MEDICARE REFORM and Harvard's Teaching Hospitals

The teaching hospitals affiliated with Harvard Medical School have always been known for being bastions of medical research, developing cutting-edge remedies for diseases and other ailments.

But with the Republican Medicare reform bill slated to hit the House floor today, Harvard's affiliated hospitals are bracing themselves for a new kind of bitter medicine.

Teaching hospitals depend on the Medicare program, which provides medical coverage for about 40 million citizens over age 65, for almost 50 percent of their patient revenue and covers a significant portion of their teaching costs, according to Stacey Simon, spokesperson for the Massachusetts Hospital Association.

The proposed cuts in Medicare payments, which total some $270 billion over seven years, will force hospitals to make substantial changes in the way they conduct their business. And Harvard's main teaching hospitals--Massachusetts General, Brigham and Women's, Children's, Beth Israel and the Deaconess--are all very anxious about the prospect of impending cuts.

"We're worried about this legislation," says Jay Pieper, vice president for corporate development and treasury affairs for Partners Healthcare System, the affiliation of Massachusetts General and Brigham and Women's Hospitals. "It is such a focused reduction in a particular segment of health care. If you're intelligent you have to be worried.

Massachusetts hospitals as a whole stand to lose almost $1.3 billion in revenue over the next seven years under the Republican legislation, says Anthony J. Santangelo, director of the Boston Organization of Teaching Hospital Financial Officers, a group made up of 10 chief financial officers of Massachusetts teaching hospitals.

According to Pieper, Partners Healthcare alone would stand to lose about 30 percent of that amount, or roughly $400 million.

Partners alone receives about $100 million per year from Medicare for teaching, which is about one-third of what all Massachusetts hospitals receive, according to Pieper.

Partners had $1.6 billion worth of expenditures in financial year 1994, according to Caroline Castel, director of corporate communications at Partners. She says about 50 percent of the patients at each of the hospitals are paid through Medicare or Medicaid.

Scrambling to Adapt

The teaching hospitals now find themselves scrambling to adapt to the proposed changes.

Robert G. Norton, president of the Deaconess Hospital, says he is less concerned with the way in which the cuts in Medicare are brought about than the actual magnitude of those cuts and the speed with which they're carried out.

"No one in the industry believes that there doesn't need to be change," Norton says. "The issue I have is with the speed of the change and the depth of the change. My own view is that the bills currently in Congress call for that change to be far too fast and far too deep."

Norton says it is important that health care reform move slowly so as not to overwhelm the public. Much of the confusion right now, he says, especially among senior citizens' groups, is a result of reformers trying to push ahead too quickly.

"The pace of change in the industry isn't in any way understood by the consumers of the product. It takes time to change their thinking on this issue," Norton says. "If you try to change the system before changing people's thinking, the patients are negatively affected in the process.

The Present System

Medicare has always played a special role at teaching hospitals, most notably because it pays for most of the costs of teaching that those hospitals incur.

According to Santangelo, Medicare pays for teaching in hospitals through two subsidies: graduate or direct medical education payments (GME), and indirect medical education payments (IME).

Graduate medical education payments are fixed amounts that Medicare pays to a teaching hospital based on the number of residents it trains and its share of patient days.

Indirect medical education payments, according to Santangelo, are intended to compensate teaching hospitals for the additional infrastructure costs inherent in the teaching mission, such as the extra costs of having standby capacity or treating more severely ill patients.

The time it takes to treat each patient is necessarily extended when doctors are being trained, so the IME is based on "teaching intensity," or the ratio of the number of residents to beds. The more intensive the care the more payment the hospital receives.

Teaching hospitals also tend to treat a higher proportion of the indigent and the poor and therefore receive a "disproportionate share" subsidy to cover those costs as well.

The Republican legislation aims to save $270 billion over the next seven years by enacting a series of measures, including reducing the inflationary updates of payments given to hospitals for procedures, reducing the disproportionate share subsidies by 20 percent over the next seven years, and reducing IME payments.

Pieper says teaching hospitals must depend on Medicare to pay these extra costs because insurance companies simply don't have a financial incentive to pay for teaching and research.

"An insurance company that pays for teaching is placed at a competitive disadvantage against another organization that does not," he says. "For them to supplement any payments with an intention of supporting teaching and research is just not in their economic interests."

The market reality in Massachusetts has further exacerbated the situation, says Santangelo.

Competition among HMOs has forced teaching hospitals to cut costs in various ways. For example, one of the hospitals in Santangelo's group is starting to cut specialty training positions.

Pieper says the lack of private insurance funding for teaching and research is the core problem. He says he doubts the competitive private environment will be able to pick up the costs if the government doesn't pay.

Impact

According to Norton, the long-term impact of the Medicare reform legislation on medical education could be devastating, since Congress appears to be targeting the indirect medical education portion of Medicare for substantial reductions.

"That area will have much more of an impact on the Deaconess since so much of what we do is medical education," Norton says. "My suspicion is that that number in the next few years could be reduced by as much as 50 percent of the current amount."

Norton says the Deaconess Hospital has already begun aggressively examining the financial impact of its commitment to medical education, in particular, thinking of ways to streamline the process and perhaps reduce the number of residency positions.

But even Norton concedes that cutting costs in its medical education infrastructure may not be adequate to recoup the loss in Medicare revenue.

"We're going to have to turn to such alternative vehicles as philanthropy and other means of support for medical education," Norton says. "Certainly at the Deaconess, medical education is such an integral part of what we do, so it is difficult to isolate it 'simply' because Medicare decides to change their funding."

