Sitting at breakfast last Sunday morning and listening to my soliloquy on President Obama’s radio address of the previous day, my wife impatiently interrupted me to administer a tongue lashing on my sloppy use of English.
“Why do you always speak of reimbursing hospitals?” she queried. “When have you last said ‘May I reimburse you?’ when checking out of a hotel? And what do you mean by Medicare payment cuts? Does it mean spending by Medicare actually goes down? If so, why does Medicare spending always go up after such ‘spending cuts’?”
To my complaint that she was being pedantic, she responded: “Language matters, because it induces habits of the mind and actions that follow from them.” (On this point, see this marvelous little book).
On reflection, I agree that there is something to this argument.
Organizations that are paid for the goods and services they deliver project the total future revenue implicit in expected future payments and then work back from that projection to determine what operating expenses and capital budgets can be supported with that revenue. Their executives do not lament that “our payers reimburse us only 90 cents on the dollar,” by which they would mean “costs.” Instead, they adjust their costs to the projected payments.
By contrast, organizations that are reimbursed for their services add up whatever expenses they incur and then expect to be made whole for those expenses, usually with a profit margin. Military contractors on cost-plus contracts, for example, think and operate this way. But surely the leaders of the health industry have more pride than to liken themselves to military contractors.
In health care, the word ‘reimbursement’ became popular when Medicare literally did reimburse each American hospital retrospectively for its full, documented cost of treating Medicare patients, including an allowance for allocated overhead and depreciation of plant and equipment. There was a Section 223 that ruled out certain questionable costs for reimbursement; but by and large each hospital was assured that whatever costs it could document it had incurred for Medicare patients would be reimbursed.
There followed an uncontrollable spending boom by hospitals. Medicare patiently underwrote that boom with its uncontrollable reimbursements.
Things changed markedly when, in 1983, the Reagan administration decided to abandon this inflationary system in favor of a “prospective payment system” (P.P.S.), already in use in New Jersey at that time. Since that time, Medicare has paid hospitals flat rates per case, for some 745 distinct diagnostically related cases (D.R.G.’s). These D.R.G. payments are updated annually. The idea was that hospitals should make do with those payments, just as any other business must do with the payments it receives.
To be sure, what sets hospitals apart from other providers of goods and services is that American society, uniquely, expects them to deliver health care to people who cannot pay for it.
Ideally, in a reformed health care system, there should not be any uninsured patients. In the meantime, however, hospitals should at least be reimbursed for their incremental cash outlays on care rendered to nonpaying patients. For most hospitals, however, these incremental costs are only a small fraction of their total costs (see this).
That issue aside, the idea that hospitals are to be reimbursed, like military contractors, seems to linger among hospital executives. It appears to persuade many of them, and the physicians affiliated with their hospitals, that they should have the freedom to put in place any structures and any equipment, and adopt any practice style, that they believe will best serve their patients. Someone — either patients or their insurers or both — should then “reimburse” hospitals fully for those incurred expenses, failing which there will be a lamentable “shortfall.”
One must wonder how long this style of thinking and management can survive in the brave new world, in which the nation’s gross domestic product literally is shrinking and may not grow much in the future, even as the nation’s debt to foreigners mounts by the multiple hundreds of billions year after year.
During the last four decades America’s health spending annually has grown an average of about 2.5 percentage points faster than has the rest of the G.D.P. Because G.D.P. has declined since 2008, health care now claims 18 percent of G.D.P., up from 16 percent only two years ago. Soon it will claim 20 percent and, at historical spending trends, 40 percent by midcentury.
Which brings us to the matter of the Medicare “budget cuts.”
In his radio address last Saturday, President Obama announced that he would seek to reduce Medicare payments to hospitals by $110 billion over the next decade by slightly lowering the annual updates in Medicare’s D.R.G. payments to help finance subsidies toward health insurance for low-income families.
An instant howl went up from the hospital industry at the news of this so-called cut. But is the president actually talking about a real cut in Medicare spending?
The $110 billion would come out of currently projected total Medicare spending on hospitals of $3.3 trillion over 2010-19. That total incorporates a projected increase from 2009 spending levels of about $1 trillion over that decade. So now it would be a projected Medicare spending increase on hospitals of “only” about $900 billion.
Evidently, the United States is a bilingual country in which words have different meanings in health care than they do elsewhere in the country. The phrase “spending cut” illustrates this phenomenon.
No one in Washington is talking about actually “cutting” total national health spending or Medicare spending over the coming decade, as that word is understood in the hinterland. At most, the president is hoping for a world in which total national health spending will grow “only” 1.5 percentage or so points faster than the rest of the G.D.P., rather than the current 2.5 percentage points.
With enough advance warning, the leaders of our health care sector ought to be able to budget their future costs accordingly. They can start with a pledge never again to utter the archaic word “reimbursement.” It’s passé.
