The Wonk Room

Hospital Industry Will Net $16 Billion From Health Reform, Let Medicare Find More Savings

The New York Times’ Prescriptions blog points to the Tennessee Hospital Association’s (THA) two page analysis of the American Hospital Association’s decision to contribute “some $155 billion in Medicare and Medicaid savings over the 10 years to cover health care cost reform.” In the document, THA explains that under the deal, hospitals would still net about $16 billion from reform:

The breakdown estimates that the industry will receive additional money of about $171 billion over those same 10 years as a result of reimbursements for newly insured patients who would be covered under the overhaul plan. In other words, the hospitals would give up $155 billion in cost cuts, but take in $171 billion in new money — a net gain of $16 billion. What’s more, the Tennessee association notes that the deal delays most of the industry’s cost givebacks until the second half the agreement’s 10-year year period — well after the hospitals have enjoyed some of the benefits of the new money they’re expecting from expanded insurance coverage. In other ways, the agreement appears to protect the hospitals from cuts they might have sustained anyway.

This isn’t to say that the agreement between the hospitals and the administration is a bad one. If the prospect of newly insured patients solidifies industry support for reform (and prevents hospitals from undermining the effort), then both patients and hospitals will gain from the effort. The deals with hospitals is significant in that it forces the industry to admit that there is waste in the system and adopt more efficient practices. The goal of the compromise, after all, isn’t to prevent hospitals from netting some amount from the initial influx of the newly insured; the goal is to reinvest the waste in the health care system towards financing health care reform.

Still, given the profitability of reform, reformers must hold hospitals to their pledge to contain costs and also use Medicare to further prod the industry — which accounts for over 40 percent of all spending — to slow cost growth. As Judy Feder and Marilyn Moon point out, “in response to payment changes in the early 1980s, hospitals reduced their lengths of stay enormously…For the last six years, Medicare has applied no such constraints, leaving open the opportunity for achieving short run savings now.” If the industry is scheduled to earn some $16 billion from health care reform, then “policy makers have no excuse not to use that leverage.”