Norton says it the government withdraws itself as the major payer of medical education, there will be a dramatic change in the way future medical leaders will be trained.

Adapting

Simon says the general cost-cutting climate in the health care system and the push towards managed care have already forced teaching hospitals to change their practices, whether through forming networks or consolidating administrative functions.

Cost cutting has been the main way in which teaching hospitals are dealing with the adverse economic climate.

To increase its competitiveness, Partners Healthcare, which already consists of Brigham and Women's Mass General, McLean and Spalding hospitals, is now in the process of merging with the North Shore Medical Center, which also has some teaching function, according to Pieper.

"I think the matter is not where to find the extra money, but it's a matter of reducing the cost to go with the money you get," says Pieper. "There are very few strategies that are very successful to argue that we will replace the money."

According to Pieper, Partners reduced the number of resident and fellow positions at its hospitals by five percent last spring, when it made a statement that it would continue such reduction until some balance had been achieved.

But Pieper says such measures don't even begin to offset the revenue loss that would occur with the proposed cuts in GME and IME.

Partners has also attempted to reduce the cost of hospital supplies by making commitments to vendors and suppliers in exchange for lower prices. But Pieper acknowledges that even with these savings, some layoffs and personnel restructuring are inevitable.

"The numbers being discussed are so large that no one should think that to meet that price we could use a catheter that costs less or a lower-priced catheter to begin with. There is an impact on people. We'll have to change the way we work and reduce our payroll costs," Pieper says.

Disproportionate Burden

Hospital officials seem to agree that their institutions are bearing a disproportionately high share of the cost of reforming Medicare and Medicaid.

Pieper says political reasons and the hospitals' relative lack of lobbying power have contributed to the new cost burdens.

"Hospitals are just one lobbying segment, and the requirement in Washington is to get the job done with the least amount of voter rebellion," says Pieper. "In this particular case, hospitals represent a somewhat vulnerable target."

Pieper says reducing inflationary payments by holding them to specific, targets, so-called market basket reduction, spreads the economic sacrifice evenly among all hospitals, but that this part of the Medicare reform legislation only accounts for 25 percent of the savings.

"Why does the other 75 percent fall on hospitals?" Pieper asks. "There are only a couple of hundred major teaching institutions in the country. Once again, the political ability of that group to complain are small compared to other groups, so it is a source of money that is very focused and harmful to that particular segment. I don't think the strategy is an accident."

Recognizing their susceptibility to bearing the brunt of the costs hospitals, while admitting they do not have the clout of the seniors' groups, have still been lobbying extensively in Washington.

Pieper says that officials at Partners, as well as many other teaching hospitals, have sent letters to members of Congress, personally appeared in Washington, D.C., and presented the dollar impact of the proposed cuts to all they could.

Jane H. Corlette, associate vice president for government, community and public affairs, says Harvard University does not have a direct role in lobbying on the hospitals' behalf, but does assist where it can.

"The hospitals are independent corporations," Corlette says, "but if I or anyone else at Harvard is talking to a staff person and the issue of the teaching hospitals comes up, we certainly defend those. We do keep abreast of what the positions of the hospitals are."

Massachusetts' largely Democratic Congressional delegation--including Rep. Joseph P. Kennedy, and Sens. Edward M. Kennedy '54-'56 and John Kerry--have all denounced the Republican proposals.

The Hospitals' Solution

While Harvard's teaching hospitals acknowledge that the Medicare system must be reformed, they feel that they are bearing more than their fair share of the responsibility.

Norton, for one, says he does not feel the trend of decreased government involvement in health care is prudent.

He says while most people agree that each individual should have equal access to health care without ability to pay, there doesn't seem to be a vehicle to realize that goal besides the government.

"My sense is that there needs to be better recognition that government has to be more involved in assuring a basic level of health care coverage to all of the population," Norton says.

According to Norton, health care is a special product that should be guaranteed for everyone, and therefore cannot simply be tossed into a free market system.

"It's easy to say that in a competitive society, economic competition can drive health care, but health care is not a product like any other product that we buy like automobiles," Norton says. "The strive towards managed competition doesn't account for the fact that health care is a different type of product."

Pieper says he would attempt to solve the Medicare crisis by increasing the incentives of enrollees to go into managed care.

"If I could identify what I would see as the single largest financial issue around the Medicare program, it's the open-minded fee-for-service characteristic," says Pieper. "Enrollment in a managed care environment has been somewhat minimal, so encouraging them to go into an environment where there is a more long-term view of their health care and a more consistent level of health care to the individual would seem like a good idea and potentially a cost-reducer."

Pieper says that the Republican legislation is positive to the extent that it encourages increased managed care enrollment and broad-based solutions to the deficit problem.

"It's the part that is disproportionately focused on a small segment that is of great concern to us," he says.

Depth of Cuts Uncertain

Though most hospital officials are fairly sure that some form of Medicare reform will be passed this year, they are not sure how deep those cuts will be. President Clinton has promised to who the Republican legislation, and according to Robert Blendon, professor of health policy at the School of Public Health and the Kennedy School of Government, no one can be certain of what the ultimate compromise will be.

"I think the uncertainty of exactly the size of the cuts has [the hospitals] worried," says Blendon. "I'm sure they're worried financially. The problem is that you just don't know. We know there will be less, but whether or not it's dramatically less, we just don't know. I think they learned, from the Clinton's health care plan the problems of assuming."

However deep the cuts turn out to be, teaching hospitals will continue to worry about the long-term effects of Medicare reform on medical education in this country.

"The implications of teaching and research have a very long-run nature to them," Pieper says.