Monthly Commentary from the Executive Director - December 1st, 1996

One Major Historic Federal Bias Ended

It's official! Wisconsin becomes a statewide locality as of January 1, 1997, ending a historic bias in Medicare payments for physicians who work in most rural communities. Thanks to the many who wrote the Health Care Financing Administration while they were considering their Final Rule. The result of this change on Medicare fee for service payments is noted below:

RWHC Hospitals Receive Antitrust Approval

In an unexpected reversal of their preliminary ruling, the Federal Department of Justice has now accepted our initial position--that RWHC rural hospitals don't compete with each other but with the problem of patients leaving the local community for care in large regional hospitals. Consequently, RWHC hospitals can work together to negotiate with HMOs and others without fear of violating strict federal antitrust laws. Justice's November 12th press release follows:

"The Department of Justice today said that it would not challenge a proposal by 21 small, rural hospitals in Wisconsin to form a network to contract with managed care plans and other third-party payers."

"The Department's Antitrust Division said the network, as proposed, would pose no threat to competition in the areas served by the members of the network. The Department's position was stated in a business review letter from Joel I. Klein, Acting Assistant Attorney General for the Antitrust Division, to counsel for the hospitals."

"The network, to be called RWHC Network, Inc. ("the Network"), would be formed by hospitals that own and operate the Rural Wisconsin Health Cooperative ("the Cooperative"), which was formed in 1979 as a shared-services corporation and advocate for rural health services. The hospitals range in size from 8 to 78 beds, with an average size of 38 beds."

"According to counsel for the Network, the individual members of the Network do not compete with each other, but rather with outmigration. That is, the alternative to using a local rural hospital is to travel to a larger, more sophisticated, regional medical center. The creation of the Network will allow these small local hospitals to contract more efficiently with health plans and other third party payers through a single agent."

"The Network will employ a third party administrator, probably the Cooperative, to collect and analyze data from each hospital and aggregate this information in order to recommend contracting terms to the members. The administrator will initially negotiate contracts with payers based on a discounted fee for service schedule, but the goal of the Network is to eventually be able to enter into risk-sharing arrangements such as capitated fees. Members will be free to contract individually and to join other networks."

" 'The existence of the Network will allow managed care plans to contract with the 21 rural hospitals in an efficient and cost-effective manner, thus ensuring that hospital services will continue to be available to consumers in rural areas,' said Klein."

"The letter states that the Department accepts the Network's contention that members do not compete, and thus their joint contracting efforts should not harm competition. In addition, they have taken steps to aggregate sensitive financial information so that no individual member will have access to any other member's costs or prices."

HMOs Can Avoid Sick Elderly And Win Big

Most of you have read the October announcement that the Medicare hospital insurance Trust Fund suffered a $4 billion shortfall in fiscal 1996, which ended September 30th. Medicare is now projected to be broke in early 2001. This only increases the pressure for Congress to see HMOs as a silver cost-cutting bullet. Encouraging the elderly to use HMOs holds a promise of avoiding bankruptcy while minimizing benefit cuts and tax increases, but this movement towards Medicare HMOs needs to take place with all eyes fully open.

Medicare's "60/10 Rule" illustrated below shows the vulnerability of the Trust Fund to "cherry picking." Cherry picking is just what it sounds like--picking the good fruit and leaving the rest. Sixty percent of Medicare beneficiaries who receive any services account for less than ten percent of total payments made by the Trust Fund (and the Supplementary Medical Insurance program). The mirror image of this statement is also true--ten percent of Medicare beneficiaries who receive services account for more than sixty percent of total payments. This is a cherry picker's dream team.

Bottom line: if you are an insurance company, your profit is very much affected by which Medicare beneficiaries you attract. To the degree you are successful in avoiding that most costly ten percent (with or without any direct action on their part), you have a profit; to the degree you attract that same most costly ten percent, you lose big. The Trust Fund faces the opposite problem; losing when HMOs win.

