HOSPITAL HEALTH CARE focus group on payment mechanisms

PAYMENT MECHANISMS that involved participants from hospitals,

commercial payers, the state medical
INTRODUCTION
society, bond insurers, hospital auditors
Payment for hospital services is made by and public health insurers.
various means—public and private, direct
and indirect. Each of these methods has DIRECT PRIVATE FINANCING MECHANISMS
different implications for hospitals’ Uncompensated Care;
financial health. Public payments have Charity Care/Bad Debt
become a larger proportion of hospitals’ Hospitals originally were charitable
revenue at a time when state and federal organizations that provided free medical
governments have sought to control their care for indigents, veterans, and those
health care costs by reducing reimburse- who were chronically ill. Doctors donated
ments and establishing managed care their services and the cost of care was
programs for Medicare and Medicaid. 1 underwritten through philanthropy and
Medicare and Medicaid presently government stipends. Despite the transfor-
reimburse hospitals at only 95% and 71% mation of the role of hospitals in the
respectively of their current costs.2 In the health care delivery system, Connecticut
past, private payments have compensated acute care hospitals are still required to
for lower public reimbursements and provide emergency care to all those who
charity care. Private payers, who are largely need it, including those who cannot pay
employers, have also sought to contain for it.3
increasing health care costs. Managed
care fee schedules, capitated rates, and Uncompensated care includes both charity
discount rates have established restrictions care (services provided to patients at no
on private reimbursements and transferred charge and where no payment is expected)
more of the financial risk of care to and bad debt (payment for services pro-
hospitals.This has an impact on hospitals’ vided was anticipated but not received).
flexibility to shift costs from public to The amount of uncompensated care
private payers. provided by a hospital is dependent upon
a variety of factors including community
This discussion provides a basic overview demographics, the availability and level
of the variety of private payers and public of health care programs offered to the
payment mechanisms. Private funds uninsured within the community, and the
consist of individuals’ out-of-pocket enforcement of hospital collection prac-
expenditures, private health insurance, tices. In Connecticut for Fiscal Year (FY)
philanthropy and non-patient revenues, 1999, uncompensated care represented
such as investment or rental income. 6.25% of hospital expenses, slightly above
Public health care expenditures include the national average of 6%. 4
federal, state and local government
programs, most notably Medicare and Uncompensated care in the United States
Medicaid. This discussion will include the is concentrated within urban public
evolution of payment trends, the impact hospitals and teaching hospitals whose
of recent federal legislation on hospital major funding comes from public
payments, and how cost shift changes sources. Nationally, urban public hospitals
have influenced hospital finances. It also account for one-third of all uncompensated
will include the recommendations from a care in this country—double their share

39
 of the total hospital market. Unlike most published rate for services, unless the
other states, uninsured people are not individual has negotiated a different, dis-
channeled into specific hospitals that are counted rate or method of payment with
designated and funded to care for the a hospital. Generally, discounts granted to
poor. All of the state's hospitals service a self-pay individual by the hospital range
uninsured and underinsured patients. from 3% to 10%, as opposed to the 20% to
In Connecticut, the state’s five large urban 30% discounts arranged with managed
hospitals accounted for 21% of uncom- care payers. 7
pensated care in 1999. 5
Fee-for-Service/Indemnity Insurance
Across the country, much of the uncom- While medical advances transformed the
pensated care in public hospitals is role of hospitals in the delivery of health
concentrated within the teaching hospital care, the development of indemnity insur-
segment. Major public teaching hospitals ance greatly expanded the number of
typically provide triple the amount of people who had access to acute care.
uncompensated care relative to their share The result was a heightened demand for
of the overall hospital market. Hospitals in acute care services and establishment of
the most competitive markets tend to be hospitals as the central element in the
in large cities, are bigger in size, have a health care delivery system.The birth of
larger Medicaid mix, and account for more modern health insurance as a means for
of the public and major teaching hospi- paying for hospital services occurred in
tals (characteristics associated with high- 1929 when a group of schoolteachers
er levels of uncompensated care). contracted with Baylor Hospital in Dallas,
Texas to provide room, board and certain
Self-Pay ancillary services at a predetermined
As advances in medical technology during monthly cost.8 This plan guaranteed these
the earlier decades of the 20th century teachers 21 days of hospital care for $6.00
made hospitals more central to the delivery a year. It was the forerunner of what is
of health care, the per- known today as Blue
centage of self-paying Cross. Blue Cross was
patients increased. An attractive not only to
examination of the annual consumers but also to
reports of Connecticut hospitals because pay-
hospitals shows that from ments were made
the 1920s to the 1960s, directly from the plan to
this percentage grew hospitals, rather than
from around one-fifth to reimbursing the patients
just under one-half of all who would then pay the
patients. Since that time, hospitals.9
the percentage of self-
payers has declined so During World War II,
that by FY 1999 only 2.2% wages were frozen to
of all acute care hospital prevent inflation and so
inpatients were self-pay- employers offered group
ers.6 Hospitals bill these health insurance in
“self-pay” patients at the order to attract and
retain workers.10 Health

