Flatlined: Resuscitating American Medicine

Chapter 4. Fifteen Years Lost

Hospitals are primarily financed by private and public health insurance. Their revenues come from care of patients with (1) private insurance, (2) Medicare, and (3) Medicaid and its affiliated programs. Hospitals earn income from investment of their profits and from services such as cafeterias , parking, and medical services that they contract out, but patient care is the core business. Private hospitals finance the care of the uninsured and low-paying publicly insured patients (Medicaid) by shifting their losses to increased prices for privately insured patients. Many hospitals also receive funds from a federal program called the Disproportionate Share Hospital (DSH) program, which is aimed at hospitals that care for a disproportionate share of low-income patients and is a substantial source of hospital revenue . The only hospitals that receive direct tax revenue are public hospitals, which account for 16 percent of hospital beds in the United States.1 While only 6 percent of the services that hospitals provide nationally are to the uninsured, a few hospitals in each region provide most of that care; these are usually emergency hospitals, and they are often financially unstable. By the late 1990s Medicare’s cost to the federal government had been growing so fast that it threatened to bankrupt the Medicare program within the foreseeable future and push the country further into debt. Funds from two public programs, Medicare and Medicaid, account for half of hospital revenue.2 Beginning in 1999, the Balanced Budget Act of 1997 reduced DSH funds by 17 percent and also sharply cut hospital payments for Medicare patients. These cuts crippled some key emergency hospitals. For example, 25 4 Fifteen Years Lost America has lost fifteen years that could have been used to improve the way the medical industry delivers care. CH004.qxd 10/7/08 9:50 AM Page 25 Ben Taub General Hospital in Houston, Texas, is a tax-supported hospital for the uninsured and also one of two major trauma hospitals that serve the region. By 2001 Ben Taub had suffered a10 percent cut in operating revenue because of DSH cuts, precipitating bed closures and the Houston emergency services crisis that first became critical in that year. But the Balanced Budget Act was not enough to cause widespread emergency medical system failure nationally. By the time the act arrived on the scene, hospitals and doctors had been reeling since the early 1990s from the effects of the managed care measures taken by employer-based insurance to control costs. These two events were the genesis of the emergency medical services failure seen today and the trigger for the health care cost escalation that now troubles the country. Fee-for-Service Medicine The managed care era cannot be understood without understanding how doctors are paid. Insurers and government programs pay doctors directly for each service they render, and they are paid separately from hospitals. Years ago a group at Harvard University developed a payment system called the relative value scale that is used by the Medicare program and almost all insurers to determine physician fees. By means of this scale, each of the thousands of services that doctors provide is assigned a numerical level of difficulty for performance; and the American Medical Association regularly updates the scale. The level of difficulty for a routine office visit is low, that for heart surgery or brain surgery is high. The performance of procedures is always assigned a greater number on the scale than is management of a patient’s health. A generalist managing a patient with diabetes in a medical office is paid about the cost of a good restaurant meal for that service; a heart surgeon or a brain surgeon can make a down payment on a car for performing an operation on the same patient. Doctors contract with insurers, including Medicare. Their contract agrees to a specific dollar figure that is then multiplied by the numerical level of difficulty from the relative value scale for each service the doctor delivers. Medicare and Medicaid’s multiplier is set by law; the multiplier doctors accept from private insurers is a matter of negotiation. The product of the multiplier and the scale’s numerical level of difficulty determines what the doctor is paid for each service. The dollar WHY THE UNINSURED SHOULD BE COVERED 26 CH004.qxd 10/7/08 9:50 AM Page 26 multiplier may be high or...