State hospitals facing Medicare cut

The federal government plans to slice about $66 million from the annual Medicare payments it sends to Connecticut hospitals in the coming fiscal year, which would deal a significant budget blow to many of the state’s health care facilities.

Connecticut hospital officials are fighting the proposed cuts announced by the federal Centers for Medicare and Medicaid Services (CMS). Other hospitals across the country will also be affected by a change in the way CMS calculates its Medicare payments, but Connecticut could be particularly hard hit.

“It’s hugely detrimental,” said Stephen Frayne, a senior vice president with the Connecticut Hospital Association, which will be submitting a formal protest with federal officials in the coming weeks in an attempt to reverse the cuts.

Medicare officials say the changes simply reflect an effort to recover overpayments to hospitals–in Connecticut and around the country–in previous years.

“A good deal of this reduction is because hospitals were overpaid” to treat patients with illnesses like pneumonia and other conditions starting in 2008, said Ellen Griffith, a CMS spokeswoman.

At issue are payments that Medicare, a federally funded program providing health insurance for the nation’s elderly, makes to hospitals for inpatient care. Each year, these payment rates are adjusted for inflation and other factors.

Before 2008, hospitals were paid the same amount for treating an otherwise healthy patient with pneumonia, for example, as they were for a pneumonia patient who had other complications. Then Medicare officials changed that system to reflect more severe diagnoses, creating a more varied payment scale that reflected the higher costs of treating severely ill patients.

That result was more money flowing out of Medicare’s coffers to state hospitals. Griffith says some hospitals “bumped up” their patients to a more severe diagnosis category than was necessary, resulting in overpayments. “There’s always a tendency to find a way to increase the amount of money that should be reimbursed,” she said.

Hospital officials adamantly deny that accusation.

“It’s not that we gamed the system, or that we’re getting paid more,” said Thomas Marchozzi, executive vice president and chief financial officer at Hartford Healthcare Corp., the Connecticut hospital network that includes Hartford Hospital and three others, as well as other non-acute facilities.

“What CMS did was properly pay, and now their upset about that,” Marchozzi said. “They’re trying to recoup payments that hospitals legitimately earned because of the severity of illnesses. They just never expected hospitals to be good at coding” patients’ illnesses.

Either way, for this coming year, Medicare’s proposed increase for inflation is wiped out by the agency’s reductions to recoup that money. In addition, the new health care reform law called for a .25 percent decrease in Medicare hospital payments.

In Connecticut, hospitals face additional reductions in payments because CMS came up with a reduced reimbursement calculation for the state’s hospital wage costs.

Frayne said the result is a combined 4 percent cut in federal Medicare payments to Connecticut hospitals. Each of the state’s hospitals would see different variations in that figure, but the proposed changes will have wide repercussions across the state. For many hospitals, Medicare makes up 40 to 60 percent of their revenue, so even a small decrease translated into a major loss of cash.

“What it means on the ground is significant downward pressure” on costs, which could force hospitals to delay raises for nurses and other staff, to postpone the purchase of new equipment, and to take other belt-tightening steps, Frayne said.

For the last 15 years, Frayne said, Connecticut hospitals have seen, on average, about a 1.5 percent increase in Medicare payments, even as inflation has been at about 3 percent or more. This year, he said, hospital executives may be content if Medicare just agrees to maintain last year’s payment levels, with no increase or decrease.

“It will be a significant relief if we don’t get cut,” he said.

CMS’s Griffith says the agency will issue a final rule on the payments in August.

In the meantime, hospital officials are in limbo as they craft their budgets for next year.

“They are trying to figure out … are we going to give raises, can we buy new stuff?” And right now, Frayne said, there aren’t any clear answers.

Marchozzi says Hartford Hospital is currently working through the details of next year’s budget and has not yet figured out what it will do if there’s a net reduction in funding from Medicare, which accounts for 40 percent of the hospital’s revenue. Marchozzi said just a one percent decrease would cost Hartford Hospital $4 million.

Right now, Marchozzi said, “I lose money on every Medicare patient,” so if the reimbursements are cut, the hospital will lose even more for each of those elderly Medicare patients.

“I will have to look at programs that are not core to our institution, and I may have look at the services we provide,” he said.  “It’s going to be a fact of life going forward,” he added.