40
insurance soon became an employee In the spring of 1994, the Connecticut
benefit when the Supreme Court ruled General Assembly responded to rising
that health insurance benefits were a costs by creating a more competitive
legitimate part of the labor- management health care market. It deregulated hospital
bargaining process.11 By the mid-1950s, prices and allowed all health care payers
health insurance had expanded rapidly, to negotiate different rates and payment
as 77 million Americans had hospital methods with hospi-
expense insurance in either the indemnity tals. Managed care dis- During the late 1980s and early
form or under a major medical plan.These count agreements were
1990s, the proportion of employers
same types of health insurance plans, intended to guarantee
although expanded, are still in wide use hospitals patient vol-
offering health care coverage
today. By 1997, there were 151.7 million ume while providing
people covered by employer-provided discounts on standard
declined, most likely due to
plans. 12 hospital charges to
managed care organi- double-digit growth rates in the
Up until the 1970s, the majority of privately zations. Although each
insured individuals had traditional of Connecticut’s acute cost of employer-sponsored health
indemnity health insurance coverage, care hospitals has
also known as fee-for-service. 13Under fee- negotiated and entered insurance during this time.
for- service, the insurance company or into alternate payment
other payer reimburses providers on the arrangements with payers, the types of
basis of a fee schedule that either approxi- agreements and negotiated rates vary
mates the costs of services or is a percent- significantly depending upon hospital
age discount off the actual charges.14 service, volume levels and location.17 In
the first two years following deregulation,
Managed Care’s Transformation
of Commercial Insurance the number of managed care agreements
mushroomed by 244% from 163 to 560
Health care costs rose dramatically in the
agreements. From FY 1994 to FY 1998, the
1970s and 1980s.15 During the late 1980s
statewide average discount rate grew from
and early 1990s, the proportion of
9% to 31% of total hospital charges. 18
employers offering health care coverage
declined, most likely due to double-digit HMOs rapidly expanded in Connecticut’s
growth rates in the cost of employer- newly competitive health care market.
sponsored health insurance during this From the early 1990s until 2000, HMO
time. Faced with premium increases, many enrollment of Connecticut citizens increased
employers have in recent years shifted from 24% to 43%, or from approximately
from conventional indemnity/fee-for- 800,000 to 1.4 million persons. 19
service plans to less expensive managed
care plans.The move to managed care Managed care is itself a broad term
was an attempt by concerned employers that encompasses many payment and
to control escalating health care expenses. review mechanisms, collaborations and
These managed care health delivery sys- types of organizations including Health
tems offered the potential for controlling Maintenance Organizations (HMOs),
costs by organizing health care providers Preferred Provider Organizations (PPOs),
into networks and by integrating the Point-of-Service organizations (POS),
financing and delivery of medical care.16 Exclusive Provider Organizations (EPOs),
Physician Hospital Organizations (PHOs)

