Managed Care - December 2008 - (Page 25)

particularly after having to restate forecasted earnings. But for most, their essentials are sound and they face less exposure to liquidity issues, despite recent decreases in their market capitalization. In fact — and as in the past — they could attract investors who decide to look for a little more risk and reward than they’re getting from treasury bills. This sector may not be terribly exciting, but excitement commands no premium in today’s market. Not good for payers If the health sector were like most other economic sectors, having good cash flow and relatively low exposure to investment losses would be good news for health insurance companies, but the health sector is not like any other economic sector, and pressures from other parts of the sector will not be good for payers, and that in turn will affect the debate on reform. The cost of the government bailout must come from someplace. With our national debt at close to $10 trillion and set to rise even higher, the federal government must look for other sources of funds or cost savings, and Medicare is the most likely place to look first. Reductions in payments to Medicare Advantage plans are likely, especially since that would incur the least short-term political pain. Medicare Advantage payments to health plans have also been targeted by some Democratic leaders of congress, who now have a more sympathetic administration coming to power. Hospital systems have been having to shift costs to private payers for years because of insufficient payments by Medicare and Medicaid, and that trend will accelerate. Like payers, hospitals are experiencing a sharp decline in investment income. But unlike payers, hospitals have high fixed costs, operate in very cash-constrained environments, and often face liquidity issues. To make things worse, hospital systems have high capital requirements not only to operate their facilities, but to continually upgrade their equipment and devices and to pay high personnel costs. This makes them depend on credit far more than insurers do, and today that means higher costs to access capital. Reductions in payments to providers, especially hospitals, are possible. Medicare’s move to severityadjusted diagnosis-related groups (DRGs) will better address disparities in use of resources by those Medicare patients who are sicker than average, but that only shifts the money around and does not result in additional overall payments. Reductions in disproportionate-share payments to urban teaching hospitals will, however, put further downward pressure on cash flow. State governments, also affected by serious losses in their investment funds, and in particular, employee retirement funds, as well as reduced tax revenues from a soured economy, will seek ways to limit increases in Medicaid costs, and payments will fall even further behind the actual cost of care. Providers will face greater revenue shortfalls compared to their cost to provide care. Hospitals face pressures on the consumer side as well, with most hospitals experiencing a drop in the number of elective — and profitable — procedures, as many consumers put off care because of the cost. Increasing deductibles and coinsurance, combined with reductions in collections from patients facing their own economic woes, are also squeezing hospitals’ cash positions. The net effect is that hospitals are substantially increasing their charges, meaning even more costshifting to commercial payers than in past years. Higher premiums Payers must then pass that along through equally high increases in premiums. Some payers anticipated this and are quoting substantially higher premiums for new and renewal business. For example, in an article in the Nov. 17 edition of the Wall Street Journal, some brokers and small business owners reported facing rate hikes of 20 percent or more in some markets. Other payers have already set their rates and require state approval to raise them, and will have difficulty raising rates until at least the second quarter of 2009. Those payers face sharply lower investment income and potentially inadequate premiums, at least for the short term. There is little danger that they will be unable to pay claims, but they may run negative margins. On top of it all, the underlying causes of health care cost inflation remain relatively unchanged. Payers’ administrative costs remain between 12 and 15 percent, and rise at almost the same rate as overall health care inflation, primarily as the result of the need to pay broker commissions (calculated as a percentage of premium) and the need to continually invest in information technology. Facility costs, drug costs, bio-pharmaceuticals, DECEMBER 2008 / MANAGED CARE 25

Table of Contents Feed for the Digital Edition of Managed Care - December 2008

Managed Care - December 2008 Editor's Memo Contents Legislation & Regulation News and Commentary Medication Management Compensation Monitor ICD-10 Offers Huge Opportunity, Challenge Part D at a Crossroads Plans Can Weather the Financial Crisis DM vs. Medical Home? Tackle Prediabetes Reasonable Approach to Morning Sickness Formulary Files Tomorrow's Medicine Outlook

Managed Care - December 2008

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