"As a result of favorable selection, the payment formula for Medicare beneficiaries enrolled in risk HMOs may be too high by about 7 percent... Currently, risk HMO payments are set at 95 percent of the estimated average per capita cost of treating beneficiaries under the fee-for-service method, adjusted for an enrollee's age, sex, welfare status, and institutional status... if HMO enrollees had stayed in fee-for-service, Medicare would have paid 88 percent of the national average. Taking into account the 95 percent payment, plans are currently overpaid by approximately 7 percent." (From an August 13th 1996 Health Care Financing Administration (HCFA) press release.)

" 'This study clearly shows there still may be a problem of risk HMOs having healthier Medicare beneficiaries,' said HCFA Administrator Bruce C. Vladeck, who oversees the Medicare program. 'The findings confirm again the need for a payment method that adjusts for the health status of Medicare beneficiaries who enroll in HMOs.' HCFA is sponsoring several research and demonstration projects to develop such a methodology."

As rural beneficiaries are less likely to have the option of choosing an HMO (due to current inequitable Medicare payment formulas), they are particularly at risk for suffering the consequences of being left behind in an under-funded risk pool of the older and less healthy Medicare beneficiaries.

Medicare Urban-Rural Payment Gap Grows

The average payment per person receiving Medicare fee-for-service services who happens to live in a rural community is for the first time over a thousand dollars less than those persons in urban areas. In other words, payments by Medicare on behalf of urban beneficiaries are 25% higher than those for rural beneficiaries.

While part of the urban-rural difference is due to the historically lower rate of payments to rural providers, most of the difference is due to lower rates of utilization by Medicare beneficiaries living in rural areas. Part of this difference is due to the problems many rural residents have in accessing health care; less clear is how much of the difference in utilization relates to urban being too high rather than rural too low.

Medigap Premium Hikes Fuel HMO Growth

Families USA <> just issued a special report, The Crushing Costs Of Medicare Supplemental Policies. The results of a 35-state survey indicate that Prudential raised its premiums for its Medigap plans by an average of 23%. Blue Cross price increases were more moderate but still many of their premiums for Medigap plans rose by at least 10%.

"Between 1995 and 1996, large numbers of elderly received major, double-digit increases in their Medicare Supplemental Insurance (Medigap) premiums, far in excess of Social Security cost-of-living increases. Rising Medigap premiums are pricing Medicare beneficiaries out of the Medicare fee-for-service program and leading to increased HMO enrollment."

In other words, increases in the cost of Medigap insurance above the average inflation rate act as a significant incentive for individuals to shift into HMOs where Medigap insurance is not needed. Of course the opportunity of this choice assumes the availability of a Medicare HMO which is rare in rural counties due to the flawed federal formula used to pay HMOs.

Medicare Physician Fees Set For 1997

Washington D.C. (November 15th) "The average fee Medicare pays to physicians for primary care services in 1997 will be 5 percent higher than the average 1996 fee, the Department of Health and Human Services announced today. The average fee Medicare pays to physicians for surgical services will decrease 1.6 percent while the average fee for all other services will decrease by 1.8 percent. Overall, the changes announced by HHS will result in an average fee decrease of 0.3 percent."

Be Wary Of Red Queen Principle

From an article by Dalton A Tong, President and CEO of the Southeast Healthcare System, Washington in the November 11th issue of Modern Healthcare :

"When I speak with other healthcare executives, it seems that everybody's running as fast as they can, The problem is that our landscape seems to move as fast as we do."

"In Lewis Carroll's Alice in Wonderland and Through the Looking Glass, Alice meets a character with the same problem.. The Red Queen, a living chess piece, runs like the wind but never gets anywhere because the landscape moves with her. As she tells Alice, 'It takes all the running you can do just to keep in the same place, If you want to get to somewhere else, you must run at least twice as fast as that.' "

"Healthcare does not have to become a graveyard of systems that failed through unsuccessful adaptation, change that was either too hasty or costly or that was precipitated erroneously in response to imaginary threats or misperceived trends in the marketplace."