41
 and Integrated Delivery Systems (IDS), to more costly care. Many experts believe
among others. These organizations all the cost savings available under
employ or contract with a provider network gatekeeper structures, pre-authorization
that delivers services to enrollees and requirements, and utilization management
either shares risk with the plan or has have already been achieved.21
some incentives to provide cost-effective
quality care. They offer policyholders DIRECT PUBLIC FINANCING MECHANISMS
significant financial incentives to use the
Historically, state and local governments
providers within a network and usually
have provided funding to hospitals for the
contain explicit standards
While government funding has care of indigents and the chronically ill.
for selecting providers
These programs did not provide systematic
always been an important source and a formal procedure coverage and the type of services they pro-
to assure quality care.20
vided varied greatly by locality. Following
of revenue for acute care hospitals, Through gatekeepers, the Civil War, the federal government
utilization reviews, and
granted stipends to hospitals for the care
19th century hospital administrators practice protocols, man- of veterans. While government funding
aged care organizations
has always been an important source of
lamented that these grants were seek to influence the revenue for acute care hospitals, 19th
delivery of health care
century hospital administrators lamented
insufficient to cover the cost of care. services, which impacts that these grants were insufficient to cover
hospital revenues. They
the cost of care; the same complaints
also affect this by their payment mecha-
are voiced today by their 21st century
nisms, discounted fee schedules and
counterparts. 22
capitated rates, which restrict the growth of
charges and shift more of the risk of care The federal government became a
to providers such as hospitals. Charges significant payer of health care expenses
that exceed pre-published fee schedules beginning in the 1960s. During the
or the capitated rate must be billed to presidential campaign of 1960, the mass
patients or absorbed by the provider. media re-discovered poverty in America.
As part of his “Great Society” program,
Today, managed care is at a crossroads.
President Lyndon Johnson committed the
Demand is rising for more services and
federal government to funding health
greater choice of providers and treatments.
care for senior citizens and the poor. He
POS and PPO plans are now the dominant
believed these initiatives to be the first
forms of managed care delivery. Consumers
steps toward a national health care system.
are expressing their frustrations and
In 1965, Congress passed legislation
concerns with the existing managed care
establishing the Medicare and Medicaid
system. Connecticut Public Act 99-284
programs as Title XVIII and Title XIX of
established an Office of Managed Care
the Social Security Act. Medicare was
Ombudsman to assist consumers with,
established in response to the specific
among other things, filing complaints and
medical care needs of the elderly and in
appeals with managed care organizations.
1973, added the severely disabled and
Hospitals, physicians and other health
certain persons with kidney disease.
care providers are voicing their dissatis-
Medicaid was created to fund health care
faction with the system as well.
for low-income households and the
Furthermore, advances in medical tech-
disabled. Medicare and Medicaid have
nology and pharmaceuticals are leading

42
made government the United States’ and X-rays, drugs, nursing services, therapy
largest single payer of health care costs, at services and services of interns and
$507 billion in FY 1997.23 In hospital FY residents-in-training. The second part of
1999, Connecticut Medicare payments Medicare is known as Supplementary
accounted for about 45% of total payments Medical Insurance (SMI), or Part B. Part B
to hospitals, and Connecticut Medicaid helps pay for physician, outpatient, home
payments represented roughly 10%.24 health care, and various other medical
During the 1990s, hospitals became services. SMI coverage is optional and
increasingly reliant upon government requires payment of a monthly premium.
reimbursements as the proportion of rev-
enue from government increased. At the Impact of Medicare’s Prospective
same time, federal and state governments Payment System Upon Hospitals
ratified measures to slow the growth of For Medicare beneficiaries, reimbursement
and even reduce their health care costs. for physicians and hospitals was on a
retrospective, fee-for-service basis until
Medicare 1983. At that time, the federal government,
seeking to control health care costs, intro-
As part of the Social Security Amendments
duced the Prospective Payment System
of 1965,the Medicare legislation established
(PPS) for hospital inpatient services based
a health insurance program for aged
on diagnosis related groups (DRGs),
persons to complement the retirement,
or broad groupings of
survivors and disability insurance benefits During the 1990s, hospitals became
diseases and proc-
under Title II of the Social Security Act.
dures drawn from the
Medicare is the largest federal health care increasingly reliant upon government
International
program.When first implemented in 1966,
Classifications of
it had 19.1 million enrollees; by 1998 its reimbursements as the proportion of
Disease. Prior to the
coverage had extended to 39 million
implementation of the
Americans, many of whom are disabled.25 revenue from government increased.
PPS, hospitals submit-
This number represents 14.4% of the total
ted patient charges to
U.S. population and 86% of all senior At the same time, federal and state
Medicare and recov-
citizens. In FY 1998, total Medicare gross
ered their expenses
revenue was $3 billion for Connecticut’s governments ratified measures to
within Medicare’s
acute care hospitals, which is just less
principles of reim-
than half of the total statewide hospital slow the growth of and even reduce
bursement, regardless
gross revenue. 26
of whether these their health care costs.
Medicare consists of two primary compo- expenses were high
nents that are separate but coordinated or low, excessive or prudent.There were
fee-for-service programs.27 Hospital few incentives for cost efficiency under
Insurance (HI), also known as Part A, pays this system.28 Under the Prospective
for inpatient hospital care, skilled nursing Payment System, hospitals are reimbursed
facility, home health, and hospice care. a fixed, predetermined amount that is
Covered inpatient hospital care includes based upon a patient’s diagnosis within a
all services ordinarily furnished by a DRG. Reimbursements are adjusted to
hospital to its patients, such as semiprivate account for local wages,urban versus rural
accommodations, meals, operating and location, and whether or not the hospital
recovery rooms, laboratory procedures is a teaching hospital.29 The PPS created
economic incentives for hospitals to

