Vampire on the Second Midnight

04/23/2015 01:14 pm ET | Updated Jun 23, 2015

Vampire on the Second Midnight: The $716 Billion Savings Killing Smaller Hospitals

Something tragic is happening with America's smaller hospitals, for the hospitals themselves, their communities and their patients. Much of it can be laid at the door of the inadvertent, unintended consequences of "health reform."


Here is the background. First, the management of all hospitals has become much more complex under "health reform." What we generally mean by the phrase "health reform" is the combination of the Affordable Care Act (the Patient Protection and Affordable Care Act of 2010, Obamacare), and the HITECH (health IT) portion of the American Recovery and Reinvestment Act (ARRA) of 2009.

HITECH brought the first new financial challenges, compelling doctors and hospitals to buy, install and work with electronic medical record systems, largely untested in medical practice and in many ways ill-suited to the provision of medical care. Health care IT was to contain cost, support quality and eliminate hazard, but appears in many instances to have done the opposite.

The Doctors' Handwriting

If you were a junior senator looking for some edge in the "health issue" during your run for the presidency, you would be impressed that a RAND study had projected billions in savings from the adoption of "Electronic Medical Records - Systems" or "EMR-S." You are a lawyer; you have always secretly suspected that a big problem in health cost was the messy handwriting of doctors. Nobody on the campaign staff told you that the RAND study was paid for ("sponsored") by vendors (Cerner, GE, Hewlett-Packard, Johnson & Johnson, Xerox) poised to benefit from federal compulsion that doctors buy their products.

Nor were you alone in conflicted advocacy. Many academics (often supported by government grants and contracts with IT manufacturers) promoted a leading federal role for expansion of IT in health services. We know now, of course, that what some academic architects of "health reform" said is not what they actually thought.

HITECH has resulted in the expenditure of tens of billions of dollars, both public and private. Some positive results have occurred. However, most feedback from practicing physicians is neutral to negative, largely on grounds that attention to the electronic record detracts from attention to the patient.

Communication, Another Victim of HITECH

Other unintended consequences involve communication. Failure of communication in the hospital setting is a leading cause of medical malpractice suits. Nurses are not given enough time for the "hand off" of information to the next shift (keep that overtime down!). Those involved in care of the patient are told that, when you need something, "look in the record." But the (extensive, voluminous) electronic record is often less informative than a 15 or 30-second conversation might be. Do we need to look further than the Ebola patient in the emergency room of Texas Health Resources Presbyterian for an example?

Financial Damage to Smaller Hospitals

So this portion of health reform -- IT -- has produced little, and has cost a lot. These expenses, especially in the smaller and rural hospital, are difficult to absorb, even after IT subsidies provided for in ARRA. The impact of electronic medical records has been, in fact, primarily financial. It is a boon for the companies selling these systems and their supporters. The IT expense is especially burdensome on the smaller hospitals, not as likely as larger health systems to have financial "wiggle room" or to employ the phalanx of programers necessary to adapt and maintain sophisticated systems.

The financial damage will go on. For example, the 2015 Medicare physician fee schedule has a "chronic care management" benefit. This new fee is intended to compensate the doctor who is coordinating care for patients with two or more chronic diseases. But the payment is available only to doctors who are using electronic medical records. Rather than surveying the damage to date, the techno-oriented plunge forward, content to believe that the complexity of medicine and medical care will succumb to standardized "1"s and "0"s.

Pathognomonic of agencies which combine "research," regulation and payment, Medicare attempts to prove the usefulness of IT by creating new "quality" measures, indicating how well things are going. If things were going well, however, Medicare would not have to change the "quality" measures so often, or abandon those which proved worse than useless. Just this year, the IT "Meaningful Use" can was kicked further down the road. MU judgment day (2017) for electronic records will take place after the Obama administration has ended.

Mitt Romney's $716 Billion

The adverse financial impact from HITECH on some providers is minor compared to the impact of the Patient Protection and Affordable Care Act (PPACA). This has been especially true for smaller community hospitals. The reason for this is simple.

We know, despite partisan pros and cons, that the expansion of insurance coverage has required the contraction of payments to doctors and hospitals. Mr. Romney was not wrong when he pointed to the $716 billion price tag that would have to be paid. Some on the Republican side made the mistake of characterizing this as a "cut in Medicare," which it was not, at least not literally. But Democrats contended (disingenuously) that the reductions would not compromise the care of Medicare patients.