"Here's prime example of bad adaptation to a misperceived trend: Just three or four years ago, it seemed "received wisdom" that only large, vertically integrated delivery systems, with non-overlapping closed panels and physician employees, would be left stalking the earth after the 'inevitability' of healthcare reform and the consolidation of healthcare purchasers."

"That received wisdom was wrong. Yes, buyers of healthcare wanted price stability or premium rollbacks, if they were big enough to sustain these demands. But they also wanted open panels, broad networks, choice and flexibility."

"Yet the received wisdom lingers, most apparent now in the efforts of some multihospital healthcare systems to fork over large chunks of reserves and capital to buy physician markets. With cash and credit gone, what happens to the original mission of the system to serve the health needs of the community?

Virtual Integration Becoming More Common

From Modern Healthcare, November 4, 1996:

"A new study predicts that competition will drive providers in a half-dozen major markets to consolidate into two or three major systems by the turn of the century. The report was prepared by the National Committee for Quality Health Care, a Washington-based industry research group.. The study said stand-alone hospitals and sole practitioners are unlikely to survive the competition in each of those markets-Atlanta, Boston--New Hampshire, Cleveland, Dallas-Fort Worth, Philadelphia and Sacramento, Calif."

"But despite the emphasis on further consolidation, the report also cast some doubt on the future of integrated delivery systems. It said vertical and horizontal integration may be 'characteristic of a transition phase rather than the end result.' "

"Joint ventures, alliances and "virtual" integration-consolidations involving less than full-asset mergers-are becoming more common, the report said. System executives increasingly recognize that bigger isn't more efficient and that they shouldn't consolidate all their facilities at one location. Rather, they say they must provide multiple access sites throughout their communities."

Managed Care: Myths On The Supply Side

From an article by Jeff C. Goldsmith and Michael J. Goran in the Healthcare Forum Journal, November/December 1996:

Myth 1. "Integrated delivery systems will dominate the managed care marketplace. - The reality is that employers and consumers are asking the healthcare system for something very different: a seemingly incongruous mixture of broad choice and economic discipline. Employers and consumers are profoundly reluctant to disrupt long-standing relationships with physicians and hospitals that have met their needs in the past."

Myth 2. "Health plans fear direct contracting by providers as a competitive threat to their business. - "The reality is less comforting: Most employers continue to view health plans as effective counterweights to provider economic interests and as market consolidators and simplifiers. It is difficult for employers who blamed hospitals and doctors for the massive run-up in their health costs during the Eighties to believe that providers have had a "religious" experience and are now wholeheartedly in the cost-containment business."

Myth 3. "Managed care is a highly profitable, low risk business. - Many providers characterize insurers as simply packages of providers' services, laying virtually all the risk of future cost increases off onto providers through capitation, and than pocketing the huge differences between premium and cost. While this may describe some health plan strategies, many health plans decline to share risk with providers, relying instead on their bargaining power and external utilization controls to contain cost. Yet, the lure of "owing the premium" has attracted an increasing number of provider groups, even Columbia/HCA, to enter the health insurance business. It would be difficult to think of a worse time to enter the health insurance market than today: when health insurance is on the down curve of the underwriting cycle."

Myth 4. "Capitation will be the dominate or exclusive form of provider payment in the future. - Many health plans see little reason ever to share risk and premium with hospitals or hospital systems, since physicians control hospital use decisions. With increasing numbers of high-risk patients from the Medicaid and Medicare programs entering health plans, there are the beginnings of a backlash against capitating the primary-care physician (see Myth 5), instead keeping the risk at the group level Increasing questions are raised about how much control primary-care physicians can or should exert over specialty use decisions."

