By Christopher Guadagnino, Ph.D.

Published May 2008

MD: Gov. Corzine’s Executive Order 39 requested that the department form a commission to review the financial condition of the hospital industry in the state; to help determine which hospitals are essential to preserving access and would therefore be entitled to state support in the future, should they need it; and ways in which we would deal with hospitals that are not essential, that do not meet those criteria – either help them to orderly closure or some sort of consolidation.

MD: The report highlights six forces: underreimbursement from Medicaid and charity care, lack of universal health coverage, misaligned incentives and interests between physicians and hospitals, lack of transparency of performance or cost, a need for more responsible governance at certain hospitals, and excessive hospital density in some parts of the state.

MD: I think reform is incremental. What we’re trying to do is improve the situation in New Jersey incrementally, in terms of health care costs and transparency. In our meetings with some of the interest groups in the state after the report’s release, it was pointed out that insurers should be held to the same standards of transparency, and we agreed to explore that being sensitive to proprietary issues. The notion is arriving at better prices through transparency, promoting what the right cost is for insurers and for services to the uninsured who have the means to pay.

MD: Hospital efficiencies are tracked by the department on a quarterly basis. One of the problems with the current approach is that it’s not timely enough. Oftentimes we need at least 45 days to get the data after the quarter closes, and we’re at least three months out by the time we’ve got the efficiency standards – things like FTEs per bed, accounts payable, cash on hand. Physician efficiency is not tracked by us at all. Economic incentives between physicians and hospitals are not necessarily aligned, and hospitals have little in the way of controlling physicians’ practice patterns through financial incentives. Physicians are paid based on the number of procedures and tests, and hospitals are not reimbursed on that basis, so you may have a physician extending a patient’s stay when the hospital cannot be reimbursed for it. The commission’s chair, Uwe Reinhardt, put it nicely by saying that hospitals are essentially a "free workshop" for physicians.

One of the things we’re trying to promote – and we’ve seen some hospitals in the state begin to do – is for hospitals to compare physicians to their peers and post their performance in terms of utilization of hospital resources, cost per inpatient case by severity-adjusted DRG, and eventually, outcomes. Another idea to boost efficiency is to promote the use of hospitalists and intensivists, which may control expenses. Legislation is currently being drafted to implement the report’s recommendation of an early warning system. We’ve already met with the hospital association in the state and requested new monthly financial information like days in accounts payable, days in accounts receivable, occupancy rate, days cash on hand, and operating margin – data we believe that they have in their daily or weekly reports – that can be useful to us to help identify when a hospital is in trouble. The most difficult balance to strike with an early warning system is, at what point do we acknowledge publicly that a hospital is in trouble or is headed toward trouble. Once you do that in a public way, it can be a self-fulfilling prophecy and you’ll push the hospital over the edge instead of helping rescue it.

MD: For example, we would say that hospitals are in trouble that fall below 25 days cash on hand – or that are having problems with payables, or are seeing a decline in admissions – which is probably the most crucial tell-tale sign, because it signals that physicians are no longer sending patients there. The report suggested that the right occupancy rate for a hospital is probably between 80 and 85 percent. Intervention would first be to consult with the hospital’s management and board to make sure that everyone is aware of the situation – there are sometimes cases where the board doesn’t have the full story. Next would be to determine what steps could be taken, perhaps bringing in a turnaround company to explore things like revenue cycle enhancement, supply management, a review of all their service areas to see whether they’ve tried to be "all things to all people" in competition with larger, more regionalized hospitals that have much higher volume and can more successfully compete with them. Then, particularly where we see overbedding, we would start looking at their potential affiliations and would ask them to consider consolidation.

If they do need state assistance, those areas would not only be consultative, but mandatory. The state budget has proposed the Health Care Stabilization Fund, which would be a maximum of $35 million to provide us with a pool during the year if a hospital is in trouble and needs a one-time infusion of cash to help them either to get over the hump, in terms of a cash-flow shortage, or to help them toward closure, in terms of paying off debt and securing the site for services. Its primary purpose is to preserve access where possible. What we’ve seen in places around the state where hospitals have closed is that there can be a health care presence in those communities that doesn’t necessarily have to be a hospital. We could, through the Health Care Stabilization Fund, provide seed money to establish local clinics, which can become permanent facilities providing a lot of primary, preventive and emergency care.

