Understanding the health care crisis that isn’t but could be

At a regional health forum in March, House Speaker Thomas Finneran bluntly told an audience of 300, “I do not believe our health care system is in crisis.” During a follow-up session, I asked the audience if they thought: A) This is the most severe crisis they have seen; B) There are serious problems, but no crisis; or C) There are no major problems and no real crisis. About two-thirds voted A and one-third voted B. No one voted C.

Since Harvard Pilgrim Health Care went into court-ordered state receivership in January, cries of crisis have become routine in the health care industry, prompted by distress calls sent out by hospitals, nursing homes, health centers, home health agencies, ambulance providers, and others. In early May, state leaders formed a 42-member health care “summit” to sort out the woes plaguing the Commonwealth’s health system. Since then, the immediate crisis of Harvard Pilgrim appears to have passed, and the HMO has been released from strict state oversight. But this has done little to settle the nerves–and finances–of the health care industry overall.

What’s going on? Are we really in crisis? How do we fix what’s wrong? The health care summit will take 12 to 18 months to figure things out. But you don’t have to wait that long. Here is what you need to know.

It Begins With The Payers

What looks like a crisis is a chronic case of financial instability, the result of never-ending attempts by the three major payers of health care bills–Medicare, private insurers, and Medicaid–to control their costs. Health care finance is a three-legged stool. Costs are shared by Medicare (federal health insurance for persons age 65 and older), Medicaid (coverage for low-income persons and the disabled, managed by the state with costs shared by the federal government), and private health insurers, but almost never on equal terms. Somebody’s always footing more of the bill. Until recently, it was Medicare.

In the mid-1990s, employers, consumers, and states enjoyed record low increases in health insurance costs, largely crediting this success to the health care market revolution–principally, the shift to managed care. But federal officials grew frustrated at the continued rise in spending for Medicare, the nation’s largest health insurance program, compared to private health costs.

So, in 1997, Congress passed the Balanced Budget Act, targeting Medicare for $115 billion in spending reductions over five years. The actual cuts dictated by the BBA were far greater, however. The Congressional Budget Office now estimates the total reduction at more than $220 billion. These measures have had dramatic impacts on hospitals (teaching and community), nursing homes, home health providers, and Medicare HMO plans, each in different ways. Last year, in response to provider outcry, Congress enacted the Balanced Budget Relief Act, restoring about $15 billion in funding. Congress could have provided a good deal more relief, but didn’t. That’s because congressional leaders and the White House are eyeing the Medicare savings for a variety of other purposes, including a prescription drug benefit for elders, tax cuts, and tax credits for the uninsured.

With the squeeze on Medicare funding, private employer health costs are on the rise again. The low rates of increase in the mid-1990s were not sustainable, not only because of disproportionately generous Medicare payments, but because intense competition among health plans (to capture market share) and among hospitals and other providers (to win HMO contracts) drove premiums and prices down to unrealistic levels. (This competition laid the groundwork for the past year’s HMO financial crisis.) Since 1998, premiums have risen 8 to 20 percent for large employers, 15 to 40 percent for many smaller employers. But little of that money is finding its way to providers. The lion’s share of increased premium revenue is being used to restore depleted HMO reserves, finance expensive new information systems, and pay for rapidly rising prescription drug costs. As a result, premium hikes of 15 to 20 percent are translating into provider rate increases of just 3 to 5 percent.

The third leg of health finance, Medicaid, has always been a stingy payer, reimbursing providers below cost. But as a result of new programs to enroll the uninsured, Massachusetts Medicaid (now called MassHealth) has grown from 470,000 enrollees in 1994 to more than 900,000 today. Other payers are unwilling to cover shortfalls for this growing population of Medicaid patients. And providers that are highly dependent on Medicaid payments find themselves increasingly at risk.

Cries Of Pain From Providers

I have been an observer of the Massachusetts health industry since entering the Legislature in 1985. Usually there’s at least one class of provider screaming that the sky is falling. But it is unusual to hear cries from the entire spectrum of caregivers. That is occurring today. Each segment of the health care industry is buffeted by pressure from Medicare, private payers, and Medicaid.

Each segment of the health idustry has been buffeted by payers.