Myth 5. - "Primary care physicians will function as incented gatekeepers for the health system. The central issue in managing care should be making sure that the fit between patient problems and clinical resources is both optimal and dynamic, and that communication among physicians and others with differing clinical competencies and knowledge is improved. Polarizing relationships between primary-care physicians and specialists via gatekeeper systems will not achieve either goal."

Another Reason For Post Election Hang-Over

Besides simple decency, the recently concluded bi-annual bi-partisan food fight among politicians turns us off because we really don't neatly fall in line behind two or even three warrior chiefs.

The Pew Research Center has developed a typology of American voters that divides the electorate into ten groups depending on three major elements -- personal values and attitudes, party affiliation, and political participation. Here are the ten groups and their attributes (shown is that groups percentage of the adult population of the United States as of October 1996):

This report with a self-test can be found on WWW at:

On the Right--Republicans or Mostly So

(12%)--"Classic Republicans who are affluent, well-educated, and predominantly white, and whose attitudes are pro-business, anti-government, anti-social welfare."

Moralists (15%)--"Middle-aged, middle-income, predominantly white, religious (mostly Evangelicals). Socially conservative and anti-welfare, militaristic, anti-big business and anti-big government."

Libertarians (7%)--"Highly-educated, affluent, predominately white male. Pro-business, anti-government, anti-welfare but highly tolerant, very low on religious faith (and uncomfortable with the religious right). Cynical about politicians."

In the Center--Independents

New Economy Independents
(14%)--"Average income, young to middle aged, mostly female. Many conflicting values, including strongly environmentalist but not believers in government regulation, pro-social welfare but not very sympathetic to blacks, inclined to fundamental religious beliefs but highly tolerant of homosexuals. Unanchored in either party."

Bystanders (10%)--"Very young, poorly educated, with low income. Opt out of politics or ineligible to vote.. Slightly more men than women. Only claimed commitment is environmentalism."

The Embittered (6%)--"Low income, low education, middle-aged. Old ties to Democrats gone but feel unwelcome in the GOP. Distrust government, politicians, corporations. Religious and socially intolerant. Strongly blame discrimination for lack of black progress, but are not strongly pro-welfare."

On the Left--Democrats or Mostly So

(7%):--"Highly educated, sophisticated, affluent, mostly white baby boomers and Generation X. Highly tolerant, driven by social issues. Embrace "liberal" label. Very low in religious faith. Highly pro-environment, moderately pro-government, distrusting of business."

New Democrats (12%)--"Mostly female, average income and education. Religious, with equal numbers of white Evangelical Protestants and white Catholics. Not intolerant, but reject discrimination as a major barrier to black progress. More pro-business than other Democratic groups, but also pro-government and environmentalist."

New Dealers (8%)--"One of the two oldest groups (one in four over 65), average education and low income. Once part of FDR's coalition, beneficiary of government programs, but now turned off by politics and politicians. Strongly conservative on race and welfare, strongly religious, moderately tolerant, pro-American, distrust business."

Partisan Poor (9%)--"Very poor (38% with households earning under $20,000 a year), disadvantaged, about four in ten in the south. This oldest typology group, rooted in New Deal coalition, wants more government spending on the poor. More than one-third are non-whites. Very religious and socially intolerant."

You May Have No Deep Discounts Now, But...

For any organization, one of several basic challenges is to understand possible future scenarios. Currently, most rural hospitals are facing rather "modest" discounts. However, most predictions are that the market share for managed care type insurance products will continue to grow in rural markets, particularly after Medicare reform to avoid a Trust Fund bankruptcy.

What do we know now, what can we expect? A part of the answer may be seen in looking at how HMO discounts change as HMO achieve a higher share of a local market. The chart below indicates (at least for hospital fiscal years ending in 1995) that discounts hover around 10 percent until the aggregate share of HMO revenue for a hospital gets in the area of twenty percent and then the typical discount doubles, by the time the HMO share of a hospitals revenue gets near thirty percent, discounts of over thirty percent are common.