43
 conserve resources, as they would have to that, similar to the experience with the
absorb the cost of care when it exceeded inpatient PPS, the outpatient PPS will
the fixed reimbursement level. affect the behavior of hospitals, including
the types and volumes of certain proce-
Along with payer preferences and techno- dures that hospitals perform. Hospitals
logical changes, the DRG system con- will have an incentive to perform a lower-
tributed to a shift of Medicare patients cost procedure within a given APC versus
from inpatient to outpatient settings where a higher-cost procedure within the same
services could be charged on a fee-for- APC, since the payment rate for both
service basis. PPS has had a significant procedures will be the same.31
effect on Medicare expenditures; Medicare
expenditures for inpatient care are approxi- Medicare Managed Care
mately 20% lower than they would have Beginning in FY 1996, Medicare Managed
been without the implementation of PPS.30 Care began to operate as approved HMOs
offered coverage to Medicare enrollees.
In 1998, the Health Care Financing In Connecticut for FY 1998, hospitals
Administration proposed a prospective received $354 million from Medicare
payment system for hospital outpatient Managed Care; this represents 11% of total
services that will replace the current gross Medicare revenues.
cost-based system with one using
ambulatory payment classifications The Balanced Budget Act (BBA) of 1997
(APCs). Once implemented, this new established a third part of Medicare, known
as Part C or Medicare+Choice, which
began to provide services to enrollees on
January 1, 1998.The establishment of
Medicare+Choice was intended to expand
the array of insurance plan choices beyond
fee-for-service indemnity coverage and
HMOs to include Preferred Provider
Organizations and Provider Sponsored
Organizations.The reform was also an
effort to strengthen Medicare’s finances
by including policies further constraining
payments to providers in the traditional
fee-for-service program and in managed
care plans. 33Unfortunately, the program
has not been without problems. Forty-three
of the 347 HMO plans in which Medicare+
outpatient PPS will use 346 APC groups Choice beneficiaries were enrolled
to pay hospitals for outpatient services announced plans to not renew their
delivered to Medicare beneficiaries. contracts with Medicare in 1999, citing
Under this system, hospitals will receive financial losses and other problems. An
proportionately less for services that are additional 54 HMOs announced their
currently paid based on costs and more intention to reduce the number of geo-
for services that had been paid under graphic areas in which they would enroll
blended payment methods. It is expected beneficiaries.These plans cited HCFA’s
reduced payment rates (per the BBA) as

44
too low and the law’s new regulations as care and private insurance trends—all of
too burdensome. 34 which are evolving rapidly.

Most Medicare beneficiaries are still Medicaid

covered under the program’s traditional Medicaid,Title XIX of the Social Security
components of prospective payment for Act, is a federal-state matching entitlement
inpatient care combined with fee-for- program that pays for medical assistance
service payments to physicians.The for certain economically and medically
program’s original structure remains the needy individuals and families with low
same, with the exception of the imposition incomes and resources. It is the largest
of administered prices through the source of funding for medical and health-
prospective payment system for hospitals related services for America’s poorest
and the Medicare fee schedule for people. In 1996, it provided health care
physicians’ services. Under Medicare’s assistance to more than 36 million per-
traditional insurance program, all physi- sons, at a cost of $160 billion dollars.37
cians and hospitals that meet Medicare’s Within federal guidelines, states set their
conditions of participation take part in the own Medicaid standards of eligibility;
program regardless of whether they are determine the type, amount, duration and
affiliated with health plans or aggregated scope of covered services; and administer
in medical groups.35 their programs. Medicaid policies for
eligibility, services, and payment are com-
The Balanced Budget Act of 1997 and
plex, and vary considerably even among
Balanced Budget Refinement Act of 1999
similar sized and/or adjacent states,
The Medicare provisions of the Balanced
meaning that a person who is eligible for
Budget Act of 1997 (BBA), Public Law
Medicaid in one state might not be eligible
105-33, reduced payments for most hospi-
in another state.Also, services provided
tal-based services, e.g., inpatient and out-
by one state may differ considerably in
patient care, home health care, skilled
amount, duration, or scope from services
nursing care, medical education, indigent
provided in a similar or neighboring
care, and many other services.This Act is
state. Medicaid eligibility and/or services
projected to reduce Medicare payments
within a state can change during the year.
to Connecticut hospitals by $1.1 billion
over five years.36 The Medicare Balanced States may pay providers directly, or pay
Budget Refinement Act of 1999 (BBRA), for Medicaid through various prepayment
effective in FY 2000, will restore some arrangements, such as HMOs. Each state
portion of the Medicare funding that was generally has broad discretion in deter-
cut in the BBA, however the industry has mining the payment methodology and
noted that BBRA payment increases have rate for services. Providers participating in
only partially reduced (by about 1%) Medicaid must accept Medicaid payment
the severity of BBA-mandated hospital rates as payment in full. In FY 1998,
payment reductions. Drawing conclusions Medicaid payments to Connecticut
about the BBA’s impact on the overall hospitals represented approximately 10%
financial status of hospitals is somewhat of total gross revenue, or $792 million.38
difficult, as it depends on a wide variety However, Connecticut has the nation’s
of factors including other Medicare third lowest Medicaid reimbursement rate
payment policies, Medicaid payment relative to the cost of care, at 71% of costs.
changes, the growth of uncompensated

