Stanley Feld M.D., FACP, MACE Menu

All items for July, 2006


Go Figure!! The KKR buy out of HCA. Another step backward!

Stanley Feld M.D., FACP,MACE

On the last two blog posts I covered the new paradigm Medicare had in the Federal Register for Hospital reimbursement. The goal was to base DRGs on hospital costs and not hospital charges. The reduction in revenue to certain hospitals would be as much as 33%. Specialty services such as Cardiac, Neurosurgical and Orthopedic services would be much affected. It turns out that 70% of hospital profits are derived from these three services.

“We are on the eve of a seismic change in revenue reimbursement for hospitals with the expected reconfiguration of diagnostic related groups as recalibrated by the Centers for Medicare and Medicaid Services”.

Paradigm Lost: The Strategic Impact of Revised DRG Payments
By Preston Gee, for HealthLeaders News, July 13, 2006

On July 26, 2006 HCA announced that it was going public and being bought out by KKR for 31 billion dollars. However, KKR, the Frist family, and Bain venture capital were going to put up only 5 billion dollars in cash and finance the rest along with the assumption of 11 billion dollars in debt.

The first question in my mind was perhaps KKR did not think this purchase through. KKR is a pretty smart outfit. I was sure they had thought it out from a cash flow standpoint. There is probably something in the new Medicare payment system that they know and we are not considering.

Private hospitals are not tax exempt. Non profit hospitals are tax exempt. Non profit hospitals have a cost advantage from the start because of the tax exemption. Private hospitals have big debt payments. Non profit hospitals have minimal to moderate debt service obligations adding to their cost advantage.

In the buyout, it looks like HCA- KKR is going to assume a debt service obligation of 25 plus billion dollars. The fees paid by Medicare are constantly being reduced. The new DRG payment system is going to be set up to pay inpatient hospital care by costs and not charges. With the new fee schedule it is hard to visualize how the debt will be serviced by KKR. It is worthwhile looking at HCA’s financial statements. If the debt is serviced, how are they going to generate profits for the LPs in the JV fund? Medicare hope is to reduce payments to hospitals for care by 30% of present levels with the new DRG formula.

The only way I can see HCA-KKR remaining viable is if there is a defect in Medicare’s new paradigm of payment for DRGs. The cost of care in the HCA institutions will go up because of the doubling of their debt. If they are paid on their cost of care and not the community cost of care, they will be able to maintain their profit margin while Medicare in effect is servicing their debt. The net result would be an increase in cost to the government. Since private insurance mimics Medicare private insurance payment to HCA-KKR will also increase. The pass through for this increase would ultimately be to the consumer and tax payer to the benefit of KKR.

If I am correct, rather then decreasing the cost of care through efficiency of care and an increased quality of care to decrease complications of chronic disease, we will see an increase in cost of care.

HCA has many hospitals in each large city. Let’s say 50% of the hospital beds in a city belong to HCAs hospitals. If patients do not choose to use HCA’s beds because of the increased hospital costs, then 100% of hospitalized patients will be competing for the remaining 50% of the beds in the city. This will create a bed shortage. This leverage can force the increase in payment for care to HCA. I have not seen one article about the consequences of this buyout to the cost of medical care.

It is just as I said. “Today’s solutions are tomorrow’s problems.”

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.


The Issue is Actual Cost of the Service to the hospital verses DRG payment

Stanley Feld M.D.,FACP,MACE

I apologizing for forgetting to link the complete report; “Proposed changes to hospital inpatient prospective payment system” is in the Federal Register April 25, 2006. It is a formidable document. It has been predicted to revolutionize the way hospitals do business.

The New York Times Article goes on to say; The basic payment for surgery to open clogged arteries, by inserting a drug-coated wire mesh stent, would be cut by 33 percent, to $7,590. The payment for implanting a defibrillator, like the one used by Vice President Dick Cheney, would be cut 23 percent, to $22,000, while the payment for hip and knee replacements would be reduced 10 percent, to $14,500.

Drug and device makers have been lobbying Congress and the Bush administration to delay the changes to allow further analysis. Device makers are scheduled to meet with top White House officials this week. More than 200 members of Congress have signed letters supporting a one-year delay.