The impact of increasingly large discounts combined with increased utilization controls create savings for purchasers that further drive market share into managed care type products and increasing financial challenges for all providers. Two, five or ten years out, our communities will have some very difficult decisions to make about what balance they want between service and cost, in both private and public sectors.

HMOs Use ERISA To Shift Malpractice Risk

From The New York Times, November 17th:

"Health maintenance organizations are telling courts across the country that they cannot be held responsible for medical malpractice in cases involving patients who receive care through an employer-sponsored health plan. HMOs like U.S. Healthcare, Kaiser Permanente, Prudential and Pacificare have asserted in court that malpractice claims against them are pre-empted by the 1974 law, the Employee Retirement Income Security Act, or ERISA. If a malpractice claim is pre-empted, it cannot be pursued and must be dismissed."

"The issue is enormously important for consumers. Unlike insurance companies that underwrite fee-for-service plans, HMOs can exert vast influence over a patient's care by setting guidelines for treatment or limiting access to medical specialists. And yet in many cases, HMOs contend that they cannot be held legally accountable for the quality of care because they do not make medical decisions."

"The issue has considerable effect on doctors as well. In many cases, patients who sue HMOs also sue the doctors. Carol L. O'Brien, a lawyer at the American Medical Association, said, 'HMOs are shifting virtually all of the risk of patient care to physicians, even though the HMOs can force doctors to change their clinical decisions by threatening to terminate their contracts.' "

"When HMOs market themselves to the public, they often promise to provide high-quality care by choosing the best doctors and hospitals and monitoring their work to guarantee that it meets the highest standards. Many advertise that they have been accredited by an independent group like the National Committee for Quality Assurance."

"But in court, the same HMOs insist that they are not legally responsible for any injuries or deaths caused by the negligence of these doctors. Wendy K. Mariner, a professor of health law at Boston University, said Congress should amend ERISA to clarify the rights of workers and their dependents. 'HMOs that claim to provide high-quality care should not hide behind ERISA to escape responsibility for failing to live up to their promises.' "

"On the other hand, Peter M. Roan, a Los Angeles lawyer who represents Pacificare and other HMOs in malpractice cases, said: 'HMOs normally cannot make medical decisions about the treatment provided to their members. Those determinations must be made by treating physicians under contract with the HMO The HMO should not be held responsible for the alleged medical negligence of the doctors.' "

EACH/RPCH Replacement & Expansion

A Policy Statement, The Need For A National Limited Services Hospital Program to replace the current and rather inflexible pilot program limited to seven states was adopted by the National Rural Health Association Health Policy Board at its meeting this month. November, 1996. The need for this national program is critical as some (not most) rural communities look to retain local emergency medical services when their full service hospital function is no longer sustainable.

Number of Beds - "The Limited Service Rural Hospital may have up to 15 acute care inpatient beds. The entire component of acute care beds may also be licensed as swing beds."

Service Limitation - "Within a Limited Service Rural Hospital, inpatient care cannot exceed 96 hours, except in circumstances where the peer review organization (PRO) or equivalent organization may, on request, waive the 96-hour restriction on a case-by-case basis."

Geographic Limitation - "The Limited Service Rural Hospital should be located no less than 20 miles from another hospital. The primary purpose for developing this program is to assure access to essential health services for rural areas."

Reimbursement - "The reimbursement for Limited Service Rural Hospitals should be based upon reasonable cost (not subject to the lesser-of-cost-or-charges) including the cost of professional services and should allow for the inclusion of costs for networking with other providers."

Networking - "Limited Service Rural Hospitals would be required to have formal agreements with at least one hospital and other appropriate providers for such services as patient referral and transfer, communication systems, the provision of emergency and non-emergency transportation and back-up medical and emergency services."

