. surgery residents found that unionized residents were more likely to have hospital-subsidized housing and more likely to have 4 weeks of vacation per year (as opposed to 2-3 weeks) than non-unionized residents. However, there was no difference in burnout, suicidality, job satisfaction, duty hour violations, mistreatment, salary, or educational environment between residents at unionized and non-unionized programs.

Residents and fellows hold a unique employment status – they are simultaneously trainees and employees of the hospital. They also have time-limited employment, unlike most American union members who can spend their entire employment career as union workers. Because of their unique status, there are advantages and disadvantages to residents unionizing.

The pros of resident unionization

  1. Ability to negotiate salary. Residents earn an average of about $64,000 per year. Typically, salaries increase by about $2,000 for each year of residency. Although the precise salary for residents varies from hospital to hospital, most of the variation is related to geographic cost of living differences. Most of the financial support for resident salaries comes from fixed Medicare payments to hospitals for graduate medical education. Overall, the ability of resident unions to impact base salaries is limited. However, supplemental pay for working during disasters and for in-house moonlighting may be more negotiable.
  2. Ability to negotiate vacation. Unlike salary, hospitals do have more flexibility in the amount of vacation time offered. The JAMA Network Open article found that unionized residents had more vacation time per year than non-unionized residents.
  3. Ability to negotiate fringe benefits. Hospital night call rooms, meals while on-duty, hospital-subsidized housing, and maternity/paternity leave are all on the table when residents are unionized.
  4. Ability to negotiate work conditions. Issues such as availability of personal protective equipment and prioritization of hospital employe vaccination became very important to residents during the COVID pandemic. Most healthcare workers experienced stressful working conditions during the pandemic and residents were no exception. Many residents turned toward unions in hope that unionization would reduce these stressful conditions.

The cons of resident unionization

  1. Union dues. Currently, annual dues for residents who belong to the CIR are 1.6% of their total salary. This can be an important deterrent to joining a union given that residents do not have high salaries to begin with and that residents are often feeling financial pressures due to student loans and young children at home.
  2. Short duration of employment. Internal medicine, pediatrics, and family medicine residencies are 3 years long. Psychiatry residency is 4 years long. Surgery is 5 years long. Many current residents do not want to go through the time and hassle of forming a union since they will personally only experience any benefits of unionization for a short period of time before they become attending physicians.
  3. Barriers to going on strike. The most powerful tool of any union is the strike. Some ethicists have opined that it is unethical for physicians to go on strike as a strike could lead to patient abandonment and resultant patient harm. It has been argued that since residents must be supervised by attending physicians, the attending physicians could cover patient care responsibilities if the residents go on strike. However, residents are integral components of health care teams and if they are not present, then there is a risk of team malfunction. There is also a very different public perception of physicians going on strike as opposed to other workers – if your Starbucks barista goes on strike, it is a minor inconvenience but if your doctor goes on strike, your health is threatened. Striking physicians may find little sympathy from the general public and may garner very negative opinions. That being said, last month, Los Angeles residents threatened to go on strike and the strike was averted at the last minute.
  4. Soured relation with attending physicians. When residents complete their residencies, they either get a job as an attending physician or continue their training as subspecialty fellows. In either case, they rely on the attending physicians that they trained under during their residency for letters of recommendation. If union activities result in an adversarial relation between the residents and those attending physicians, those letters of recommendations may take on a negative tone. Labor laws prohibit retribution against union members for union activities; however, when it comes to these letters, an average recommendation implies that the resident is actually significantly below average. Therefore, a resident whose union activities antagonized his/her attending physician could receive a lukewarm recommendation letter from that attending. Such a letter could not be proven to be retribution from a legal standpoint but would put that resident at a considerable disadvantage when applying to fellowship positions compared to other resident applicants with glowing letters. Moreover, residents who develop reputations for organizing collective actions against their hospitals on the part of their union may be perceived as troublemakers by fellowship programs at other hospitals, placing those residents at a competitive disadvantage when applying for fellowship positions after completion of their residencies.
  5. Lack of credibility. It can be difficult to negotiate for salary and benefits when everyone knows that you are going to have an annual income of hundreds of thousands of dollars in a couple of years.
  6. The ACGME already dictates many work conditions. The Accreditation Council for Graduate Medical Education has fairly strict limits on weekly duty hours, call schedules, educational curriculum, resident responsibility for non-clinical activities (such as patient transportation, blood drawing, etc.), and work environment. As such, the ACGME has functioned in a resident advocacy role similar to the advocacy roles played by unions in other occupations. Failure of hospitals to comply with ACGME requirements can result in loss of hospital accreditation which can be a death sentence to the hospital’s residency program.
  7. The loudest voices do not always represent the majority of the doctors. Often, the residents who are most opinionated and passionate are the ones who become most vocal in union affairs. This can result in issues that are of no importance to the silent majority of residents becoming the forefront of union demands.
  8. Most residents cannot chose to unionize. Senior medical students are assigned the hospital where they will do their residency by the National Residency Match Program. The students create a preference list of the residency programs that they are most interested in and a computer then matches the students with the residency programs based on their degree of mutual interest. Most students will list about 10 programs on their match list but for competitive specialties, such as otolaryngology and ophthalmology, students will typically list 20 or more programs. Unless a residency program is located in a right-to-work state (see below), the students have no say in whether or not they will be in a union. After 3-5 years, all of the residents turn over and those who had originally voted to unionize are replaced by others who may or may not have any interest in belonging to a union.
  9. Loss of autonomy. As a breed, doctors tend to be independent. The surgeon in the operating room, the emergency medicine physician in the ED on trauma call, the cardiologist doing an emergent heart catheterization – all of these physicians have to be self-reliant and generally do not want to be told how to do their job. A hospital with a thousand doctors is a hospital with a thousand people who think of themselves as the CEO. Many physicians are inherently distrustful of any organization that tells them what to do and that includes unions.

Right-To-Work states

American unions became empowered by the 1935 National Labor Relations Act (Wagner Act). This allowed workers to organize into closed shops (where union membership was a prerequisite requirement to employment),  union shops (where non-union workers could be hired with the requirement that they join the union within a specified amount of time), agency shops (where workers were not required to join a union but could still be charged union dues), and open shops (where workers were neither required to join a union nor pay dues). In 1947, the Taft-Hartley Act repealed some elements of the Wagner Act – closed shops became illegal and states were individually allowed to decide whether union shops and agency shops would be allowed.