Hospitals. In the past, hospitals made money from Medicare and private payers, and used part of that surplus to cover losses from Medicaid and uncompensated care (which is partially reimbursed by the state). But intense pressure from health plans and employers led hospitals to accept inadequate private sector/ HMO contracts, and make up the difference from Medicare. The BBA put an end to that strategy. Now, according to the American Hospital Association, the Massachusetts hospital industry is the only one in the US where all three major financing sources pay less than the actual cost of care.

Massachusetts has the nation’s highest concentration of expensive teaching hospitals. That’s a costly claim to fame, but also a source of lucrative federal research grants. Contrary to conventional wisdom, Massachusetts does not have an excessive number of hospital beds (2.6 beds per 1000 residents vs. 2.8 nationally), and admission rates and length of stay are only slightly higher than national averages. The number of hospitals has dropped from 114 in 1980 to 84 in 1990 to 69 today. Rather than looking at further consolidation as a way to reduce costs, we now need to consider what steps may be needed to preserve essential institutions.

Nursing Homes. Crying wolf may be reflexive provider behavior, but Chapter 11 is financial distress for grownups. In January, one in six Massachusetts nursing home beds was in an institution that was in bankruptcy proceedings. Sixteen homes closed in 1999 and six more closed in March of this year. Citations for poor quality issued by the state Department of Public Health rose 61 percent in the last half of 1999. Care for 70 percent of the 58,000 nursing home residents in Massachusetts is financed by Medicaid, which pays rates below cost. Historically, homes have made up these losses from private pay and Medicare patients. But the private payers are vanishing, lured away by assisted living and new home care arrangements, and the BBA removed the last penny of profit from Medicare payments.

It’s true that many of the homes now in bankruptcy engaged in expensive and foolish acquisitions and expansions during the mid-1990s, a fact nursing home officials do not dispute. But their financial crisis collides with a severe labor shortage in the hot Massachusetts employment market, where unemployment dipped below 3 percent in April. With more than one out of 10 nursing positions vacant, homes are forced to use expensive temporary nursing agencies and overtime to care for a markedly frailer and sicker pool of patients. Not only are nursing homes failing, but patient care is suffering.

Health Centers. For their tale of woe, community health centers have a poster child in the East Boston Health Center, among the most respected and innovative in the nation, which entered bankruptcy proceedings in 1999. It is hardly alone in financial distress: 41 percent of the state’s health clinics lost money in 1998, and two-thirds have less than 30 days’ cash on hand. Like community hospitals, health centers are strapped by limited reserves and non-existent endowments. While serving more patients than ever–total visits reached 2.9 million in 1999–health centers have seen a large portion of their paying patient base diverted to other settings by managed care, and Medicaid pays well below cost.

Home Health. The BBA put home health agencies in the barber chair as well. But instead of the trim–of about $15 billion–they were slated for, they ended up with a crew cut. These agencies lost an estimated $69 billion as the number of Medicare beneficiaries receiving these services dropped from 3.6 million in 1997 to 3 million in 1998. The ire of Congress was directed at scam home health operations, but their instrument was blunt, severely harming the nonprofit agencies that make up 70 percent of the Massachusetts industry. Prior to BBA, generous Medicare payments compensated for shortfalls. Between 1994 and 1999, the Commonwealth granted only one Medicaid rate increase, a 2.1 percent hike in 1997.

When Is A Crisis Not A Crisis?

If this sounds pretty serious, it is. But is it a crisis? I’m reminded of the old saying about joblessness: When someone else can’t find a job, it’s an unemployment problem; when I can’t find a job, it’s a crisis. To those in the health care industry, what they’re in feels like a crisis. For the rest of us, Speaker Finneran has a point.

To Finneran, any “crisis” is compared instinctively with the intense fiscal crisis that engulfed the Commonwealth between 1989 and 1991, in which health costs played a key role. Those recession years were extraordinary, with the simultaneous collapse of the state’s banking, real estate, computer, and defense industries. Each month brought lower estimates of state revenues, and higher estimates of Medicaid deficits–prompting repeated rounds of mid-year cuts and tax increases. Taming Medicaid was key to restoring stability, and to enabling other public investments, chiefly education, which has grown twice as fast as Medicaid over the past five years.