45
 The State of Connecticut itself pays 50% 1915(b) and 1115 of the Social Security
of the total costs for its Medicaid program, Act allow states to apply for waivers that
which is the largest share that any state is provide them with greater flexibility in
required to contribute.39 the design and implementation of their
Medicaid managed care programs.
Most states have an uncompensated care Section 1915(b) of the law allows states
program that makes additional payments to develop innovative health delivery or
to qualified hospitals that provide services reimbursement systems. Section 1115 of
to a disproportionate number of Medicaid the law allows statewide health care reform
recipients and/or to demonstrations for testing various methods
Title XXI allowed states to craft other low-income or
of covering uninsured populations, and
uninsured persons testing new delivery systems without
or expand an existing State
under what is known as increasing costs. Under Medicaid managed
“disproportionate share care, HMOs, prepaid health plans or
insurance program in order
hospital” (DSH) pay- comparable entities agree to provide a
ments. With the passage specific set of services to Medicaid
to extend Medicaid eligibility to
of the BBA in 1997, enrollees, usually in return for a predeter-
include more uninsured children. state allotments for pay- mined periodic prepayment per enrollee.
ments to DSH hospitals
have become increasingly limited. In The BBA of 1997 eliminated the waiver
addition, the BBA’s repeal of the Boren requirement altogether, except for per-
Amendment weakened hospitals’ bargain- sons who are eligible for both Medicare
ing power with the Medicaid program.40 and Medicaid (disabled and elderly poor
people), children with special needs and
Title XXI of the Social Security Act, known Native Americans. Currently, all states
as the State Children’s Health Insurance except Alaska now rely on some form of
Program (SCHIP), is a relatively new managed care to serve their Medicaid
program initiated by the BBA.Title XXI population.42 Connecticut introduced
allowed states to craft or expand an exist- Medicaid managed care in FY 1995 and
ing State insurance program in order to as of June 30, 1999, 71% of Connecticut’s
extend Medicaid eligibility to include 322,181 Medicaid enrollees were in man-
more uninsured children.41 Connecticut’s aged care.43 In FY 1998, hospital revenues
SCHIP program, Healthcare for UninSured from Medicaid managed care totaled
Kids and Youth (HUSKY), uses a combi- $312 million, or 40% of total Medicaid
nation approach with a non-Medicaid revenues.44
option for uninsured residents under age
19 and above 185% of the federal poverty INDIRECT PAYMENT MECHANISMS
level. Other Operating Revenue,
Non-Operating Income from Philanthropic
Medicaid Managed Care and Non-Philanthropic Sources
A significant development in Medicaid is In addition to direct funding of health
the growth of managed care as an alter- care services by public and private payers,
native service delivery method different hospitals have several sources of other/
from the traditional fee-for-service system. non-operating revenue. Other operating
Since the 1980s, many states have experi- revenue includes income not directly
mented with managed care as a means of related to patient care, patient services, or
limiting Medicaid expenditures. Sections the sale of patient care goods, and