The result of the Taft-Hartley Act was that some states passed legislation or state constitutional amendments to become “right-to-work” states. In these states, union shops and agency shops were not allowed and unions could only exist act open shops. The phrase “right-to-work” in essence means that workers had the right to work without having to join a union. 27 states have have right-to-work laws (red in the map below) and in addition, Delaware allows individual localities to make their own decisions about right-to-work.

The vast majority of unionized residency programs are in non-right to work states, meaning that once the residency is unionized, future residents do not have a choice about whether or not they want to participate in the union or pay union dues.

A new era of physician unionization?

In the 1950’s, about 75% of U.S. physicians belonged to the American Medical Association. Today, that number is only about 17%. The AMA is not a union but it does play an important role in physician advocacy and lobbying. Today’s physicians have not felt that the AMA provides sufficient benefits to warrant membership and attendant annual dues of $450 per year. As a consequence, the AMA has less political and public health influence today than it had in the past. Some medical leaders have called for a new form of unionization for attending physicians to more strongly advocate for issues of importance to physicians such as gun control and vaccinations against communicable disease. Although a laudable idea, it is probably unrealistic.

However, the recent change in physician employment models resulting in most physicians now being hospital-employed rather than in private practice may change the appetite of some physicians to become unionized. As many specialties have had compensation become untethered to professional practice income, physicians in these specialties depend more on the wording of their hospital employment contracts for their salary and work hours. Anesthesiologists, hospitalists, critical care physicians, and emergency medicine physicians are perhaps most notable. For example, tying hospitalist RVU production too tightly to compensation can work counterproductively to hospital goals of patient length of stay, readmission rates, and patient satisfaction scores. For shift work-based physicians, unionization may become appealing if the physicians perceive that their hospital is not responsive to appeals to improve working conditions or pay competitive salaries and benefits.

Physicians whose incomes are more closely tied to their RVU production (such as surgeons, gastroenterologists, and ophthalmologists) are likely to feel less benefit to unionization as they would want to preserve their ability to tie high incomes to work effort. Also, when there are relatively few physicians in a specialty at a hospital, they already command a great deal of power and may not perceive a benefit to unionization. For example, if there are only 2 orthopedic surgeons at a hospital, just one of them threatening to leave to go to another hospital on the other side of town can be enough for the hospital to acquiesce to their demand to contract with a different joint implant vendor.

For the foreseeable future, there is projected to be physician shortages in most specialties. This results in a state of perpetual imbalance between supply and demand for physicians. A hospitalist who is not happy with their salary or required number of shifts per year at one hospital can easily get a job at another hospital within commuting distance. This imbalance gives attending physicians a great deal of power in negotiating salary, benefits, and working conditions with the hospital. In the future, if the supply of physicians catches up with the demand for physicians, then the benefits of unionization may become more appealing to physicians in some specialties.

For now, unionization is likely to be primarily relegated to residents and fellows. The current increased interest in resident unions will likely be transitory as life in the hospital returns to normal with receding COVID-19 cases.

June 16, 2022

Categories
Medical Economics

Will Inflation Eliminate Private Medical Practices?

When the inflation rate rises, different professions are affected differently. One of the most vulnerable is the private practice physician and the recent rise in inflation may just be enough to close many private practices and force those physicians to become hospital-employed.

In a previous post in 2019, I laid out the argument that all physicians should be afraid of inflation. At that time, inflation was just a hypothetical possibility – something that would likely happen at some time in the remote future. But now, inflation is a reality and it is causing financial pressures on physician practices.

Inflation results when there is an increase in the cost of goods. Some inflation is good and is a sign of strong consumer demand, growing worker income, and low unemployment rates. The ideal inflation rate is around 2% per year. But when the inflation rate is too high, consumers cannot afford to purchase the same amount of goods and services. As a result, in a free market, workers will demand higher wages in order to maintain a constant purchasing power. However, people on fixed incomes lose their purchasing power since their incomes cannot keep pace with inflation. Although retirees are the group of people who are most often mentioned as being harmed by high inflation, physicians in private practice are also essentially on fixed incomes.

Physician reimbursement is not a free market system. When inflation affects a restaurant, a grocery, or a retail store, that business can increase prices overnight in order to keep up with expenses. However, physicians cannot increase the amount that they get paid. Physician income from professional fees primarily comes from two sources: the government (through Medicare and Medicaid) and commercial health insurance companies. The U.S. Congress sets Medicare payments each year for every physician service. Commercial insurance companies negotiate contracts with physicians that typically set the fees for several years in the future. Most physicians will have a “fee schedule” that allows them to change their charged amount for any given service. The charged amount on the fee schedule for any given service is set at an price higher than their highest paying commercial insurance contract. However, for all practical purposes, no one pays the amount of the fee schedule since it only applies to uninsured patients and most of the uninsured negotiate reduced amounts on an individual basis because of financial hardship.

Medicare payments do not keep up with inflation

The amount that Medicare pays a physician for a given service or procedure depends on two things: (1) the Medicare conversion factor and (2) the Medicare RVU schedule. The conversion factor is the amount that Medicare pays a physician for each RVU. The RVU schedule is how many RVUs Medicare assigns to each physician service or procedure. Every November, Congress sets the conversion factor for the upcoming year and over the past 20 years, it has been essentially flat.

In 1998, the Medicare conversion factor was $36.69 per RVU and in 2022, the current conversion factor is $34.61. In other words, the conversion factor is 2 dollars less today than it was 24 year ago! However, the inflation rate has resulted in us now needing $67.22 in 2022 in order to purchase $36.69 worth of goods & services in 1998. The net effect is that in terms of purchasing power, 1 RVU is worth half as much today as it was in 1998.

The Medicare RVU schedule varies from year to year depending on what types of services Medicare wants to promote. Over the past two decades, Medicare has been tending toward emphasizing primary care and de-emphasizing procedure-based specialties. Therefore, Medicare has increased the RVUs for outpatient office visits and reduced the RVUs for procedures. However, neither office visit nor procedure reimbursement has kept up with inflation. The graph below compares the reimbursement for a level 4 new outpatient visit (CPT 99204) in Ohio from 2000 to 2022 compared to the effect of inflation during this same time period. During this time, a new outpatient visit lost 25% of its value due to inflation:

In order to increase the RVUs for outpatient visits, Medicare had to take those RVUs from other service and consequently, procedure reimbursement has lost even more value. Two common procedures performed by outpatient physicians are knee injections (CPT 20610) and EKGs (CPT 93000). Between 2000 and 2022, reimbursement for performing knee injection fell from $70.53 to $63.79. When adjusted for inflation, this represents a 49% loss of value.

