What Do We Gain From The New Hospital Agreement?

hospitalgraphic2Jonathan Cohn makes a good point about the pending agreement between the White House, Senate Finance Committee and the nation’s hospitals to reduce spending by $155 billion over 10 years. I’ve been rather skeptical about the series of voluntary pledges (first the industry as a whole, then PhRMA and now hospitals) but Cohn correctly points out that “the drug and hospital industries are making a more important pledge: They are suggesting they will go along with legislation that changes the way they are paid”:

The hospital industry has offered to endorse changes in the way Medicare pays hospital bills. By themselves, the endorsements are meaningless. But the endorsements make it possible, politically, for lawmakers to write these changes into reform legislation. That’s not meaningless.

Remember, expanding coverage to all people, or virtually all people, will likely cost between $1 and $1.5 trillion over ten years. If indeed the drug industry can sign off on changes that will generate $80 billion in revenue and if, indeed, the hospital industry can sign off on changes that will generate $155 billion in revenue, that’s $235 billion reformers don’t have to find elsewhere (assuming, of course, the Congressional Budget Office agrees).

From a purely political sense this is true. If hospitals and drug makers pledge to save the government $235 billion, then the price of reform has just gone on sale. But the sale is only good if the deal is real because health reform is only sustainable if it truly lowers health care costs and eliminates some of the wasteful spending already in the system.

It’s not clear that the hospitals are doing that. As Cohn asks, “it’s not clear whether, perhaps, this is an example of some hospitals effectively cutting a deal that hurts others. Insofar as the savings come from reduced payments for charity care–payments that now flow through Medicaid–is this a case in which suburban and specialty hospitals actually do just fine but charity hospitals take a hit?”

In June, the White House identified “proposals that will contribute another $313 billion over 10 years to paying for health care reform.” The administration proposed cutting “more than $200 billion in expected reimbursements to hospitals over 10 years” (in part) by incorporating productivity adjustments into Medicare payment updates and reducing subsidies to hospitals for treating the uninsured as coverage increases. The hospitals — which were the first to backpedal from the initial industry agreement to lower health care spending by 1.5 percentage points over 10 years — objected. Reactions from the American Hospital Association (AHA):

We are disappointed to see cuts of this magnitude to hospitals, especially in these tough economic times…Additional cuts of this magnitude could severely jeopardize hospitals’ ability to care for their patients and communities.

Now, in an effort to regain control of federal government reimbursement rates and to stave off several undesirable policy options, the industry has agreed to roughly half of what Obama initially proposed. As Chip Kahn, the President & Chief Executive Officer of the Federation of American Hospitals (FAH) explained in recent Congressional testimony, hospitals fear that reductions in reimbursements would not parallel increases in coverage. “The FAH recognizes the importance of shared sacrifice, but we need to be very careful that health reform legislation does not arbitrarily reduce hospital revenue,” Kahn said.

To that end, the hospitals fear a robust public option that would reimburse Medicare-like rates, a “Super-MedPAC” — the proposal to change the mission of the Medicare Payment Advisory Commission (MedPAC) from a congressional advisory body to an Executive Branch decision making entity — and incorporating productivity adjustments into payment updates.

Hospitals do support banning self-referrals to physician owned hospitals, decreasing preventable readmissions, and a “reasonable time frame” on reforming post-acute payments and this latest agreement may incorporate many of these shared points of agreement. So what trade-offs did Baucus make? No super MedPac, no robust public option? That’s still to be seen. But to come back to Cohn’s point, what would make this all even more meaningful is if policy makers held hospitals to their cost and quality promises.