46
includes purchase discounts, television age group. Hospitals may also solicit
commissions, and leased land rental donations for the specific purpose of
revenue. Non-operating income, which establishing funds to provide medical care.
can be classified as either philanthropic
or non-philanthropic, includes unrestricted Hospitals may have their own founda-
gifts, unrestricted income from endowment tions dedicated to providing financial
funds, income gains from investments of resources on an ongoing basis.These
restricted funds, gains on the sale of foundations raise funds through annual
hospital properties, and net rentals of appeals, planned giving, endowment funds
facilities not used in the operation of the and capital campaigns. Often, a separate
hospital, such as parking garages and volunteer board of directors manages
cafeterias. Nationally, about half of hospi- such foundations, and
is responsible for With declining commercial and
tal budget surpluses come from non-oper-
ating income. In Connecticut during FY its management to
ensure that there is public reimbursements, hospitals
1999, hospitals earned $81.6 million from
total hospital non-operating, non-philan- adequate financial
support to assist in are becoming increasingly reliant
thropic sources.
meeting the hospital’s
on philanthropic funds to maintain
Philanthropic Funds immediate and long-
Philanthropic and corporate foundations term objectives. In FY
their financial equilibrium.
or giving programs indirectly finance 1999,24 of Connecticut’s
health care by issuing money, usually in 31 acute care hospitals reported non-
the form of grants, to research methods of operating, philanthropic revenue, ranging
improving health and/or health care. from $11,983 to $22,528,993.With declining
Health philanthropies generally aim for commercial and public reimbursements,
the greatest number of beneficiaries. In hospitals are becoming increasingly
addition to donations from foundations, reliant on philanthropic funds to maintain
hospitals may receive gifts of money, their financial equilibrium.
stock, bonds or other property from
Investment Income
donors for the purpose of establishing a
fund to provide medical care to patients. Hospitals may also indirectly finance
These funds may be established by gift, health care through investment income,
bequest, subscription or dedication.They where trusts, endowments and cash are
may be either restricted or non-restricted, invested in vehicles such as securities or
that is, there may be donor stipulations real estate, which may ultimately generate
that limit the use or recipients of donated hospital income.
funds. For example, Connecticut hospitals
have received donations stipulating funds
may be used only to provide hospital
care for patients with a specific disease,
from a particular town, or in a particular

47
 CONCLUSION
Hospital spending continues to consume upon government reimbursement—nearly
the largest portion of the health care 60% of their total revenue in FY 1999—at
dollar and is financed by a variety of a time when state and federal governments
revenue sources including private and have needed to rein in health care costs
commercial payers, public programs, by adopting managed care for the
investment and non-operating revenue, Medicare and Medicaid programs. In
and philanthropy. In the past several Connecticut, 71% of all Medicaid enrollees
decades, the health care are in managed care and, although
If patient care payment-to-cost
system has seen dramat- Medicare managed care has developed
ic changes in the way more slowly, it still accounted for $354
ratios decline consistent with
health care, hospital million in hospital reimbursements in FY
current Medicare policy, state care in particular, is 1998. Hospital dependence upon govern-
delivered and funded. ment revenues weakens their financial
budget recommendations and The mix of services stability because Medicare and Medicaid
offered by most hospi- reimbursements currently cover 95% and
market expectations, then hospital tals has shifted from 71% respectively of their costs of care.
inpatient stays toward
If patient care payment-to-cost ratios
operating losses are likely to greater use of outpatient
and post-discharge serv- decline consistent with current Medicare
increase, placing additional ices such as home policy, state budget recommendations
health care and skilled and market expectations, then hospital
pressure on private payers nursing facilities. operating losses are likely to increase,
placing additional pressure on private
to offset public payer shortfalls. On the financial side, payers to offset public payer shortfalls.
hospitals are In the past, hospitals relied upon private
experiencing tightening commercial and payers to cover the payment shortfalls of
public reimbursements.As a result, the Medicare, Medicaid, and uncompensated
statewide annual growth of hospital rev- care. Given the increased competitive
enues has stagnated at 1%. Commercial pressures in the private insurance market-
payers have moved from traditional fee- place, commercial payers are unwilling to
for-service toward managed care that increase their reimbursements to hospitals
imposed tighter restrictions on the utiliza- to cover Medicare and Medicaid losses.
tion of services and reimbursement for Although there are many factors that
care. Following the 1994 deregulation of affect hospital financial stability, BBA
Connecticut’s health care market, the payment reductions, government reim-
number of managed care enrollees has bursement rates, and continued private
grown to 1.4 million, or 43% of the state’s payer pressures contribute significantly
total population. Acute care hospitals to the situation.
have become increasingly dependent