EKGs lost even more value. Between 2000 and 2022, reimbursement for performing an EKG with interpretation fell from $27.63 to $13.91. When adjusted for inflation, this represents a 72% loss of value.

…and office expenses keep rising

At the same time that inflation has eroded the value of Medicare reimbursement, physician practice overhead expenses keep going up. Doctors have to pay more for office rent, utilities, and office staff salaries due to inflation. As a consequence, what many physicians take home at the end of the day in income for performing outpatient services has fallen.

As an example, in 2005, the average rent in the U.S. was $12.12 per square foot. By 2020, the average rent increased to $19.27 per square foot. In 2000, the average LPN annual income was $29,100 and by 2021, it had risen to $48,070. In 2000, the average RN annual income was $43,900 and by 2021, it had risen to $77,600.

So, what can the private practice physician do?

With inflation accelerating overhead expenses and with Medicare payments not keeping up with inflation, there are only a limited number of options for the private practice physician who depends on receipts from clinical practice to stay in business.

  1. Retire. For many older physicians, this is the most appealing option. However, that assumes that they have been able to save up enough in their retirement portfolio. Over the past several years, many physicians reduced their annual retirement saving contributions in order to pay their mounting office expenses in the setting of reduced or unchanged Medicare payments.
  2. Stop accepting uninsured patients. Currently 8.6% of Americans lack any form of health insurance. Most of these people are either unemployed or work in low-income jobs that do not provide health insurance. Many private practice physicians require payment in advance for patients without health insurance who seek healthcare and most of these patients do not have the money to pay for physician services.
  3. Stop accepting Medicaid and Medicare. Physicians can usually negotiate higher rates from commercial insurance companies than they get from Medicare. In theory, these negotiations could result in reimbursement that could keep up with inflation. However, given the large percentage of Americans who are covered by either Medicare (18.4%) or Medicaid (17.8%), this is impractical for most physicians, particularly older primary care physicians whose patient panels have aged as the physicians have aged. Currently, 15% of physicians do not accept new Medicare patients and 1% of non-pediatric physicians do not accept any Medicare patients (nearly half of the latter physicians are psychiatrists). Medicaid pays physicians even less than Medicare and currently, 29% of physicians do not accept new Medicaid patients.
  4. Concierge medicine. Concierge physicians charge patients a monthly or annual retainer fee in exchange for enhanced care such as immediate availability to office appointments and longer office visit times.. These physicians will typically have much smaller patient panel sizes than other primary care physicians – by some estimates approximately 1/7th the size. Because these fees are charged directly to the patient, most patients contracting with a concierge physicians are wealthy.
  5. Increase patient volumes. In medical practices, there is little room for increased production. There is a limit to the number of patients that a physician can safely see per hour and the prospect of working more hours per week is unpalatable given that the average physician already works an average of 52 hours per week. Although there can be some improvement in operational efficiency by optimizing patient throughput and improving electronic medical record utilization, most private medical practices have already instituted these measures.
  6. Join the Veteran’s Administration. The VA is attractive to many physicians in private practice, particularly older physicians. For those working in VA outpatient clinics, there is generally no weekends, no night call, and no overhead expense. VA physicians have an average salary of $230,000 per year and after 5 years of employment, are eligible for a retirement pension. As a result, many physicians in private practice can have a higher annual income and better retirement benefits by moving to the VA.
  7. Become hospital-employed. For many physicians in private practice, this is the only realistic option. Currently, 70% of physicians are employed by hospitals or corporate entities and the overwhelming majority of new physicians completing their training become employed by hospitals rather than enter private practice. The Stark law prevents hospitals from subsidizing private practice physician salaries. However, hospitals can subsidize salaries of those physicians who are employed by the hospital.

2022 is a very bad year for physicians in private practice

Over the past 2 years, the Medicare conversion rate fell from $36.09 per RVU for 2020 to $34.61 for 2022. In March 2022, the annual inflation rate reached 8.5%, the highest rate in 40 years. For many physicians in private practice who were barely getting by a year ago, this surge in the inflation rate combined with a reduction in this year’s Medicare conversion rate will be too much to financially bear.

In a free market economy, quality is the most important determinate of cost – the best chef commands the highest wage and the best architect commands the highest fee. Since the creation of Medicare in 1965, physician practices become less and less susceptible to free market forces. The inexperienced physician and the physician with 30 years of experience get paid exactly the same by Medicare. Similarly, the worst physician in the community gets paid by Medicare the same as the best physician. The recent increase in inflation will likely force many physicians away from private practice employment models and move medicine even further from a free market workforce. We are spectators to the extinction of the private medical practice.

April 18, 2022

Categories
Hospital Finances Medical Economics

Hospitals Should Embrace Working From Home

The COVID-19 pandemic has forced many businesses to adapt to employees working from home and hospitals are no exception. When the pandemic is over, should these workers continue to work from home? In many cases, the answer is yes. Before COVID, teleconferencing usually meant calling in on a multi-line telephone system. These systems were clunky and often either did not work at all or had acoustics that were so bad that many participants could not be heard. The pandemic fostered a technical revolution in telecommunications that now permits high quality video teleconferencing. Simultaneously, the widespread use of electronic medical records made remote patient care feasible. There are several key advantages of working from home that can result in a competitive advantage for hospitals and other businesses that embrace the concept.

Reduced office space requirements

Everyone wants their own office. Employees gauge their value by how many square feet they have, how many windows they have, how nice the office furniture is, and what kind of view their office has. When we hire a new doctor, the first question we get asked is usually “Where is my office going to be?”. But hospitals are far more than just doctors and nurses, there are a whole cadre of support staff necessary for operations, revenue cycle, quality, compliance, etc. The bureaucracy of American healthcare has grown dramatically over the past 3 decades and with it has come the need for more and more of these support staff. In addition, as hospitals have increasingly expanded outpatient clinical operations, there are even more administrative staff necessary to oversee these non-hospital-based activities. And every one of those employees wants an office.

As hospital census grows within a confined building, patient care space encroaches on office space. When new hospital additions are built, the emphasis is on return on investment in square footage and there is relatively little direct return on investment for individual offices (as opposed to clinical space). As a consequence, office space is often relegated to decommissioned patient care areas or repurposed windowless basements areas. Many hospital operations have been moved off-site to dedicated office buildings in areas where real estate is less expensive.