Telemedicine Buildout & Discount Needed

The Advisory Committee on Telecommunications and Health Care was established by the Federal Communications Commission to provide advice to the Commission on telemedicine, particularly the rural telemedicine provisions of the Telecommunications Act of 1996. The following is taken from an overview in their Findings and Recommendations-October 14th, 1996:

"While telemedicine holds much promise to improve the quality of healthcare for rural residents, the Advisory Committee believes that the growth of telemedicine in rural areas will require both an adequate rural infrastructure buildout and a discounted rate."

"The Advisory Committee recommends, and believes the Act requires, adequate telecommunications infrastructure to be made available to rural healthcare providers. The telecommunications infrastructure, whether it be wireline or wireless, must be sufficient to allow eligible healthcare practitioners requesting these services to access a basic set of telemedicine applications necessary for healthcare in rural areas."

"The Act specifically mandates that a telecommunications carrier provide telecommunications services to healthcare providers serving those in rural areas at rates comparable to rates in urban areas. The Advisory Committee believes the discounted rate is critical to the success of rural telemedicine, and the comparable urban rate should eliminate differences in urban and rural rates created by distance."

"The Committee believes that the Universal Service fund should reimburse the telecommunications carrier for extending the infrastructure to the rural community and for the discounted rate for telecommunications services provided to the rural healthcare professional. To the extent the improved infrastructure can be coordinated with efforts on behalf of schools and libraries, the opportunities will be greater and the costs lower."

"The Advisory Committee has made other recommendations which should improve healthcare in rural areas through telemedicine. These recommendations include ensuring access to the Internet for rural health providers at the same cost as access in urban areas, providing bandwidth availability for emergency services, the need for standards to ensure interoperability among networks with differing technologies and telemedicine equipment, and a number of others."

Rural Lead In Uncompensated Care

Given the number of some full page newspaper advertisements in regional papers, one could conclude that all charity comes from the large, typically urban, health care facilities. Not true; in fact by a small margin, rural hospitals in Wisconsin provide more uncompensated care (services provided for which full payment is not received) than urban hospitals.

Of particular interest in southern-central Wisconsin is the contribution by RWHC rural hospitals is fifty percent higher than their neighboring specialty based referral hospitals.

The most recent data available for hospitals is for fiscal years ending in 1995; this analysis excluded Medicare and Medicaid revenue and shortfalls.

RWHC Director Receives National Honor

Rich Donkle, the Cooperative's Director of Financial Consulting Services (and our newest staff member) has just been awarded the Founders Medal of Honor by the Healthcare Financial Management Association (HFMA). The Founders Medal of Honor recognizes Rich for his outstanding contributions to the Wisconsin Chapter. Rich can be reached at the Sauk City office or by email:

More Seeing Value Of HMO Collaboration

Wisconsin's Rural Zones Of Collaboration initiative is not alone. The following story is taken from the November 4th issue of Modern Healthcare:

"In an unprecedented collaboration among HMOs, seven plans in Atlanta are partnering with a group of local providers and agencies to develop a model program to treat asthmatic children. Although "virtually all HMOs" are involved in community projects, this is the first time competing plans are collaborating in such a program."

"Each partner will take the lead in one aspect of the project. For example, HMOs will spearhead providing education about the causes of asthma and proper medications and will train community workers in case management. Grady Memorial will take the lead in clinical education."

"Using what it learns from the Atlanta project, the American Association of Health Plans and its 1,000 member plans will begin to develop community-based healthcare programs across the country, the organization said in a written statement."

National Academy of Sciences Taps Kindig

UW Professor David A. Kindig, M.D. has been elected to the National Academy of Sciences. He is director of the Wisconsin Network for Health Policy Research and a long time friend of rural health.

The National Academy of Sciences is a private, non-profit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters.

Members and foreign associates of the Academy are elected in recognition of their distinguished and continuing achievements in original research; election to the Academy is considered one of the highest honors that can be accorded a scientist or engineer. The Academy membership is comprised of approximately 1,800 members and 300 foreign associates, of whom 129 have won Nobel Prizes.

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