In fact, the $716 billion was the Congressional Budget Office (CBO) estimate of the amount of projected increases in spending which would ordinarily have taken place in the Medicare and Medicaid programs, without "reform." These increases, during the 10-year roll-out of PPACA, would have to be eliminated, in order to finance the expansion of health insurance benefits.

What has this meant? It has meant (among other "savings") that CMS (the agency that oversees Medicare and Medicaid) has had to create a wide variety of financial penalties which reduce Medicare payments to hospitals. It is the aggregate of these penalties that will generate some $400 billion of the $716 billion in "savings" needed to finance benefit expansion.

The Second Midnight

What sort of penalties are we talking about?

CMS has decided that it doesn't want to pay for short hospital stays, such as the exacerbation of congestive heart failure, acute asthma attacks, some orthopedic injuries and the like. Income from service to patients with these short stays is especially important in smaller community hospitals, with lower case mix indices or "intensity" of services. In rural communities the hospital and its doctors may be the only medical care providers for hundreds of miles. Knocking these short admissions out is done through intimidation of the doctor, who is forced to attest that a patient needs to be in the hospital for more than "two midnights." Denied admissions represent lost hospital revenue.

So the hospital (increasingly the employer of the doctor) will be pressuring the doctor to "attest" that the patient in fact requires hospitalization, beyond two midnights. The Recovery Audit Contractors (RACs) will be patrolling, to catch the miscreants who have falsely attested. The doctor will find his or her name in headlines the following year, accused of delivering "low quality" health services, having falsely attested to the requirement that a patient be in a hospital, dinged personally and/or professionally.

This will all be extremely painful in smaller hospitals, proportionately more dependent on short stay patients. Moreover, the smaller hospital, in the smaller community, will generally involve people who know each other, and have some personal investment in "taking care." It will be a short road for some of these hospitals and doctors to A&E (Accident and Emergency, the British hollowed out hospital) status.

The short-stay Medicare patient, brought to the hospital, but admission denied, is now in "observer" status, paid by Medicare at outpatient rates, with greater patient financial responsibility. The "observer status" is a surprise to the patient. The doctor knows what is going to happen (financially) to the patient, if the doctor does not "attest" that the patient requires an admission lasting longer than two midnights. The hospital is going to lose money. The patient is faced with unanticipated bills. But the foregone expense to the Medicare program counts toward meeting the $716 billion needed in "savings" to finance benefit expansion. And, by the way, these avoided expenses become part of the success trumpeted by those who are "bending the cost curve" -- they think "downward," but in fact "upward" for the patient.


Reaction to these financial pressures on the smaller hospital gets baked into the structure of our health care system. As protection from financial mischief, smaller hospitals seek out larger "partners." These partners are generally urban, larger health systems, the non-profits with millionaire executives. The new "combined" system inherits the patients formerly seen by the smaller hospital. Such acquisitions or affiliations are accompanied by time-limited pledges to keep the smaller hospital open.

These combinations usually don't last, at least in the form anticipated at the time of partnering. Smaller hospitals close or are limited. The net expense to Medicare in the long term -- unanticipated -- is that patients from smaller communities will now receive care from more expensive "hospital systems." Medicare will pay more for these services, at higher rates. We have seen this before, of course, when we lost 1,200 community hospitals in the wake of the 1983 adoption of "Diagnosis Related Groups" as the new (prix fixe) model of hospital payments by Medicare.

Winsted, Connecticut

The small town of Winsted, Connecticut, Ralph Nader's hometown, is facing just such a challenge right now. Hartford Hospital, a large, well-staffed organization, plans to develop new "ambulatory care" services, salting the mines to take patients away from the local hospital, Charlotte Hungerford. What are the right strategies for that smaller hospital -- to join up, or to stay independent? There are really no winning strategies. The ultimate loser is always the community -- for whom the hospital is an "organizing principle" of health services.

So Congress thought it was doing the right thing to expand benefits, in 2009 and 2010. But they financed that expansion with mirrors, compromising doctors and hospitals, with unintended and expensive collateral damage.

This Congress should do what it can to "repair" health reform. In this repair, Congress should not walk away from civilized principles, providing medical care for those who need it. An overlooked issue (set of issues, really, see future posts) is access. But Congress should repair carefully.

In the expansion of insurance benefits Congress should do better than its predecessors, avoiding compromise to the very doctors and hospitals they hope will care for more patients. They (and we) will hopefully be more wary of "reform," at least to the extent of asking how, in fact, expansion is paid for.