Executive Director's Report: November 21st, 1995

A monthly report of experiences and observations to colleagues.

Rural Medicare Increases Already At Zero

Contrary to conventional wisdom, Medicare spending for each rural person served has not been increasing; accounting for inflation, it has actually decreased.

Program payments for rural residents increased by 2 billion dollars (7.4 percent) from 1992 to 1993 but that was almost totally due to a 7.4 percent increase in the number of rural elderly using their Medicare benefit.

The average payment per rural person served slipped slightly from its already low 86.5 percent of the national average to 85.2 percent.

Source: RWHC comparison of data published in Health Care Financing Review Medicare and Medicaid Statistical Supplements, 1995 & 1994.

The Good & Ugly Of Budget Reconciliation

Half of the trillion dollar savings in the federal budget reconciliation bill passed Friday by the House and Senate comes from cuts in the Medicare and Medicaid programs. With an expected veto from President Clinton, the Republican and Democrat political dance, each roaring to their strongest partisan interests, comes to an end. The second act of the real work now begins.

In a related act, President Clinton agreed to balancing the budget in seven years. Between now and the end of the year the battle will be over tax cuts versus the depth of the program cuts. Compromise is expected, with each party intent on making the '96 Presidential election a national referendum on their position. This is getting close to looking like a more democratic process.

The 80 billion dollar reduction to hospitals (off of the current formula) is the result in large part of the annual update being reduced to "the greater of the market basket percentage increase minus 2.5 percentage points, or 1.1 percent (1.3 percent for discharges during fiscal year 1996 and 1.2 percent for discharges during fiscal year 1997)."

As the depth of cuts (deep versus real deep) is negotiated, there are several major elements in the budget bill that are helpful to rural communities. In my opinion, the most important is the dramatic improvement in the payments for rural residents enrolling in Medicare HMOs.

The bill places a $300 floor on the minimum standardized county rate in 1996 and $350 in 1997. (These rates are adjusted up or down based on various demographic cost factors such as gender and age.)

For reference, in 1995 the standardized county rates varied within Wisconsin from $211 to $398. In addition, starting in 1996 each county's rate becomes a blend of its local rate and the national average. The blend starts in 1996 at 90/10 (local/national) and phases in to 70/30 by 2001.

The result is a somewhat more advantageous than the House proposal, I described here last month, but substantially more advantageous than current law. As shown in the map most counties will be at the $350 floor in 1997. The chart shows that county rates continue to converge until by 2002, the lowest is at 94.5% of the national average and the highest is at 99.9% of the national average.

Increases In Medicare Expenditures

The federal Health Care Financing Administration has just released via the internet the 1996 county rates that form the base for their monthly payments to Medicare HMOs. These rates are also of particular interest because they are an indication of the county variation in how much Medicare is paying under the traditional plan for enrollees (based on a five year rolling average, most recently through 1993).

Of note is the wide variation in the increases around the state. In previously underserved areas, these increases may reflect an increase in the availability of appropriate levels of care.

Rural Zones Of Collaboration

As competing managed care systems become increasingly present in rural communities, a number of us have been talking about the benefit of also thinking in terms of developing "zones of collaboration." (Term I first heard being used several years ago by Terry Potter, CEO at Meriter in Madison.)

As a result of these discussions, the Cooperative and a number of regional organizational representatives are coming together to discuss whether and how competing entities can agree to carve out rural zones of collaboration in southern, central Wisconsin. The focus is expected to be on possible collaborative initiatives aimed at reducing the incidence and associated costs of preventable illness or injury. Many communities have already begun local health assessments and interventions; a primary purpose of the proposed regional dialogue will be to find ways to support and expand these local initiatives to achieve both corporate and community goals.

The Group Health Cooperatives (State of Washington) has identified 11 prevention priorities, targeting problems--including smoking, cancer, and heart disease--that lead to about 80 percent of the diseases and deaths in the U.S. But the Cooperative has noted that it "can't achieve its goals in isolation. If it's to succeed at improving the health and well-being of its members it must also reach out and improve the health of surrounding communities. The general public health and the health of Group Health patients are inextricably linked, he says. For example, if Group Health programs can help reduce the broader community prevalence of violence, Co-op members will benefit by working and living in a safer environment. Group Health staffers realize, as well, that tobacco prevention efforts might be more effective in the schools than in a doctor's office, where a youngster may visit only once or twice a year. 'We're looking at prevention as an internal and external priority.' "

OHCI Details HMO WI Presence

Wisconsin's Office of Health Care Information may just have achieved a new record for getting the most useful information onto one sheet of paper; it is even easier to refold than a Wisconsin road map. Copies can be obtained by calling them at 608-266-7568. The map below was generated using just part of their 1994 data.
Twenty-one percent of Wisconsin's population in 1994 was enrolled in an HMO. The range is from a low of practically zero percent in a number of counties to fifty percent in Dane County. While HMOs already have a substantive market share in Wisconsin, the expected move by both Medicare and Medicaid to encourage managed care will certainly quicken the filling and darkening of this map with consequences about which we can only speculate.

How Competitive Are "Free" Markets?