48
RECOMMENDATIONS OF THE HOSPITAL STUDY Recommendations on the
FOCUS GROUP ON PAYMENT MECHANISMS Role of Government

In the summer of 2000, the Office of " Government reimbursements are

Health Care Access sponsored a focus insufficient to cover the cost of care
group composed of hospital administra- and, therefore, must be improved. In
tors, commercial payer executives, bond Connecticut, Medicaid pays 71 cents
insurers, hospital auditors, and state offi- on the dollar, the 3rd lowest payment-
cials to discuss hospital payment mecha- to-cost ratio in the nation.
nisms and the financial status of
" CHEFA, the Connecticut Health &
Connecticut hospitals.The focus group
Educational Facilities Authority, and
offered the following observations:
OHCA should collaborate to evaluate
Observations on the what is needed for hospitals to
Current Financial Status of Hospitals maintain their financial solvency.
" Hospital revenues are not keeping " The government must provide
pace with costs. New technology, adequate funding for teaching and
new safety rules for blood products, research—medical education is
pharmaceutical advances, rising under-funded and needs additional
energy costs, and compliance with dollars.
regulations, such as HIPAA, outpatient
prospective payment method, and " The State should intervene regarding
new, required testing of newborns, commercial payment issues—denials
have driven hospital expenses of payments and late payments have
upward. negatively affected hospitals’ financial
performance.The state should also
" Hospital unit costs have increased by help to simplify and standardize
approximately 3%. Consequently, they claims processing. OHCA should
have had to slash unit costs by 3% to work with the Department of
maintain margins. This may not be Insurance regarding these issues.
sustainable and future cost reductions
could result in reduced quality of care. " The Outpatient Prospective Payment
System mandated by HCFA is not
" Many Connecticut hospitals reported operational—it requires a higher
negative operating margins in 1999. level of coding and more paperwork.
The state is below the national average
operating margin of 4% to 5%. Observations on Interactions
Hospitals need a minimum of a 2% to with the Insurance Industry
3% operating margin to refurbish " Insurance company pre-authorization
their physical plants, keep current requirements are labor intensive and
with technology, and have access to costly.
capital.
" Private insurers are taking longer to
" Some hospitals are resorting to dip- pay claims. In some cases, claims pro-
ping into their endowments to cover cessing is actually less automated
cash losses. Others are deferring than it formerly was because it often
capital and other expenditures. requires more human intervention to
navigate a claim through the system.

49
 NOTES
1
Brief Summaries of Medicare & Medicaid. 2, http://www.hcfa.gov/medicare/ormedmed.htm.
2
The Lewin Group. (Feb. 23, 2000) Independent Analysis of the Fairness and Equity of Connecticut
Medicaid Hospital Reimbursement.
3
IRS Title 26 Internal Revenue Code Sec. (501) (c) (3).
4
State of Connecticut Office of Health Care Access Hospital Budget Reporting System.
5
State of Connecticut Office of Health Care Access Hospital Budget Reporting System. The five large urban
hospitals are Bridgeport, Hartford, Saint Francis, Saint Raphael’s, and Yale-New Haven.
6
CT Office of Health Care Access Inpatient Database.
7
Managed Care Discount Rates, Office of Health Care Access, 2000.
8
http://www.wa-ic.org/in_hist.htm, Health Insurance,The History, p. 1
9
http://www.bluecares.com/know/history.html, Get to Know Blue Cross and Blue Shield, p. 1
10
http://www.wa-ic.org/in_hist.htm, p. 2
11
Longest, Jr., Beaufort B., Health Policymaking in the United States, p. 20
12
Kuttner, Robert, The American Health Care System: Employer Sponsored Health Care Coverage, New
England Journal of Medicine; (January 1999), p.248
13
http://ww.insure.com/health/terms.html, Sorting out the details of private health insurance, p. 2
14
CHIPS Consulting, Handbook of Managed Care Terminology, p. 33
15
http://www.wa-ic.org/in_hist.htm, p. 4
16
http://www.wa-ic.org/in_hist.htm, p. 4
17
State of Connecticut Office of Health Care Access, Managed Care Discount Rates
18
State of Connecticut Office of Health Care Access Hospital Budget Reporting System.
19
State of Connecticut Department of Insurance HMO Statistics for June 2000.
20
http://ww.insure.com/health/terms.html, p. 3
21
http://www.allhealth.org/sourcebook/chp_05/ch05A_summary.html
22
Grace and New Haven Hospital Annual Reports, 1868 – 1945 and Hospital Study Focus Group on
Competition and Integration, 2000.
23
Iglehart,The American Health Care System: Medicare, The New England Journal of Medicine; (January 1999),
327 & Iglehart,The American Health Care System: Expenditures, The New England Journal of Medicine;
(January 1999), 72.
24
State of Connecticut Office of Health Care Access Hospital Budget Reporting System.
25
http://www.hcfa.gov/medicare/ormedmed.htm, p. 4
26
The State of Connecticut Office of Health Care Access Hospital Budget Reporting System and The Henry
J. Kaiser Family Foundation, Medicare State Profiles, State and Regional Data on Medicare and the
Population it Serves, September 1999, p. viii and the Office of Health Care Access Hospital Budget
Reporting System.
27
All financial operations for Medicare are handled through two funds, one for Hospital Insurance and one
for Supplementary Medical Insurance.The funds are special accounts in the U.S.Treasury that are credited
with all income receipts and charged with all Medicare expenditures for benefits and administration
costs. Medicare is funded from four different sources: mandatory contributions by employers and employees,
general tax revenues, beneficiaries’ premiums, and deductibles and copayments by patients. Social
Security Bulletin,Annual Statistical Supplement, 1998, Supplemental Security Income, p. 81-108
28
Institute for the Future, Health and Health Care 2010, the Forecast, the Challenge, p. 52
29
Folland, Goodman, and Stanno, The Economics of Health and Health Care, 2nd Edition, p. 453
30
Longest, Jr., Beaufort B., p. 115
31
http://www.snm.org/policy/nprmsum.html, Policy and Practice, Health Care Financing Administration
Proposed Rule on the Hospital Outpatient Prospective Payment System, p. 1-2
32
State of Connecticut Office of Health Care Access Hospital Budget Reporting System.
33
Social Security Bulletin,Annual Statistical Supplement, p. 93