MD: It gives us the ability to make those determinations with more than just anecdotal data. The consultant to the commission – Navigant – provided us with an algorithm that uses the hospital’s financial, market and utilization data. Key variables include operating margin, cash on hand, long-term debt to capitalization, Medicaid and uninsured discharges and emergency department visits, Medicare disproportionate share, ratio of patient days for Medicare dual-eligibles, Trauma Center designation, percent of total ED visits in a hospital’s service area, inpatient occupancy rate, and total patient days and ED visits. The "essential hospital" definition in the report is a dynamic model – for example, it considers market area. Suppose Hospital A is essential, Hospital B is in the middle, and Hospital C is not. If Hospital B closes, Hospital C may become essential.

MD: No, they’re pretty much evaluated equally. The report also notes that they are not the only measures that the government should take into account. For example, there are issues of transportation in some areas of the state where it might actually take 40 minutes to get across town, when on a map it might look like it would take only 10 minutes. The economic impact of a closure also has to be taken into account, particularly for workers who rely on the hospital for employment. You’re not going to maintain a hospital simply for employment, but it’s certainly a factor that an administration is confronted with when making the ultimate decision.

MD: It would probably require a private vendor with experience in crunching the data. We’re often reminded that New Jersey’s Medicaid reimbursement pays 73 percent of a hospital’s cost. That’s a little misleading. Our Medicaid people say it’s true for inpatient care, but for outpatient reimbursement, which is growing as a percentage of the total hospital business, they’re actually paid closer to 96 percent of their costs. But the definition of "cost" was a question mark throughout the process. We don’t get to evaluate the salary structure of the hospital administration, for example. For nursing homes, we reimburse based on cost, but with screens – such as no more than 100 percent of the statewide median cost for food, laundry, or other costs. Applying those kinds of measures as a gauge for hospital payments, even if they’re only a guidepost, might be studied.

MD: Very much so. It was something that the commission debated, and the level of the debate probably wasn’t reflected in the report, but the idea was to dedicate severely limited state resources to the most vulnerable populations. Currently, charity care follows the patients – the hospitals submit claims, those claims are put into a statutory formula, and the next year’s allocation comes out based on how charity care utilization occurred in the previous year as a proxy for what they’re currently experiencing. The report suggests that perhaps not all hospitals should be included for charity care subsidies, even though they’re all required to provide it, and that charity care funds should be dedicated to the safety net hospitals that rely on it most heavily. The way that was proposed in this budget was a compromise: charity care subsidies still follow that statutory formula, however, there is a tier of hospitals whose percentage of charity care is so small relative to their total business – less than 3.6 percent – that they won’t receive any subsidy. The second tier would be between 3.6 and 8 percent and would experience a 34 percent reduction in the aid they currently receive, and the upper tier – hospitals whose percentage of charity care is more than 8 percent of their total business – would receive a five percent reduction. However, remember this is a proposal. Every year the governor’s recommended budget includes a proposal on charity care, and every year it is modified by the Legislature.

MD: It certainly sounds reasonable, but to finance it would be impossible in this budget year. The state’s Medicaid program uses managed care organizations that are fully capitated, as many states do, and they reimburse physicians at a rate different from Medicaid fee-for-service in New Jersey. We’re often quoted as being the lowest in the country, in terms of our Medicaid rates to physicians. Unless the state were to leave managed care and do it all through fee-for-service, I’m not sure it would be in total control of physician reimbursement, as there is a considerable number of Medicaid beneficiaries in managed care now in New Jersey.

MD: Part of it is in the negative, in terms of following Medicare’s new policy to deny payments for medical errors. If outcome measures could be agreed to, physicians’ rates might be enhanced for lower emergency room utilization, and other goals. There are other models that are highly controversial, like economic credentialing, that I don’t think we’re contemplating right now.

MD: A Health Information Technology Commission has formed since the report was completed, but there is no financing to go with it yet. Chairman Reinhardt was adamant that it was a government responsibility to create such a repository of data to which a variety of other systems would have access, and in some way to finance the maintenance of the data – electronic health records and performance data of hospitals, ambulatory centers and physicians – and allow everyone to use it – consumers, researchers, regulators and practitioners. We’re taking small steps toward that vision. There’s a promising demonstration project in the Atlantic City area.

MD: There is a lot of legislative interest that has sprung from the report. By the end of the current legislative session, we think there may be three or four bills that embody recommendations from the commission – the early warning system, the Health Care Stabilization Fund, monitoring ambulatory surgical center cost and quality, capping at the Medicare rate what hospitals can charge the uninsured, and perhaps licensing one-room operating rooms which heretofore have been considered the private practice of medicine. The Commissioner has been activly engaging boards to let them know how much their service is respected and appreciated, but also to stress how establishing baseline standards for governance helps reassure the public and lay the foundation for all future boards.