"Many have dissected the "life cycles" of regulatory agencies but cyclical dynamics in competitive health care markets are less discussed. Price competition may succumb to evolutionary dynamics of its own... weakly managed market forces may degenerate into unmanaged oligopoly, as a handful of integrated service networks survive Darwinian market selection and carve up areas, thwarting competition... it is doubtful that many political leaders, now content to hand the managed-care industry the keys to the kingdom of health 'reform,' will generate the will or marshal the means to fix such problems before damage is done." From the "Comment: Containing State Health Care Expenditures­p;The Competition vs. Regulation Debate," by Sherry Glied, Michael Sparer and Lawrence Brown in the American Journal of Public Health, October, 1995)

Robin Hood Flees Marketplace

"The emerging health care marketplace is likely to reduce access to care for the uninsured. Hospitals and clinics have traditionally shifted the cost of charity to insured patients, who have consequently paid a hidden "tax" in their bills. Managed-care plans refuse to pay that tax; they demand discounts, and if one refuses, they contract with another. The hospital and clinic that provides charity care commits an economic sin; it risks making itself uncompetitive... the emerging market makes the old Robin Hood system impossible to maintain."

By Paul Starr, an author of the Clinton health plan, The New York Times Magazine, September 3, 1995.

In Sickness And In Wealth

A friend recently asked me if I had read Rosemary Steven's 1989 award winning history of the American Hospital, In Sickness And In Wealth. The embarrassment of having had to admit that I hadn't read this key work about hospitals has been more than made up by doing so. I can recommend no better tonic (at least for $12.95) or balance to the conventional wisdom of those who speak with such certainty (and self-interest) about the inevitable mega-systemization and subjugation of all community hospitals.

"What we decide to do depends on where we think change is heading--and this may depend in turn on our interpretation of history. All of which is to say that ideas may carry political baggage with them."

"How we interpret recent hospital history may affect our actions in the present. Paul Starr, for example, writing in the early 1980's described a historical process wherein a long period of "medical domination" of health-care institutions had been recently overtaken by the "coming of the corporation." It is easy to take such an observation--;as many hospital observers now do--;as a theory of inevitable change, and to draw the analogy between hospitals and industrial consolidation."

"If this analogy is extended, hospitals can be viewed as firms which will (indeed, should) move towards consolidation, while the small-scale local hospital can be seen as a vanishing breed, doomed to be replaced by larger, more complex, corporate organizations... Indeed, if one believes hospitals to be inevitably heading toward large, corporate chains, why not speed up the process.?"

But consider: "... In the United States the essential tension in the hospital system is not a simple question of what is to be regarded as "public" (governmental) and what "private" (non-governmental). Tension lies, rather in conflicting models of hospital service which overlap both public and private domains. On one side is a model of hospitals as a supply-driven, technological systems analogous to a system for producing military aircraft. On the other is a model of hospitals as community services, with lingering religious, humanitarian, and egalitarian goals analogous to a system of schools."

"The Illusive Logic Of Integration"

The following is from "The Illusive Logic Of Integration" by Jeff Goldsmith, published in the September/October 1994 issue of the HEALTHCARE FORUM JOURNAL. The whole article is very much worth obtaining and reading.

"The prospect of health reform has unleashed a frenzy of activity in healthcare: mergers, consolidations, alliances, physician-hospital organization development, practice acquisitions and the like... It is assumed that it will be easier if all the pieces of the health system needed to care for the population are integrated into­p;that is, owned by­p;a single organization."

"The core flaw in the integration movement in healthcare is the use of an obsolete. 19th-century, asset-based model of integration, in which accumulation of assets in a conglomerate style is assumed by itself to confer meaningful economic advantage."

"In business, the correct organizational structure is the one that most elegantly and simply encourages the creation of value. In healthcare, we are only now learning that structure must follow from strategy, not precede it or somehow embody it."

Update Re Anti-Trust Relief

With the submission of additional data re the growth into rural areas of urban based corporations, RWHC has entered the next phase of its application to the U.S. Department of Justice for a "business advisory letter." If they agree with our position, members of the Cooperative will be able to work more closely together (a la Goldstein's above article.) Mike Weiden from Quarles & Brady summed up our position nicely in our letter to the Antitrust Division:

"We are very aware of your sensitivity to the possibility of unintentionally setting in motion anti-competitive market forces. Based upon the actual evolution of health care markets in this state, and based upon our personal experiences in this area, the opposite is much more likely to be the case."

"Unless rural hospitals are provided with opportunity to become a significant market factor, it is more likely than not that larger more integrated entities will segment the state geographically. There will be minimal competition in the border areas of this segmentation."

"However, it will not be worth the investment of larger, integrated delivery systems to move beyond the border areas to compete in thinly populated markets. As a result, rural hospitals may, and probably will, find themselves at a tremendous disadvantage, negotiating with a single dominant integrated delivery system, unless they can act cooperatively. At the extreme are situations in which the integrated delivery system requests and receives ownership of the hospital."

"We are not in an economic position to try to develop a model to prove our points. We exhort you not to make the standard that we prove a negative, that is, prove that the arrangements we are proposing could not influence potential competition (which we do not believe exists) between the rural hospital involved in this project."

Click here to return to RWHC Home Page.