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34
Iglehart, John K., The New England Journal of Medicine, January 28, 1999,Vol. 340, No. 4,The American
Health Care System – Medicare, p. 1
35
Iglehart, John K., p. 3
36
Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, p. 35
37
http://www.hcfa.gov/medicare/ormedmed.htm, p. 12
38
State of Connecticut Office of Health Care Access Hospital Budget Reporting System.
39
The federal government pays a share of the medical assistance expenditures under each State’s Medicaid
program.That share, known as the Federal Medical Assistance Percentage (FMAP), is determined annually
by a formula that compares the State’s average per capita income level with the national income average.
States with a higher per capita income level are reimbursed a smaller share of their costs. Social Security
Bulletin, p. 109-112
40
The Boren Amendment to the Medicaid law provided that state payment for hospitals and nursing facilities
must be reasonable and adequate to meet the costs incurred by efficiently and economically operated
facilities that meet state and federal standards.
41
http://www.hcfa.gov/medicare/ormedmed.htm, p. 15
42
Iglehart, John K., The New England Journal of Medicine, February 4, 1999,Vol. 340, No. 5,The American
Health Care System—Medicaid, p. 5
43
http://www.hcfa.gov/medicaid/mcsten99.htm
44
State of Connecticut Office of Health Care Access Hospital Reporting System.
45
Congress and the Internal Revenue Service (IRS) regulate philanthropies. By law, they need disburse only
five percent of their net assets annually for charitable purposes. In the United States today, there are more
than 44,000 foundations. Approximately one-third, or 13,500, hold more than $1 million in assets or make
more than $50,000 in yearly donations. In the latest year of record, foundations gave away nearly $16
billion. Schroeder, Steven A., Reflections on the Challenges of Philanthropy, Health Affairs, (July/August
1998); p. 211 & http://www.cof.org/whatis/types/contents.htm, Types of Foundations.
46
With rising costs, the average statewide gain from operations fell from $106 million in FY 1996 to $13
million in FY 1998. State of Connecticut Office of Health Care Access Hospital Budget Reporting System.
47
The Lewin Group, Independent Analysis of the Fairness and Equity of Connecticut Medicaid Hospital
Reimbursement Executive Summary, Feb. 23, 2000, p. 11.
48
The Lewin Group, The Impact of the Medicare Balanced Budget Refinement Act on Medicare Payments to
Hospitals,American Hospital Association, Feb. 1, 2000, p. 23
49
The Lewin Group, Independent Analysis of the Fairness and Equity of Connecticut Medicaid Hospital
Reimbursement, Feb. 23, 2000.

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