The charges should definitely be lined up with costs of service. These charges seem very high to me. The actual cost of the service, procedure and device should be calculated into the charge. We have seen some device charges to be extremely secretive. A reasonable profit should be added to the cost. The fee for the community is then determined. If one provider is more efficient than another provider the efficient provider should not be penalized. The efficient provider should be rewarded by the extra profit. If costs go down then the charge will go down.

The New York Times Article goes on to say; The goal of the new payment system is to pay hospitals more accurately for the cost of care. But Jayson S. Slotnik, director of Medicare policy at the Biotechnology Industry Organization, a trade group, said that payments would, in many cases, be less accurate because the government had relied on old hospital cost reports and claims data that did not reflect the use of new technology.

Without a delay, Mr. Slotnik said, hospitals can expect to see a 35 percent reduction in Medicare payments for stroke patients treated with clot-busting drugs. The basic payment for such cases is now $11,578.

Is this the actual cost of service plus a reasonable profit or the distortion created by the DRG payment systems? Are these distortions leading to profits that have enabled hospitals to be make vast improvements in their infrastructure and facilities?
Physicians treating patients are not aware of these distortions when they order the procedures to practice the best medicine they can. Physicians only see the decreases in payment they receive while experiencing and increase in overhead. Physicians experiencing a decrease in net profit should be thinking about how to become more efficient and decrease their overhead.

The hospitals taking care of less profitable diseases should be encouraged to develop centers of excellence for those less profitable disease, so they can become more efficient and in turn more profitable.

Mark B. McClellan Medicare administrator said in an interview “If you take a big step back and look at Medicare spending, 90%-plus of what we are spending is going for the complications of chronic disease.” He goes on to say “We can get healthier beneficiaries and lot lower costs related to complications if we can get more prevention.”

A problem in the system is we do not provide reimbursement for prevention. We will discuss this in detail in the future.

In Focused Factories, the system has an increased chance of experiencing less complications from diseases and procedures than in a general care facility. We should be encouraging “Focused Factories” and not discourages them.

There is much more to say about this article. These new rules can lead to more dysfunction in the healthcare system as well as a decrease the quality of care. However, prices paid for DRGs have to be aligned to be more realistic with the actual cost the hospital accrues for care. This will be extremely difficult to obtain voluntarily. In a consumer driven environment, the consumer can demand this price transparent.

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.


Another Complicated Mistake Coming Up !

Stanley Feld M.D.,FACP,MACE

An article “Bush Administration Plans Medicare Changes” in the New York Times on July 17, 2006 illustrates the point I made previously. This article needs to be read carefully by all. It is especially confusing to the consumer who should be driving the repair of the healthcare system. The complete report; “Proposed changes to hospital inpatient prospective payment system” is in the Federal Register April 25, 2006

I believe the government is trying to do the right thing from the hospital cost of service viewpoint. Hospital DRG fees are exorbitant. It is doing the wrong thing from a quality of care point of view. In my opinion, the DRGs should reflect the hospitals cost plus a reasonable profit. Presently, certain DRGs are too low and others are much too high.

Michael Levittt, the Secretary of Health and Human Services, said “the new system would be more accurate because payments would be based on hospital costs, rather than on charges, and would be adjusted to reflect the severity of a patient’s illness. A hospital now receives the same amount for a patient with a particular condition, like pneumonia, regardless of whether the illness is mild or severe.”

This new approach is a good thing, because then hospital costs for service will be transparent. Hospitals will have the incentive to become more efficient if their costs are too high to make a reasonable profit. We have established previously that charges are artificial retail prices.

Federal officials said that biases and distortions in the current system had created financial incentives for hospitals to treat certain patients, on whom they could make money, and to avoid others, who were less profitable.

Dr. Alan D. Guerci, president of St. Francis Hospital in Roslyn, N.Y., said the new formula would cut Medicare payments to his hospital by $21 million, or 12 percent. “It will significantly reduce payments for cardiac care and will force many hospitals to reduce the number of cardiac procedures they perform,” Dr. Guerci said.