Office space is costly. A standard office is about 150 sq ft and even a standard cubicle is 48 sq ft. Here in Columbus, Ohio, office space rents for an average of about $22 per sq ft per year. Therefore, the cost of individual offices is expensive:

  • Standard office = $3,300/year
  • Small office = $2,640/year
  • Cubicle = $2,056

And these costs do not include the additional cost of square footage devoted to common space such as hallways, break rooms, waiting areas, and bathrooms! Once you add in the cost of these common areas, office furniture, and utilities, the cost of maintaining on-site administrative offices in the hospital is staggering.

When staff work from home, they no longer need individual offices and so these overhead costs drop considerably. The hospital can then dedicate a much smaller amount of space for “hoteling” offices or cubicles that can be used by many different physicians or administrative employees during those times that they must be physically in the hospital.

Reduced employee transportation and parking costs

Based on typical travel distances of 5 to 13 miles to commute to work in the United States, most people spend $2,000 – $5,000 per year to commute. In addition, many hospitals (particularly in urban areas) require staff to pay to park on-site. Last year, my cost for a campus parking garage pass was $1,200. These costs do not appear on hospitals’ financial statements but they do appear on the employees checking account statements. I estimate that my cost of parking and driving to work was $3,000 per year but that is partly because I already had a car. If I did not already have a car and needed to get one just so I could commute, then my cost would be $9,000 per year.

For the employee, these personal expenses are significant. By eliminating or reducing these costs, the hospital can pay that employee a lower salary and that employee can still have the same net disposable income. If the hospital continues to pay the original salary, then for the employee, it is like getting a several thousand dollar a year raise.

Employee residence flexibility

How often have you had a highly valued employee resign because their spouse got a job in another city? Or because they needed to move to be close to an aging parent out of state? Or because they wanted to be near the mountians/ocean? Or because they were tired of the weather in your city? Or because they wanted to move to a more rural area? Or because they move closer to a city? Not only do you lose an experienced employee but the average cost to replace an employee is equivalent to 6-9 months of that employee’s salary. That works out to $30,000 to $45,000 for a typical non-physician hospital employee.

A few years ago, a radiology colleague of mine moved to New Zealand where he could read x-rays and CT scans over the internet during the daytime in New Zealand that were being done at night in Ohio. He was happy because he could live in his dream location and the hospital’s radiology department was happy because the Ohio-based radiologists no longer needed to do night shifts reading films. Remote working was a win-win for everyone in this case.

By working from home, employees no longer need to be in the same city as the hospital. They don’t need to be in the same state or even the same country. This allows many employees to permanently move to a different part of the country. But it also allows those employees to travel more while working at the same time. For example, a few weeks ago, my wife and I rented a house  on the coast in Northern California. Two of our daughters joined us – they both worked remotely by day and we were able to have family time together in the evenings and weekends.

For many employees, this flexibility allows them to buy a home in a less expensive community, move to a better school system, or be happier because they were able to move closer to friends and family.

Better job applicant pool

In the past, when the hospital posted a job opening, the applicant pool was limited to people who either already lived within commuting distance of the hospital or who were willing to move within commuting distance. This necessarily restricted the applicant pool and as a result, the hospital often ended up with a less than ideal employee for that job. By allowing employees to work remotely, the applicant pool increases in size exponentially. The hospital now has access to people who live outside of the community and would never have applied for the job in the past.

This can be particularly important for hospitals in smaller communities or rural areas where the applicant pool for most jobs is particularly small due to the size of the local population.

More productive employees (maybe)

Employees who are sequestered alone at home can have fewer distractions from co-workers who want to chat. They can walk 20 feet to get a cup of coffee in their kitchen versus taking an elevator to the cafeteria and waiting in line for 5 minutes. They can join a meeting with a mouse click rather than walking to a different building on the hospital campus. They don’t have to spend the 55 minutes per day that the average American spends commuting to work. All of these can increase employee productivity.

However, in some situations, employees working from home can have reduced productivity. For example, if the employee has children at home and they are multitasking work with childcare. Of if the absence of those on-site chats with co-workers reduces the opportunity for mentoring and collaboration.

Some have argued that virtual meetings are less effective because remote attendees can be less engaged when no one can see them. This is especially more likely to happen if virtual meetings become more like webinars, when a single presenter armed with a few dozen PowerPoint word slides talks non-stop for 60 minutes. One way to counteract this is to about Steve Jobs’ 3-point formula for conducting meetings:

  1. Keep the number of participants small – ideally 3 to 5 people
  2. Keep the agenda short – no more than 3 items
  3. Keep the length short – no more than 30 minutes

Fewer sick days

Employees who are moderately or severely ill should not work. However, during the COVID-19 pandemic, many employees were required to stay home for 14 days because of isolation requirements after an exposure. Some had mild or asymptomatic COVID infections but had to remain on home quarantine for 10 days. Those employees who could work from home did not need to stop working in these situations.

Our workplaces are also the site that many employees acquire infections such as colds and the flu. Less face-to-face exposure to co-workers means fewer of these infections and consequently, fewer sick days.

Studies prior to COVID-19 showed that people working from home used fewer sick days than people working on-site at an office. However, studies have also shown that people working from home were more likely to continue to work when they were sick than people working on-site at an office. Sometimes, working remotely while having a mild illness can be appropriate. For example, when an employee has a mild cold that has minimal impact on productivity but the employee is discouraged from coming to the hospital in order to prevent infecting others. But there has to be expectations that when a remote employee has more than just a mild illness, they should use sick time.

Hospital jobs amenable to working remotely

  1. Telemedicine. Not only does the provider (doctor, NP, PA, nurse midwife, etc.) not need to be in the office, but the registration staff and nurses don’t need to be there either. Psychologists, speech therapists, and dietitians can also frequently work remotely.
  2. Phone triage nurses. Many outpatient practices use triage nurses for patient calls. Hospitals use triage nurses for inter-hospital transfers. In neither situation does the nurse need to be on-site.
  3. Schedulers. Even before COVID-19, many employees who scheduled office visits, hospital admissions, and procedures worked from home.
  4. Revenue cycle staff. Coding and billing staff are often the first to be moved away from the hospital campus to an off-site office building. Working from home is a natural transition.
  5. Pre-admission screening. Similar to revenue cycle, staff who screen pre-operative and pre-procedure patients for insurance coverage do not need to be located on-site.
  6. Compliance staff. The nurses or administrative staff who do quality and compliance only need access to a computer and a phone.
  7. Case management. Certain elements of case management require the case manager to have face-to-face meetings with inpatients. However, other elements only require access to the electronic medical record. Separating these responsibilities permits some case management staff to work from home.
  8. Social services. Social workers who are primarily responsible for outpatients can often work from home.
  9. Office assistants. Many of the tasks that would have in the past be classified as secretarial do not require on-site presence. Some of these tasks include answering phones, doing transcription, preparing reports, and making schedules.
  10. Technology support. Every hospital needs computer savvy people to solve password problems, trouble shoot electronic medical record access, and generally help out technologically-impaired hospital staff. As long as they have computer access, they can do most of their work anywhere.
  11. Purchasing staff. This can include everyone from those who prepare contracts with hospital vendors to supply chain employees responsible for purchasing supplies and maintaining inventories.
  12. Recruiters. Just as an increasing number of new employees will be working remotely from distant locations, recruiters can use virtual communications to recruit these employees.
  13. Communications and marketing. In the past, a lot of this work was done by phone and COVID-19 has shown that the majority of this work can be done virtually.
  14. Interpreters. For years, hospitals and physician offices have used interpreters/translators by telephone or internet connection when providing care for patients who do not speak English.

