Why are providers struggling

Abstract: In the current healthcare setting, the providers (hospitals and physicians) are under pressures that stem from gaps in market and legislation. Our response must include ways to stabilize the current dynamics between payers, the providers and the patient using a mix of legislative guidelines and financial incentives.

I. Background - From Then to NOW
The healthcare ecosystem is shared by patients, providers (hospitals and physicians) and payers/insurers (managed care organizations, Medicare, Medicare). The payers played a big role in the corporatization of healthcare. Their main intention was to curb exploitation of fee-for-service system by providers. Gradually, the payers took control over the functioning of healthcare in America by containing cost in all respects. Managed care organizations did so by restricting patient’s preferences, limiting access to care (using gatekeepers), denying coverage, risk contracting and rationing based on the ability of the patients to pay premium. All payers resorted to standard reimbursement schemes with variants (Medicare had diagnosis related groups - DRG, managed care used flat fee per day etc). The payers enjoyed the advantage of huge subscriber (patient) base, which was used to negotiate (dictate) terms with providers. During this time the cost of healthcare (Premiums, out of pocket, copayments) rose at a rate higher than inflation and the rate of growth of income. The situation roused much public discontent and a power struggle between provider and the payers ensued.
The providers responded by consolidating amongst themselves through mergers and acquisitions, by forming large physician groups and by becoming process efficient. Thus they were in a position to negotiate better reimbursement rates from the payers (especially commercial insurers). Responding to their subscriber sentiments, the payers began to loosen up (like offer more flexible plans and relax pre authorization rules) and an uneasy cease fire was established among the players in the healthcare industry.
In the current scheme of things, the providers are under struggling to survive due to asymmetric market forces and regulations. Profit margins are triumphing over social medicine. To be successful, the current health reform will have to balance the loci of power among the players in the healthcare industry.

II. Provider Challenges
The impact the challenges given below may vary in degree for hospitals and physicians
· Treatment of uninsured – Under EMTALA (Emergency Medical Treatment and Active Labour Act), the hospitals may not turn down patients coming to the ER. The hospitals incur a high financial overhead to maintain and run an ER. There is a growing number of uninsured visiting the ER to address their medical needs. This is in addition to the valid emergency cases without insurance. The cost of care in all such cases (including follow up post the ER episode) is borne by the provider bringing down the profit margin.
· Labour costs – There is a shortage of medical staff. High demand and low supply cause the providers to offer competitive salary to attract quality care givers. Specialists consider ER duty as unrewarding. It is known to take a toll on their personal life. In their perception, ER duty takes away the time they would have otherwise spent attending insured (financially rewarding) patients.
· Cost shifting – High-end cost effective technology is helping day care (out-patient) surgery units to succeed. Traditional hospitals are not set up for this and suffer loss of in-patient revenue from lost patients. This market is dominated by specialty hospitals which work with insured patients and revenue generating medical conditions. They minimize losses by not having the obligation to treat uninsured or provide public welfare programs, ER and trauma units. Competition from specialty units is driving traditional providers to take losses or invest in similar initiatives. Increase in proportion of out-patient visits are also contributing to loss in in-patient revenue.
· Low reimbursements – Medicare and Medicaid pay hospitals 95% and 73% of what it costs them to provide care, while private insurance pays about 120% of those costs. This mechanism of cross subsidy employed by providers allows them to sustain themselves, financially. The healthcare reform bill in its current draft proposes to cut funds to Medicare and Medicaid even further which would mean even lower payments to the provider.
· Cost of drugs – Newer drugs are costly and many a time the physician’s choice of drugs is in conflict with the hospitals cost containment efforts. Number of episodes due to lifestyle related diseases are rising and driving up cost of care.
III. Provider Response
The providers may respond to their current challenges using a combination of strategies outlined below.
· Contain labour costs and close less-profitable services and consolidate by mergers and acquisitions
· Integrate logistics to negotiate better rates for purchasing medical supplies from corporate vendors.
· Seek a more favourable payer mix to be able to cross subsidize better. A public option will make this difficult as government run programs will continue to pay less for care in line with Medicare and Medicaid.
· Restructure hospital and physician relationship. Become competitive by creating specialty units (possibly in partnership with physicians) and retain both good physicians and their patients.
· Increase reliance on non operating income (The portion of an organization's income that is derived from activities not related to its core operations). Engage staff in financial performance improvement
IV. Our Response and conclusion
Our response must include ways to enable the providers to sustain and grow. A mix of regulatory mandates and financial incentives are suggested below.
· Mandate insurance for one and all. This will reduce financial burden of the provider to give charity care to uninsured (Reference: Senate Finance Committee draft by Sen. Max Baucus).
· Provide financial incentive for providers to adopt technology to improve process efficiency and care coordination. Example: Shared nomenclature between hospital billing system and insurance companies(that reduce cost towards healthcare clearinghouse), e-prescription, etc (Reference: HITECH Bill)
· Mandate specialty hospitals to offer, at least one, public welfare program(s). This will rein in elements of social medicine in their practice.
· Provide incentives for providers to come together and form shared-services department (where feasible) especially in high-end diagnostics, medical coding, etc. This will result in cost sharing and higher utilization for the providers.