The first statement is misleading because the charges have nothing to do with the treatment of certain diseases. It has to do with distortions in reimbursement caused by the DRG reimbursement system. Additionally, everyone would love not to have to treat certain diseases that are less profitable. This is why our system is broken. The two thirds of the uninsured are uninsured because they are individuals group insurance plans are in their 50’s with hypertension, and obesity. They cannot buy insurance even if they wanted to because the insurance company views them as too high a risk for complications of their underlying chronic disease.

Regina Herzlinger in her book Market Driven Health Care advocated Focused Factories. Focused Factories are a great idea. The best example is a proprietary hospital in Canada that only does hernias. The hospital can do hernias cheaply, efficiently and still generate a healthy profit. The focused factory has developed a system of care (process of care) and experience treating many hernia patients resulting in few complications and short length of stay in the hospital. The hospital can therefore afford to do hernias more cheaply than the traditional hospital reducing the cost of care.

Focus Factories such as this one can serve as a model to stimulate an increase in quality care throughout the healthcare system. Hospitals and Clinics concentrating on full service care for each chronic disease (Focused Factories) are an excellent idea. Inpatient and Outpatient Focused Factories are one of the solutions to Repairing the Healthcare System.

You will recall I said 80% of the healthcare dollars are spend on the complications of chronic disease. Medicare claims that 90% of its’ healthcare dollars are spent on the complications of chronic disease. Focused Factories developing Systems of Chronic Disease Management using evidence based medicine can reduce the complications of chronic disease by at least 50%. The result would be a savings of 40% of the total healthcare dollars spent ( 50%*80%=40%).

St Francis Hospital in Roslyn N.Y. is a small hospital that had a difficulty competing with Long Island Jewish Hospital and North Shore Hospital, very close and powerful neighbors. Twenty-five years ago the hospital decided to build a strong Cardiac Treatment Center. It built a “Focused Factory” for Cardiac Disease. It sounds like it is going to get penalized for developing this center of excellence. I do not know what the difference between their cost of service rendered and charges is, or the differences in charges between it and its competitors. However, if the actual cost of service is in line with the cost of service in the community it should not be forced to reduce their emphasis on Cardiac Care to take on less profitable diseases. This will diminish the quality of service in the community.

  • Walenty

    Beautiful site

  • wulansari

    Many travel nurses claim that working as a travel nurse gives them a renewed sense of patient focused nursing.

  • •••
  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.


The Demise of Physician Management Companies

Stanley Feld M.D.,FACP,MACE

As I predicted, after the Practice Management Companies bought physicians practices, physicians’ productivity fell sharply, and collection dropped greatly. Overhead increased as the Physician Management Companies moved their bureaucratic machinery into the physicians’ office. The PMCs’ hiring practices came into conflict with physician hiring reflexes. Profit decreased even further. Most of the National Practice Management Companies went out of business. Many sold the practices back to the doctors at ten cents on the dollar and left town.

The Hospital systems were forced to sell the practices back to the physicians also. The consultants for the hospital systems had a plan. If the hospital system could not profit by owning the physicians practices, they could at least own the front office and back office management of the physicians practice and collect a fee.

You will recall hospital systems were pouring profits in expansion of their hospitals, as well as buying other failing hospitals. Their goal was to have greater control over their marketplace. The marketplace control should result in better negotiating power with the insurance industry and Medicare.

Physicians, in general, are lousy business men. I mentioned previously that physicians want to take care of patients. They do not want to be business managers nor deal with the complexity of managing large practices. The physicians permitted the hospital systems hold onto the billing and employment functions. The physicians were paid on the basis of salary plus productivity minus overhead. Most physicians had some ideas of the workings of the formula. However, most did not and do not know the components of the overhead structure. They also have little understanding of the percentage of collections. Again, the physicians were driven to work harder to increase productivity, but did not seem to be increasing income.

Presently, another layer of mistrust between hospital systems and physicians is developing. They are starting to question the hospital system’s ability to manage the practice and are starting to rebel against the multitude of practice rules imposed.

If only the hospital systems and physicians trusted each other. They could then promote the concept of delivering excellent care to patients and permit each others skills to implement this goal. This concept would go a long way to start repairing the healthcare system.