Hospitals allowing remote working have a competitive advantage

Flying into Phoenix from California earlier this month, I saw mile after mile of office buildings with empty parking lots… at noon on a Thursday. It is because of the mass migration of employees from offices to remote working brought on by the COVID-19. The pandemic has given American workers a taste of what it is like to work from home. Many of those workers like it and do not want to go back to the office. Our nation’s hospitals are no different than those office buildings in Phoenix. Certain jobs require employees to be physically present, such as doctors, nurses, and respiratory therapists providing inpatient or procedural care. However, an increasingly large number of employees do not need to be physically present in the hospital. Those hospitals that can adapt to the new paradigm of remote employees will be successful. Those that try to go back to “the old days” when all employees were expected to work on-site in the hospital building will not be able to compete for the best workers.

Supervisors, managers, medical directors and CEOs are mostly older with decades of comfort working in an office. Many of the employees working for them are younger and more adapted to working remotely. It is incumbent on those of use who are hiring employees to remember that it is about what the employee wants, not what we are accustomed to.

October 28, 2021

Categories
Epidemiology Medical Economics

Should You Mandate Employee COVID-19 Vaccination?

“Individual freedom!” has been the rallying cry of a highly vocal but increasingly small minority of Americans who oppose COVID-19 vaccines. Most of these anti-vaxxers represent the intersection of ignorance, arrogance, and obstinance. But should you require them to get vaccinated if they are your employees? In a free market economy, businesses with vaccinated employees have a competitive advantage over businesses with unvaccinated employees.

COVID infection is costly

A study from the City University of New York found that the average direct medical cost of a symptomatic COVID-19 infection is $3,045. Infections that require hospitalization are considerably more expensive than those that can be managed as an outpatient. A report from CMS found that the Medicare payments for a COVID-19 hospitalization was $24,033 (this does not include co-pays that the individual is responsible for). A study in JAMA Open Network this week found that the average out-of-pocket co-pay for a COVID-19 hospitalization was $3,804. A report from the Kaiser Family Foundation found that the average cost of COVID-19 hospitalization for commercially-insured patients with pre-existing medical conditions is estimated to be $20,292 (commercially-insured patients are younger than Medicare patients, have fewer medical co-morbidities, and tend to have shorter hospital stays – all resulting in lower cost per hospitalization than Medicare patients).

In addition to direct medical costs, there is a cost of lost worker productivity during their infection. Recommendations by the CDC are persons infected with COVID-19 should not return to the workplace for at least 10 days from the onset of symptoms. Those persons who are immunocompromised or who require hospitalization for more severe COVID-19 infections should not return for 20 days. Asymptomatic persons who test positive for COVID-19 should not return to the workplace for 10 days from the date of the COVID-19 test. In total, COVID-19 absenteeism is quite costly to employers.

Unvaccinated employees cost more

Vaccines are effective in preventing COVID-19 infection. Overall, unvaccinated persons are 6.1 times more likely to test positive for COVID-19 than vaccinated persons. That means that unvaccinated persons are 6.1 times more likely to be absent from work for at least 10 days. They are 6.1 times more likely to incur the $3,045 direct medical cost of the average COVID-19 infection. The graph below shows the COVID-19 case rate per 100,000 for vaccinated and unvaccinated Americans of working age.

Vaccines are even more effective in preventing severe infection; most of the people hospitalized for COVID-19 infection are now unvaccinated. The CDC reports that unvaccinated COVID-infected persons are 12 times more likely to require hospitalization than unvaccinated persons. Preliminary data suggest that unvaccinated persons are 20-30 times more likely to require ICU admission for COVID-19 infection than vaccinated persons. The graph below shows hospitalization rates per 100,000 for vaccinated versus unvaccinated persons.

Older unvaccinated workers are even more likely to require hospitalization. The CDC reports that in August 2021, persons age 50-64 were 30 times more likely to require hospitalization if they are unvaccinated versus being vaccinated. Currently, the cost of those hospitalizations is being borne by commercial insurance companies and by Medicare. However, in the future, this will translate to higher health insurance costs and higher Medicare costs. These costs will then be transferred to employees by higher health insurance premiums and higher Medicare payroll taxes

Not only are vaccinated employees more likely to be hospitalized with COVID-19, but they are also more likely to die if they get COVID-19. In August, the overall death rate was 11.3 times higher in unvaccinated than vaccinated persons. Dead employees not only result in the cost of replacing them but they also generate life insurance payouts that then result in higher life insurance premiums for the business. The graph below shows the number of COVID-19 deaths per 100,000 in vaccinated versus unvaccinated people of working age. One implication of this graph is that it is safer for a company to hire a 70-year-old vaccinated employee than to hire a 30-year-old unvaccinated employee from a COVID-19 death risk standpoint.

 

Unvaccinated workers who are exposed to COVID-19 also incur higher lost productivity costs than vaccinated workers. Recommendations by the CDC are that unvaccinated employees exposed to COVID-19 quarantine at home for 14 days from the date of exposure. However, vaccinated employees do not need to quarantine and can continue to work as long as they wear a mask. These worker absences can be very costly to the employer who continues to pay the worker who is off work (“sick time”) and has to additionally pay someone else to do that worker’s job (often requiring expensive overtime pay). Because of the different quarantine requirements, it is far more costly to the employer if an unvaccinated employee is exposed to COVID-19 than if a vaccinated employee is exposed, even if the employee has no symptoms.

If vaccines save so much money, why don’t we just mandate them?

