April 30, 1999

Budget Act has teaching hospitals awash in red ink

Budget Act has teaching hospitals awash in red ink


Dr. Harry Jacobson is working with the Assiciation of American Medical Colleges to inform federal officials about the impact of the Balanced Budget Act. (photo by Donna Jones Bailey)

Sometimes even the most well-intended plans can have unforeseen – yet incredibly damaging – consequences.

That's the case with the U.S. Government's Balanced Budget Act of 1997 (BBA), which, in its implementation, is contributing to Vanderbilt University Medical Center's and the rest of the nation's teaching hospitals financial stranglehold.

At issue is the solvency of the Medicare Trust Fund, which dominantly pays for non-physician medical expenses (mainly hospital expenses) of Medicare beneficiaries. At the time of the BBA's passing, it was projected the fund would go broke in 2004. Since then – due in part to a record slowdown in growth of Medicare expenditures – estimates of when the fund would go broke have been steadily pushed back; to 2008, then 2010, and most recently to 2015.

But even though the Medicare Trust Fund's solvency lifespan keeps getting extended, the cuts in funding to America's teaching hospitals as a result of the BBA remain.

And these cuts are deep.

For VUMC alone, it's projected that the total negative financial impact of the BBA over the course of the next five years will exceed $45 million. Medicare reimbursement to hospitals has been set so low by the BBA that many of the best hospitals in the country and in Tennessee, up to 33 percent of the rural hospitals are failing financially.

It is projected that for Tennessee's hospitals, Medicare reimbursement this year will be below the cost of delivering that care, and it will be driven even lower over the course of the next four years as the BBA is fully phased in.

The impact doesn't stop there. Since the Federal Government often assumes that any mistake made while navigating its long and complex set of rules and regulations is due to fraud, as opposed to, say, an honest mistake, the cost of crossing the i's and dotting the t's has risen dramatically to ensure that no mistake is made. Two years ago, VUMC's regulatory compliance expenses totaled $1.6 million. Last year they rose to $3.3 million, and the trend is heading anywhere but down.

The BBA's impact is creating a wave of red ink for the nation's teaching hospitals, but efforts are under way to stem the tide.

The Association of American Medical Colleges (AAMC) is seeking to eliminate any further cuts to the indirect medical education (IME) and disproportionate share payments as a result of the BBA. In particular, the AAMC is calling for these payments to return to their pre-BBA levels. Also, the direct medical education and IME payments associated with Medicare managed care enrollees, which are being paid in 20 percent increments over the life of the BBA (1997-2002), should be paid at a 100 percent level beginning in fiscal year 2000.

Finally, the AAMC is seeking adjustments to the outpatient prospective payment system so teaching hospitals are on a level playing field with other hospitals.

According to figures from the AAMC, other impacts of the BBA nationwide include:

o Medicare reductions resulting from the BBA could result in the total margin for a typical Council of Teaching Hospitals and Health Systems (COTH) hospital falling by as much as half or more – to about 1 percent by 2002.

o 38 percent of COTH-member hospitals, about 100 institutions, could face negative margins by 2002.

o Projected BBA Medicare payments compared with estimates of what Medicare payments should have been had the BBA not been enacted reveal a cumulative loss of $45.8 million in Medicare Support for a typical general, acute, non-federal COTH hospital by 2002. The cumulative BBA losses for all COTH hospitals are estimated to be $14.7 billion.

o BBA changes to Medicare policy are slated to have a particularly adverse effect on teaching hospitals with an intern and resident-to-bed ratio of .25 or greater. The total margins for this subset of teaching hospitals could fall from an average of 3 percent in 1996 to an average of 0.3 percent in 2002. 47 percent or more of these hospitals could face negative margins by 2002 or sooner.

If the financial threat of the BBA weren't imposing enough, VUMC and the rest of Tennessee's academic health centers are also currently dealing with the reality that hospitals in this state already receive much less than cost reimbursement from TennCare, virtually ensuring that many hospitals will soon no longer be able to provide service.

The impact of TennCare – the state's alternative to Medicaid that provides medical insurance for low-income Tennesseans – has been felt for nearly six years. For the first year, losses associated with TennCare were $3 million. Then, as reimbursement rates plummeted due to the removal of state Disproportionate Share (DSH) payments, losses have averaged more than $15 million per year.

DSH is critical. Across the state, the major teaching hospitals such as VUMC account for only 6 percent of hospitals. They care for 17 percent of all patients yet account for 40 percent of all charity care performed. VUMC, by the way, provides more hospital care under TennCare than any hospital in Tennessee – averaging more than $50 million per year. That figure is higher than the Regional Medical Center in Memphis and double that of Middle Tennessee hospitals such as Baptist Hospital and Centennial Medical Center.

Combine the TennCare losses with the projected negative financial impact of the BBA, and the picture is gloomy indeed.

However, VUMC officials are working hard to reverse the cuts and impress upon federal representatives and officials that the growing negative impact of the BBA is acute.

Two days ago, Dr. Harry R. Jacobson, vice chancellor for Health Affairs, took part in a press conference in Washington, D.C., outlining the projected impact of the BBA on U.S. teaching hospitals. He was joined at the conference by Dr. Jordan J. Cohen, president of the AAMC, and Jeffrey Otten, president of Brigham and Women's Hospital in Boston.

Jacobson, along with Marilyn K. Yager, director of health policy development, has been meeting frequently with federal officials and policymakers about the need for immediate and substantive policy corrections.

"There are other alternative approaches to addressing the health care problems in this country than endlessly pushing reimbursement cuts, rushing to managed care and managed competition and distracting providers into creating large and difficult-to-manage 'integrated delivery systems,' " said Jacobson.

"The technology required to improve the quality and cost efficiency of health maintenance and care in this country is available – it's called clinical judgment, evidence-based practice, disease management and disease prevention.

"Providers need to get serious about taking the lead in using our core competency-clinical knowledge and training – to provide better and more consistent health maintenance and care."