I think the tension between hospital systems and physicians serves as a potential firebox that can blow up the entire system.

Many single specialty practices merged in order to have negotiating power with the various hospital systems in their town as well as with the Managed Care Companies. Some of these mergers have been very successful. Most have not been effective. Merging cultural and personality differences between competing medical practices is a very difficult task. The development of efficient governance in large multi-office merged practices is extremely difficult. Information technology and systems development could help greatly but would require large expenditures of money. As practice revenue diminishes physicians are hesitant to make large capital outlays.

In any event, it is easy to see how the variety of tensions created could lead to the further dysfunction in the healthcare system.

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.


In Texas, The Turkey Buzzards Move In When They Smell Blood !

Stanley Feld M.D.,FACP,MACE

The concept of buying physicians’ practices, have the physician produce revenue by working 12 hours a day and efficiently billing and efficiently collecting billing opened an opportunity for Managers with advanced information technology expertise and equipment. It also offered an opportunity to form national networks to negotiate better fees with the national insurance industries. This represents Price Transparency for negotiated fees from the insurance industry by large physician networks. These National Practice Management Companies could also have immense negotiating power because they controlled the labor force. The development of these Practice Management Companies along with hospital systems controlling their labor force through the IPA frightened the insurance industry. Their promise of reducing the cost to the employer healthcare benefit from 18% of gross revenue to 12% of gross revenue seemed to be fading as their negotiating position was threatened by coalescing groups of networks.

The industry of National Practice Management Companies grew quickly. The Professional Management Organizations (PMOs) had the same notion as the hospital system. If they put a powerful information technology system in place and bought physician practices, maintained the productivity of the workforce, and leveraged the ability of the information systems, they could increase the PMOs value. Once that was accomplished they could go public, and make millions from a hard working labor force (physicians and their practices). The attraction to the physicians was the cash and stock in the PMO obtained from selling their practice. Additionally, the practice debt was taken over, salaries were guaranteed with incentives and the complexity of practice management was gone. The physicians could also buy additional private stock in these startup PMOs. The hope was when the PMO went public the physicians would get an additional payout for their practice. This was supposed to represent additional incentive to make the Practice Management Organization successful. Remember, the physicians could not keep track of their collections and income was falling. Income was falling because of decreasing fees, increasing overhead and poor individual practice administration. The promise of the PMO was to fix all of this. Then the physician simply had to take care of his patients.

None of these management organizations foresaw the inevitable. Physicians were now paid employees for a larger company. The Physicians did not like the corporate rules applied or the restrictions on their freedom to make clinical judgments. No matter how hard they worked their income did not increase. Bilateral mistrust increased. The physicians’ productivity decreased partly because of reduced work hours, coffee breaks, and lunch hours, luxuries they did not enjoy previously. Physicians adopted a 9 am -5 pm schedules rather than a 6 am-9 pm schedule they maintained when they owned their own practice.

Who suffered? The patient and the physician patient relationship suffered greatly.

What happened next?

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.


Mistrust Between Hospital Systems and Physician Increases

Stanley Feld M.D.,FACP,MACE

Unfortunately, the relationships between hospitals and physicians have always been adversarial. However, when insurance carriers presented a dizzying array of fees for services, hospital systems stepped in and volunteered to “help” physicians form negotiating organizations called IPAs (Independent Physician Associations). I assume the hospital systems consultants told the administrations of the hospital systems that organizing was the only route to survival. It also seems that every hospital system organized its staff simultaneously.

These associations would negotiate fees for the physicians who practice at that hospital. The independent physicians could either opt in or out of the contract at their own free will. The fees for joining an Independent Practice Association (IPA) ranged from $1,000 to $10,000. What was strange to me was that in all of the IPAs I was involved, the hospital systems knew the physicians negotiated fees but the physicians never knew the deal the hospital made with the insurance company and their various managed care products. Nor did we know the fees they were getting for the services we ordered in the hospital. I always had the feeling the physicians were at a disadvantage. However, I did not have any proof. Most of the physicians were confused about the contracts. They could not keep up with the various prices the various Managed Care Companies (MCOs) were paying for their services. The physicians did not have sophisticated enough information systems to keep track of the changing fees. The physicians’ income was going down. It seemed that hospital systems’ net profit was increasing.