Vaccine misinformation has permeated the American public and has spilled over into American politics. Intuitively, one would have thought that Republicans would have been more pro-vaccine than Democrats given that Republicans historically were aligned with business and were in favor of policies that reduce business costs. Furthermore, Republicans historically opposed legislation that places constraints on the free market. Paradoxically, during the COVID-19 pandemic, Republicans have fought against vaccinations that could have lowered costs to businesses. Republicans have also introduced legislation that would prevent individual businesses from requiring employee vaccinations – even when businesses believe that having 100% employee vaccination can give them a free market competitive advantage over other businesses. As a consequence, when it comes to COVID-19 legislation, Chambers of Commerce have been aligning themselves with Democrats rather than their normal alignment with Republicans.

Most Americans are already vaccinated. As of this week, 66% of us have received at least one dose of a COVID-19 vaccine. Because many children are not eligible to be vaccinated, a better metric is the percent of adults who are vaccinated – currently 79% of Americans over age 18 have received a vaccine and 96% of Americans over age 65 have received a vaccine. The people who are vaccinated are not the ones who are vocally protesting against vaccine mandates – it is the minority of Americans who are not vaccinated that are making all of the noise. They are also the ones who are filling up our hospitals, increasing costs to employers, and increasing costs to Medicare and insurance companies. Getting these Americans vaccinated is not just good for our country’s health but it is good for our nation’s businesses. So, how to best get them vaccinated?

The mandate versus the nudge

A mandate is a directive requiring an employee to do something. A nudge is a more subtle means of influencing employee behavior without imposing a mandate. An example of a nudge applied to COVID-19 would be to make it easy for employees to get vaccinated by giving them paid time off work to get vaccinated. A nudge can be as simple as providing education about COVID-19 and vaccines in the workplace. Some employers use the nudge of paying their employees to get vaccinated and in Ohio, we have a free tuition lottery that vaccinated teenagers are automatically enrolled in. Public shaming can be a powerful nudge, for example requiring unvaccinated employees to wear masks at work but allowing vaccinated employees to work mask-free, making it clear to all who is and is not vaccinated. But perhaps one of the most effective nudges is to transfer the costs of COVID-19 to unvaccinated employees.

This was the approach taken by Delta Airlines which increased insurance premiums by $200 for unvaccinated employees. So far, 90% of Delta employees are now vaccinated and Delta projects that 95% will be vaccinated within the next month. On the other hand, United Airlines mandated vaccination and currently has 96% of its employees vaccinated with 3% having a medical/religious exemption to vaccination and only 1% of employees refusing vaccination. American Airlines and Southwest Airlines are also mandating vaccinations but their company policies are being stymied by a Texas law prohibiting businesses with headquarters in Texas from requiring vaccinations. This represents a fascinating social experiment: whether the mandate is more effective than the nudge. Over the next year, we will have an answer to this question and future economic analysis will show us which is the most cost-effective: the Delta Airlines strategy or the United Airlines strategy.

The difference between a mandate and a nudge is that a mandate eliminates choice but choice is inherent in a nudge. As a species, Americans rebel when being told what to do and are passionate about having the freedom of choice. In the song Growing Up, Bruce Springsteen said this better than anyone when he sang: When they said “sit down”, I stood up. The nudge can influence us to change our behavior without requiring us to change our behavior. But there are situations when the mandate is essential, for example, in the military on the battlefield.

When is the mandate better?

The danger of a vaccine nudge is that it may not be effective and if the business needs all of its employees to be vaccinated in order to be competitive, relying on the nudge could put the business at a competitive disadvantage. As an example, elective orthopedic hip replacement surgeries are very lucrative and are mostly performed in people over age 65. These older people have COVID phobia (which is why 96% of them have received a vaccine). The hospital that boasts that all front-line employees are vaccinated will be at a competitive advantage to attract people needing a hip replacement surgery compared to a hospital with unvaccinated nurses and doctors.

Many, if not most, businesses actually welcome legislated vaccine mandates. When the mandates come from the government, then the employer does not have to take responsibility for the mandate and can tell employees “Hey, this requirement is from the government, I’m just the messenger…”. Furthermore, with government mandates, a business does not need to worry about losing employees to its competition over vaccine requirements. If only one restaurant in town mandates vaccinations, there is a danger that the serving staff may quit and go work for a different restaurant rather than get vaccinated but if the State Health Department mandates that all restaurant employees in the state get vaccinated, then those serving staff will be unable to get a job anywhere if they remain unvaccinated.

In states with a high percentage of the population vaccinated, it is easier for employers to mandate vaccination because the pool of unvaccinated employees is relatively small to begin with. The implication is that if you have employees who quit rather than getting vaccinated, there will be ample other workers out there who are vaccinated and who you can hire to replace them. Thus, it is safer for a business owner in California to mandate vaccinations than for a business owner in West Virginia. The graphic below shows the geographic variation in vaccination status.

Similarly, within each state, there are regional variations in vaccination rates that can affect the worker pool and thus the willingness of a business to invoke a vaccine mandate. For example, in Ohio, it is more feasible for a restaurant owner in Delaware County, where 68% of the population has received a vaccine, to mandate employee vaccinations than in Holmes County, where only 15% of the population has received a vaccine. The restaurant owner in Holmes County will have a difficult time finding vaccinated applicants to replace unvaccinated workers who quit because of a vaccine mandate. In the graphic below, Delaware County is the darkest shade county in the middle of the state whereas Holmes County is the lightest shade county.

Another situation where vaccine mandates may be preferable is when mandates can mitigate personal injury litigation. Ever since COVID-19 vaccines have been available to all adults, there is a risk of getting sued if a customer becomes ill or dies from a COVID infection acquired at a business. In many situations, causality can be hard to prove. For example, it can be hard for a customer to conclusively prove that he acquired COVID-19 from an infected bartender at the pub that the customer was in for 45 minutes one evening. However, hospitals may be uniquely vulnerable since patients hospitalized for several days with non-COVID-19 conditions are as a group more susceptible to having severe COVID infections and hospitals have robust epidemiology measures in place that can effectively trace disease contacts. In the future, a hospital will likely be held responsible in civil court for patients who become infected from an exposure to an unvaccinated nurse with COVID-19.

When is the nudge better?

The danger of a vaccine mandate is that some recalcitrant anti-vaxxer employees may decide to quit. For many businesses, this may actually be a good thing if those individuals have a history of being disruptive or otherwise being problem employees in the past. But in other businesses, a large number of employees quitting because of a vaccine mandate can lead to worker shortages, reduced business production, and unfavorable public relations. The wise employer will find out which employees are unlikely to get vaccinated before the employer roles out a vaccine mandate. Strategically timing a vaccine mandate after researching employee vaccination status may provide the company with a rare opportunity to eliminate undesirable employees without having to deal with a protracted human resources battle over alleged unlawful job termination.

