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Can Hospitals Break Even with Medicare?

Elyas Bakhtiari, for HealthLeaders Media, December 13, 2010
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But it isn't totally about costs. There's room for improvement on the revenue side, though it isn't as easy to control. Part of Floyd Medical Center's success with Medicare is because of the add-on disproportionate-share payments the hospital receives for serving a low-income population, says Rick Sheerin, CFO of the 304-staffed-bed not-for-profit community hospital. A provision in this year's healthcare reform legislation could cut into those payments.

There has also been an effort in recent years, however, to grow successful service lines---those built around procedures with higher-margin Medicare reimbursements---that will offset a portion of costs, he says. The hospital has seen a boost from newly added cardiology services, for instance. Even though reimbursements for some cardiology procedures are on the decline, it is on the whole a high-margin, highly reimbursed service line.

Looking at Medicare reimbursement from the perspective of service lines has its advantages on the cost side, too. Todd Hofheins, CFO of Providence Regional Medical Center, a 372-bed hospital in Everett, WA, says dissecting the Medicare population by service line makes it easier to address utilization and supply management. For instance, he has worked with the orthopedic and total joint service lines to rein in supply costs by negotiating with vendors in an attempt to make the procedure itself more profitable.

"Medicare pushes 40% of our payer mix, so for us it's pretty important to really manage the Medicare costs of our business," he says. "One of the things we do is through our costing system, break the Medicare population into service lines, break those into diagnoses and procedures, and really get into the cost components of it."

Providence Regional Medical Center isn't making money on Medicare overall, but it has reached the break-even point in several key areas and generally hovers near the break-even point.

The forecast
The challenge of running a hospital with Medicare reimbursements is only going to grow. The Medicare trust fund is expected to be exhausted by 2029, barring any changes. The program is becoming a national financial burden and will need to be reined in to survive, which means it is possible that Medicare reimbursement levels are near their inflation-adjusted peak, for a while. In the HealthLeaders Media Industry Survey 2010, 90.4% of CFOs rated Medicare reimbursement as having primary importance to their revenue stream in the next three years. It was rated higher than any other factor.

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5 comments on "Can Hospitals Break Even with Medicare?"

Todd (12/20/2010 at 5:06 PM)
I have to agree with Steven Watkins. Why would the government continue to pay facilities above break even? A facility showing it can effectively get cost out will just further show the government that it makes sense to cut reimbursement. In the future, look for fully public (Medicare and Medicaid) facilities and fully private facilities to provide care.

Insight 101 (12/16/2010 at 12:43 PM)
It's not a given that hospitals have to lose money on medicare. One commenter noted they often can't truly identify if they are losing money by the payer in the truest sense of the concept. I work for an large MA only company and we believe hosptials could become more profitable with us if they become more engaged. There is so much opportunity to improve they just tend to have no interest. I can't frankly explain the reticence but it's real and unfortunate.

Steven Watkins (12/15/2010 at 2:19 PM)
The answer is, "No". Hospitals cannot make money on Medicare(or Medicaid) only. As soon as hospitals reduce costs, Medicare reduces it's a never-ending cycle. In fact, facilities operating with 70% Medicare and Medicaid (without dipping into a mega-foundation) would be hard-pressed to demonstrate high quality and patient satisfaction scores today. In response to Obamacare, we'll soon see "Medicare Only" facilities and "Private Only" facilities in the same communities.