Hospitals increased expansion and renewal of their physical plants with the increase income. This increased profit could only occur if the hospital systems were getting a better deal from the insurance industry or Medicare than we were. In order to decrease costs, more services and procedures were paid for as outpatient services. Many of these workups and procedures could only previously be done in hospital at great expense. Complete workups for illness could easily be done as an outpatient in the physicians’ office at a much lower cost to the insurance company. The insurance industry was started paying for outpatient workups to reduce their costs.

Hospitals then went into the outpatient business in direct competitors to their staff physicians. However, independent practicing physicians on the hospital systems staff were hesitant to refer patients to the hospital owned and controlled staff. It was clear that one could workup and treat a patient as an outpatient cheaper than as and inpatient in the hospital. Presently hospital outpatient clinic workup is more costly than a workup in a physician’s office. Please note Dr Westbrook’s x-ray example.

Hospitals had very high brick and mortar investments. This investment was now being underutilization, as they continued to pour money into expansion and improvements to the structures. Hospital systems now became interested in buying physicians’ practices. The hospital systems viewed practicing physicians as a hard working labor force that could be very profitable to the hospital. Physicians had a difficult time keeping track of their collections and negotiated fees, while trying to practice medicine. With the hospitals’ “sophisticated” information systems that they paid millions for, collections by the hospitals seemed to be a no brainer to hospital administrators.

The hospital systems also saw that if they controlled physicians’ practices they would be in a more powerful negotiating position with the Managed Care Organizations. Many hospital systems bought physicians practices cash plus a guaranteed salary for 3 to 5 years. The hospital took over the debt and the administration of the practices.

What happened next was disastrous to all, patients, physicians, hospitals, insurance companies and the government. Everything seems to be going from bad to worse.

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.


Two Important Points!

Stanley Feld M.D.,FACP,MACE

1. Physicians and hospitals bill their retail prices with every claim form. They receive and accept Medicare prices as published. They have also negotiated deeply discounted prices with the insurance companies which they accept. An uninsured person, like Denise, has only seen the providers’ retail price. She could negotiate that fee before the service was rendered if she had a choice of provider. She could negotiate the price after service was performed if she knew the discount fees that the providers accepted. This is the best that she could do at the moment. Once everyone can buy insurance on a level playing field she will do much better. I will explain how, in my view, the medical savings account should be set up to be affordable to everyone, profitable to everyone, and driven by free market forces with freedom of choice for everyone. The model will lead to less people uninsured. It will also lead to a decrease in healthcare costs, because of a reduction in chronic disease complication rate.

2. In my blog, a Simple Solution to the Problem of Price Transparency some readers had the impression that I was advocating Price Control. I am a firm believer than Price Controls do not work. Price Controls in my view only create bigger problems.

The solution is competitive pricing. If a physician or hospital has a better product at a higher price, they will not lose their market share. One needs only to look at Neiman Marcus. If the product is similar the higher price product has a problem. The impartial web site will give that practice or hospital the opportunity to defend his price and in fact, prove its value to the consumer. They could publish their qualifications as well as medical and financial outcomes on the site and differentiate their value from the average.

In order to get that information, the providers will have to have a functioning electronic medical record (EMR). They could then have the opportunity to link medical and financial outcomes to cost and prove their value to those who want the superior product. Presently, there is little motivation for physicians or hospitals to have an electronic medical record. There is little incentive to buy one because presently there is no reward for having an EMR. The only incentive is a government mandate. However, mandates never seem to work. In addition, with the reimbursement declining it is difficult for a physicians or hospitals to understand the value of EMRs to be motivated to make the capital outlay necessary to purchase an electronic medical record. Many times these EMRs take years to install and function properly. Another barrier is the pain of converting to an EMR. The providers are tied also to a never ending costly service contract. The service from the EMR provider sometimes does not solve the problems that arise. In the past, many of us have spent large sums on the false promise of a significant payback. The false hope inhibits us from making an additional large investment that might not work well.