If institutional providers feel themselves in crisis today, they are the only ones. State revenues continue to grow at a healthy rate (8.1 percent in the last fiscal year). Earlier this year, then-Administration and Finance Secretary Andrew Natsios declared, “The state is awash in cash.” The federal government isn’t in crisis either, with surpluses as far as the eye can see and the Medicare Part A Trust Fund now solvent through the year 2023–thanks to BBA Medicare cuts. The private sector is doing quite nicely as the current expansion continues despite occasional jitters.

Indeed, to the vast majority of citizens, provider cries of crisis are faint and distant. After all, a crisis is a situation where one’s back is to the wall, and potential sources of aid are similarly distressed. That is not the case today. These provider problems are eminently fixable; state Senate and House leaders are already using the fiscal year 2001 budget to address the most pressing financial issues.

There is no health care crisis. But there may be one.

But money alone is insufficient to address these problems. The providers’ need for relief opens a window of opportunity for reform. Here’s what needs to be done:

1. State officials need to reassert leadership of the health system. In the 1980s, then-Gov. Michael Dukakis ran a health summit called the State Health Coordinating Council that included all major health interests and provided a forum to address controversies in an ongoing and accountable way. Though grounded in naïve ideas about the potential for “rational” health planning, it was a place to raise concerns, test ideas, and argue things out. We need it back. Hospital deregulation in the early ’90s reduced the role of the state in directly managing the health care system. But the current instability shows that the executive branch needs to designate an assertive, empowered point person who can use state authority to soften the deleterious impact of current payment policies and ensure that the disparate components of state health policy move in the same direction.

2. We need smart, responsive regulation. The Harvard Pilgrim episode provoked two rapid and opposite reactions: 1) We need new, heavy regulation of the health industry, and 2) We need less, not more, government interference. Both views miss the point. Outside of health care, the 1990s witnessed the development of new regulatory models that transcend the stale market-vs.-regulation debate. Osborne and Gaebler’s Reinventing Government, Ayres and Braithwaite’s Responsive Regulation, and Gunningham, Grabosky, and Sinclair’s Smart Regulation are three texts that identify new approaches to overcoming the inefficiencies of traditional regulation and the pitfalls of deregulation. Health policy has been laggard in experimenting with new regulatory forms that respect market forces. We need that experimentation now.

3. We need a fairer, more realistic payment structure for Medicaid. The legacy of Medicaid as the short-dollar payer of last resort is no longer viable. A program covering close to one out of six Massachusetts residents can no longer get away with paying only part of its bill. Here’s what the spending hawks at the Massachusetts Taxpayers Foundation have to say about Medicaid’s payment policies: “One of the state’s key strategies for holding down Medicaid costs–limiting reimbursement rates to providers–is no longer practical. It is unrealistic, and unfair, for the state to expect hospitals, nursing homes and home care providers–many of whom are experiencing serious financial problems–to continue offering services for Medicaid patients at rates that fall well short of actual expenses.” It’s not just providers who are at risk. In recent years, Medicaid has become the vehicle for expanding access for the uninsured, chiefly because of generous federal cost-sharing. (Massachusetts gets at least a 50 percent federal reimbursement on all Medicaid expenditures.) If Medicaid is going to be the health insurer for growing numbers of citizens, it has to be a more responsible one.

Meet the Author

4. We need to expand coverage of the uninsured. Last year, a US Census report showed that the number of uninsured in Massachusetts had declined from 753,000 in 1997 to 623,000 in 1998. This drop reflects Medicaid expansions approved in 1996 offering coverage to uninsured children and their parents. Without further expansion the number of uninsured will begin to rise again, the result of increases in the cost of private health insurance. Last year, New York State increased its tobacco tax by 50 cents, using the revenue to pay for a major health access expansion for uninsured, lower-income working adults. It’s a model worth emulating–especially since we invented it in 1996 with a 25 cent tobacco tax to fund children’s health insurance and senior drug coverage!

Finneran may be right–there is no health care crisis. But there may be one if the state ignores its responsibility. Our near-crisis provides an opportunity to consider what works and what doesn’t in our health system. It’s an opportunity worth seizing.

John E. McDonough, a former House chairman of the Legislature’s Joint Committee on Health Care, is an associate professor at the Heller School, Brandeis University.