In some businesses, particularly those with a small number of employees, relentless education will eventually sway all but the most rabid anti-vaxxers. Once all of the existing employees are vaccinated, then the business can adopt a proof of vaccination requirement for all new employees, thus getting the benefits of the mandate without losing any employees.

Sometimes, the incremental nudge can be highly effective. With the incremental nudge, employee choice is preserved but over time, the consequences of choosing to be unvaccinated become incrementally more onerous for the employee. An example is as follows:

  • Step 1: Education about COVID-19 vaccination in the workplace
  • Step 2: Paid time off to get vaccinated and recover from any vaccine-related side effects
  • Step 3: Pay an incentive of $100 to every vaccinated employee
  • Step 4: Requirement that unvaccinated employees wear masks at work but vaccinated employees are not required to wear masks
  • Step 5: Requirement that unvaccinated employees get weekly COVID-19 nasopharyngeal swab tests
  • Step 6: Requirement that unvaccinated employees get daily COVID-19 nasopharyngeal swab tests
  • Step 7: Increase health insurance premiums for unvaccinated employees by $500 per year
  • Step 8: Increase life insurance premiums for unvaccinated employees by $500 per year
  • Step 9: Mandate vaccination

By the time the employer reaches step 8, only the most hardened anti-vaxxers will remain unvaccinated. This will be a relatively small percentage of employees and will mostly be disruptive employees that the employer would like to have an excuse to get rid of anyway. Therefore, step 9 could be mandating vaccinations and then terminating those few remaining unvaccinated employees. This allows the employer to time the mandate strategically in order to selectively cull the employment roster.

The future is right around the corner

In the very near future, there will be two kinds of people: those who are vaccinated against COVID-19 and those who either have had or will have COVID-19 infection. This pandemic is different than the SARS, MERS, and Ebola outbreaks – in those outbreaks, the virus was able to be contained locally until no new infections occurred. COVID-19 today is too widespread throughout the world and has long past the time when it could be locally contained. This pandemic is also different from the 1918 influenza pandemic and the 2009 H1N1 pandemic – in those pandemics, the inciting virus eventually disappeared and was replaced by other, less deadly strains of the virus. COVID-19 does not show any signs of going away or being replaced by a less deadly coronavirus.

Thus, it appears that COVID-19 is going to be with us for a long time and unless all nations can mount a universally successful vaccination campaign, as was done with polio, COVID-19 may be with us indefinitely. But it is clear that vaccination is the only way out of a perpetual pandemic. The good news is that the number of unvaccinated people is dwindling as the tolerance of the vaccinated for those who are unvaccinated also dwindles.

October 20, 2021

Categories
Medical Economics

A Modest Proposal To Fix American Healthcare

Using the definition that value = quality ÷ cost, Americans get the least value in healthcare of all nationalities in the world. Per OECD data, U.S. healthcare cost per person is the highest in the world at $11,072 per year; the next closest is Switzerland at $7,732. But the U.S. trails other peer countries in most measures of quality of medical care. In other words, we pay more and get less.

A Kaiser Family Foundation survey found that most Americans are in favor of a national health plan. However, the three words that create the most political polarization among Americans with regard to healthcare are: “Medicare For All“. The reality is that Medicare is already a national health plan for 44 million Americans over age 65, Medicaid is already a national health plan for 74 million low income adults, and CHIP is already a national health plan for 7 million low income children. Add in 9 million Americans covered by the Veteran’s Administration and 9 million covered by the Federal Employees Health Benefits program and it turns out that 44% of Americans are already covered by one national health plan or another. When looked at by expenditures, according to CMS, 73% of all U.S. healthcare is currently paid for either by the government or by individual households:

One of the problems with our existing national health plans is that they all too often pay for health care for preventable medical conditions; had these conditions been prevented in the first place, then the overall cost to society would be less. For example, if an uninsured person does not have their hypertension and diabetes diagnosed and treated, then they become a financial burden on society when they develop kidney failure and require dialysis (Americans requiring dialysis are automatically eligible for Medicare, and thus paid for by taxpayers). Or if an American has unrecognized hepatitis C at age 45, that person can develop cirrhosis requiring a costly liver transplant later in life when they are now over age 65 and on Medicare. Or the low income woman who lacks access to birth control has an unintended pregnancy that results in delivery costs charged to Medicaid and child healthcare costs charged to CHIP.

Although I believe that the United States will eventually have a national health plan akin to “Medicare for all”, there are too many powerful economic and political forces that pose a barrier to overnight adoption of a national health plan. Most notably, opposition can be expected from health insurance companies, pharmaceutical companies, some hospitals, and some doctors who all benefit from private health insurance (which generally pays more for any given medical service than Medicare does).

Therefore, I believe that the first step toward improving U.S. health outcomes while reducing U.S. health costs per capita should not be “Medicare For All” but should instead be “Preventive Care For All“.

The Affordable Care Act already requires Health Insurance Marketplace plans and Medicaid to provide a group of preventative services to all covered individuals, without co-pay. For adults, this includes services such as 14 different vaccinations, blood pressure & diabetes screening, and HIV prevention medications for high-risk persons. For women, this includes services such as birth control, breast cancer screening, and bone density screening. For children, this includes services such as vaccinations, well-child visits, and autism screening. People who have Medicare, Medicaid, CHIP, or commercial insurance through a Health Insurance Marketplace plan already get preventive care at no additional out-of-pocket costs. The problem is that uninsured Americans do not have access to preventive care, unless they pay for it with their own money. So, who are these uninsured?

Currently, according to a report by the Kaiser Family Foundation, there are about 27 million uninsured Americans who are nearly all between ages 18 -64. Children of parents without commercial insurance are mostly eligible for healthcare coverage through CHIP and adults 65 and over are eligible for healthcare coverage by Medicare. In short, the typical uninsured person in the United States is non-white, low income, employed, and lives in a South or Mountain West state:

  • Race: 41% White, 38% Hispanic, 13% Black, and 4% Asian.
  • Income: 21% fall below the Federal Poverty Level (FPL), 28% fall between 100-200% of the FPL, 34% fall between 200-400% of the FPL, and 17% have an income greater than 400% of the FPL.
  • Work status: 73% have at least one family member working full-time, 11% have a part-time worker, and 15% have no one in the family working.
  • Age: 85.4% are between ages 18-64 and 5.6% are younger than age 18.
  • Citizenship: 77% are U.S. citizens and 23% are non-U.S. citizens.
  • State of residence: In Medicaid expansion states, 8.3% of the population is uninsured whereas in states that did not expand Medicaid, 15.5% of the population is uninsured. States with the highest percentages of uninsured persons are in green and the next highest percentages in dark blue in the map below:

When an uninsured person is discovered to have a medical condition that requires treatment, such as kidney failure, unintended pregnancy, or metastatic breast cancer, one of the first things the hospital will do is to get that person enrolled in Medicaid or Medicare in order to cover the costs of chronic dialysis, pregnancy, or chemotherapy. For those patients who are not eligible for Medicaid or Medicare, the hospital will generally provide “free” medical care. However, nothing in health care is really free, so, the hospital has to charge more to the commercial insurance companies in order to pay for treating the uninsured. Consequently, employed American taxpayers eventually end up paying for medical care for the uninsured, either directly through taxes or indirectly through health insurance premiums.