I will go into these problems and my proposed solution in the near future. Presently, one can start to see the depth and breadth of the problems the healthcare system has faced and the dysfunctional responses of stakeholders to the immediate problems. Their responses simply served to create greater problems for the healthcare system. The new problems generate further problems.

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.


The Next Devastating Blow to a Dysfunctional Healthcare System

Stanley Feld M.D.,FACP,MACE

In the late 1980’s, business said, “enough is enough”. We cannot afford to pay 18% of our gross revenue toward healthcare benefits. The insurance industry responded by asking a simple question. “How much can you afford?” The answer was 12-13% of our gross revenue would be tolerable.

The insurance industry’s immediate response was “no problem!” Managed Care was instantly born. Managed care was the nice term. Managed Care suggested that care would be managed so that patients would be healthier and health care costs would be reduced. Costs would go down because by managing care, complications of chronic disease would be avoided. However, in reality, Managed Care was simply the insurance industry managing cost. The insurance industry knew it could negotiate at least a 33% discount from the price shifted fees of the previous decade of healthcare system dysfunction.

The insurance industry knew that physicians and hospitals were accepting more than a 50% discount on their base retail prices for Medicare payment from the government. The insurance industry was the outsourced carrier (adjudicator of claims, and Administrative Service Organization) for Medicare . Even if they reduced payment by 50%, physicians and hospitals would be getting more than the Medicare was paying.

The math was as follows: As an example, if the original fee for service was $100 the government reduced the fee to $50. Employers’ insurance was paying a price shifted fee of $150. A 50% reduction was a fee of $75 or $25 more than the Medicare payment. The insurance companies also understand how disorganized the medical profession was from a business point of view. If insurance companies could not get adequate price concessions from hospitals they were certain they could get it from physicians. They also knew that physicians were afraid to lose their patients. Physicians would accept reduced fees to maintain their patient load because their capacity to see patients was being reduced by increased Medicare patient load and decreased reimbursement. This also meant that physicians had to see more patients per day to maintain their revenue.

You can start to see how distorted the system had become.

The new games then began!

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.


Did I Solve Denise’s Problem? Not yet!

Stanley Feld M.D.,FACP,MACE

My last few blogs dealt with Price Transparency. These posts were meant to describe the problem as well as offer a solution to the problem.

Denise, as an uninsured patient, was thrown into a situation where she was at a tremendous price disadvantage. The solution presented would provide her with price ranges that she could negotiate. However, when you are ill, you do not want to be forced to negotiate the price of your own care. If there was a Universal Medical Saving Account available to everyone, sold by insurance companies without eligibility or tax restrictions, the fees would have already been negotiated for Denise. Her decision making would be simplified. She would decide whether the insurance company was allowing too little or too much to be paid for a service with her MSA money. She should have the opportunity to express her impression of the quality of the service. If she was displeased with the service, she should be able to choose another insurance company, physician or hospital.

These simple principles would create a competitive marketplace in favor of the patient. The impartial web site would permit other patients to judge the quality of their care. The provider could defend the quality of his care to others in this transparent marketplace. One can begin to see that a Consumer Driven Healthcare System (CDHCS) could be effective by market forces determining cost and price. It could also be a good deal for the patient. An effective CDHCS could encourage a system of patient responsibility for his care. In turn, it could increase adherence rates to treatment and reduce complication rates of chronic illness. The result would be a decreasing cost of care to the healthcare system. I will, in future blogs, discuss the system of Consumer Driven Healthcare that would work.

I mentioned that Dr David Westbrock was correct when he stated that the insurance industry has subverted the Medical Saving Account product which is key to the Consumer Driven Healthcare movement. They have substituted an alteration in the original system called the Health Saving Account. This alteration serves the insurance industries’ vested interest and not the patients’. In the long run, the HSA will serve as a false hope to the Repair of the Healthcare System.

Next, I will return to the evolution of steps that have distorted the Healthcare System. They are a threat to destroy our medical care system.

  • Thanks for leaving a comment, please keep it clean. HTML allowed is strong, code and a href.