Low reimbursement rates hurting health systems
Health care costs have risen steadily for decades, putting increased financial strain on patients, providers and insurers. Insurance reimbursement rates paid to hospitals often fail to keep pace with these rising expenses.
As the gap between costs and reimbursement rates continues to widen, more hospitals find themselves struggling to stay solvent.
Nowhere is the reimbursement-to-cost ratio more apparent than with Medicare, the federal health insurance program for seniors.
“It’s a real pressure for hospitals. We just released some data that says Medicare pays 82 cents on the dollar for care that hospitals provide for Medicare beneficiaries,” said Aaron Wesolowski, vice president of policy research, analytics and strategy at the American Hospital Association. “A full two-thirds of hospitals have a negative Medicare reimbursement. That’s just one of the many financial pressures that hospitals have faced in recent years.”
Butler County hospitals aren’t immune to the problem. Butler Health System and Excela Health merged in 2023 to create Independence Health System. Both cited static Medicare reimbursement rates as a contributing factor to their ongoing financial distress.
Medicare constitutes about 55% of the hospital system’s payer mix and Medicaid about 12%, said Tom Albanesi, Independence Health System’s chief financial officer. The figures are typical for Western Pennsylvania.
“Governmental payers set their rates well short of our actual costs, especially Medicaid,” Albanesi said. “While governmental-insured patients are generally not profitable, our charitable mission is to treat everyone in need of care, regardless of their ability to pay or source of payment.”
Jolene Calla, Hospital Association of Pennsylvania’s vice president of health care finance and insurance, said Medicaid’s reimbursement rate is just below that of Medicare.
“The reimbursement rate of 81 cents on each dollar of cost to care for this population is unsustainable over time,” Calla said.” This is a significant contributor to many hospitals’ precarious financial positions.”
In addition to unsustainable reimbursement rates for both Medicare and Medicaid patients, hospitals face other financial challenges, Albanesi said.
“The real administrative burden are the differences between insurers’ preauthorization practices, payment policies and medical record ‘coding edits’ for care that has already been provided. We provide high-quality, lifesaving health care services, then must work way too hard to be paid for those services,” he said. “The balance of power in health care is way too lopsided toward insurers, who are heavily incentivized to deny payments for work already performed.”
Key data provided by Wesolowski said U.S. hospitals experience $100 billion in underpayment between the cost of treatment and reimbursement rates. “Some hospitals are paid even lower than others, making their situations more dire,” he said.
Before the coronavirus pandemic, Wesolowski said, Medicare reimbursement rates fluctuated between 86 and 87 cents on the dollar.
“Acuity has risen, and the pandemic accelerated that,” he said. “Some patients coming in for treatment have been very sick.”
Cost containment and cuts in Medicare have made the situation worse for some health care facilities. Every year, the Centers for Medicare & Medicaid Services updates the payments.
“Even when they increase those rates, that increase is not anywhere near the actual rate of inflation,” Wesolowski said.
Albanesi agreed the pandemic is a contributing factor, noting that before COVID-19, hospital reimbursement rates lagged slightly behind inflationary pressures from salaries, wages and medical supplies and lagged significantly behind inflationary pressures from pharmaceuticals, insurance and employee health benefits.
“After COVID-19, rampant inflationary pressures on all expenses, including salaries and wages and medical supplies, have significantly outstripped previously negotiated reimbursement increases and have eroded hospital operating margins,” he said.
Additionally, most health systems have created large, employed physician networks, as many physicians have left private practice for the security and simplicity of employment.
“Reimbursement for physician services has significantly lagged the increasing costs of employing physicians,” Albanesi said.
Wesolowski said one way hospitals try to accommodate for these shortfalls from Medicare payments is by shifting costs to commercial insurers.
“Hospitals rely on those higher commercial rates given the shortfalls on the Medicare and Medicaid sides just to make themselves whole,” he said. “Even when the commercial rates are higher, it’s been hard to get commercial insurers to pay those rates.”
The hospital association continues to push back on further reductions to Medicare rates.
“At the very least, we want to see rates keep up with the costs of rising expenses,” Wesolowski said.
Albanesi said there’s another policy change for Medicare and Medicaid that could address some of the gap between reimbursements and costs.
Medicare Advantage plans have grown in popularity with beneficiaries, he said. However, insurers who sell these products don’t have to follow Medicare rules in adjudicating these claims, which results in more administrative denials for care already provided.
“The growth in Medicare Advantage has been very damaging to the finances of health systems here and across the U.S., and a number of systems have withdrawn participation,” Albanesi said.
Additionally, the Pennsylvania Medicaid system is antiquated, he said.
“The (state) Medicaid outpatient fee schedule, which most Medicaid insurers use as the basis for payment, hasn’t been updated in decades,” Albanesi said. “Many newer pharmaceuticals aren’t covered by Medicaid as they are not contained on the antiquated fee schedule.”
When insurance reimbursements don’t fully cover the costs of care, health systems have to tap into their cash reserves to fund operating deficits.
“This isn’t a sustainable business model,” Albanesi said. “While we are constantly seeking expense efficiencies, government and private insurance reimbursement for hospital and physician services must be increased.”
This article first appeared in the February edition of Butler County Business Matters.