Prevention costs less than treatment

The costs of preventable medical conditions is staggering. Dialysis costs about $90,000 per year per person. Delivery costs of an unintended pregnancy is about $15,000 (and that does not include costs of pre-natal care or health care for the next 18 years for the child). The cost of treating breast cancer in the 24 months following diagnosis is $72,000 for stage I but $183,000 for stage IV.

However, the cost to diagnosis hypertension and diabetes (before they cause kidney failure) is about $40/year. The cost of birth control pills to prevent unintended pregnancy is about $200/year. the cost of a mammogram is about $300/year. When it comes to preventable medical conditions, for the American taxpayer, it is a “Pay me now or pay me later” proposition… and it is a lot cheaper to pay for preventive care now rather than pay for the medical condition later.

How to pay for it

The greatest resistance will come from those opposed to increasing taxes to pay for someone else’s health care. It is true that in the short run, Preventive Care For All will require increased federal expenditures that will consequently require increased taxes. I would argue, however, that in the long run, Preventive Care For All will pay for itself by:

  • Reduction in expenditures by Medicaid and Medicare for medical conditions that could have been prevented
  • Reduction in Social Security disability payments for Americans who leave the workforce early due medical conditions that could have been prevented
  • Reduction in CHIPs expenditures for healthcare for children resulting from unwanted pregnancies due to lack of access to and information about birth control
  • Increase in income tax and payroll tax receipts from American workers who are able to stay in the workforce by avoiding unwanted disabling medical conditions

Seen this way, Preventive Care For All is a national investment that will cost us more now but more than pay us back after several years.

Humans have created a myriad number of ways to tax ourselves but taxes can be broken down into three basic types: (1) taxes on what you earn, (2) taxes on what you buy, and (3) taxes on what you own. Healthcare in the U.S. is primarily funded by the first of these types, taxes on what you earn. Commercial health insurance is usually paid by a combination of employee pay deductions to cover premiums for employer-sponsored health insurance plus an employer contribution that is derived from the employee’s benefit package. Medicare is paid for similarly by employee and employer payroll taxes. Payroll taxes are divided into two buckets: Social Security at 12.4% (which is only taxed on the first $142,800 in income) and Medicare at 2.9% for people making less than $200,000/year and 3.7% for those making greater than $200,000/year. Medicaid is a bit different and is paid for jointly by the Federal and State governments. I would propose paying for Preventive Care For All by increasing the Medicare component of payroll taxes.

Inevitably, progressives will argue that increasing payroll taxes on earned income hurts low-income persons. My counter argument is that by funding through payroll taxes, the wealthy pay more than the poor and furthermore, Preventive Care For All will primarily benefit low-income families.

Equally inevitably, conservatives will argue that increasing taxes takes more money from those Americans with higher incomes. My counter argument is that by funding through payroll taxes (rather than regular income taxes), all American workers contribute by an equal proportion of income and furthermore, Preventive Care For All will ultimately reduce future Medicaid and Medicare expenditures, offering the possibility of decreasing payroll taxes in the future.

Americans hate taxes, and I am no different. However, if you take the view that premiums Americans pay for employer-sponsored health insurance are simply a tax paid to a commercial insurance company rather than a government, then it is clear that we are already paying an enormous tax bill for healthcare in the United States. The best way to reduce that tax bill is to pay for prevention so we do not have to pay for disease.

How to implement it

As a starting point, the group of preventative services required by the Affordable Care Act could be made available to all uninsured Americans with a family income less than 400% of the Federal Poverty Level (currently, the Federal Poverty Level is $12,880 for an individual and $26,500 for a household of 4 people).

There will be groups that object on moral or philosophical grounds, such as anti-vaxxers who object to using government money to cover vaccinations and some religious groups that will object to using government money to cover birth control. My response to the anti-vaxxers is that they are just nuts. My response to the religious objectors is that America’s abortion problem is mostly an unintended pregnancy problem and reducing unintended pregnancies is the best way to non-controversially reduce abortions.

It could also be a disincentive for some lower income workers to purchase full health insurance since they would be able to get preventive care for free from the government. This could be addressed by an income-driven co-pay for the program. For example, no co-pay for family incomes less than 100% of the Federal Poverty Level, a $200/year/person co-pay for incomes 100-200% of the FPL, a $300/year/person co-pay for incomes 200-300% of the FPL, etc.

Another implementation barrier would be deciding who would provide the preventive care? It would be difficult to turn this over to existing primary care private physician practices. Many of these physicians already do not accept Medicaid patients due to the low reimbursement and a preventive care program paid by the Federal government would likely also be hard to break even on. Furthermore, once a full-service primary care physician establishes a preventive care relationship with an otherwise uninsured patient,  that physician will feel morally (and possibly legally) responsible to treat any chronic medical conditions that the physician identifies, even if he or she will not be paid for that care by the uninsured patient.

Personally, I believe that this type of preventive care could be ideally provided by groups of nurse practitioners, physician assistants, and nurse midwives. Preventive care is largely protocol-driven which is ideal for advance practice providers. Furthermore, there would not be a moral or legal requirement for such a preventive care office practice to manage chronic medical conditions or answer sick-calls from patients. Instead, these practices would function similarly to health screening fairs currently sponsored by hospitals, religious groups, and social service organizations.

“An ounce of prevention is worth a pound of cure”… Benjamin Franklin: February 4, 1735

By preventing many chronic medical conditions and by screening to identify other medical conditions early, Preventive Care For All would reduce overall American healthcare costs, keep lower income workers in the workforce, and improve the quality of health in the United States. In other words, Preventive Care For All would improve the value of American health care. We would do well to heed the words of one of America’s Founding Fathers…

August 11, 2021