The potential impact of a Medicare public option on US rural hospitals [PODCAST]

Mike Passanante: Hi. This is Mike Passanante, and welcome back to the award-winning Hospital Finance Podcast.

Recently, Navigant released a study that looked at the potential impact of a Medicare public option on rural hospitals. To share the findings of this study, I’m joined by one of the study’s authors, Jeff Leibach. Jeff is a director with Navigant’s Healthcare Strategic Solutions team, supporting clients as they manage the financial and strategic challenges in today’s rapidly changing healthcare landscape. Jeff’s areas of expertise include managed care negotiations, pricing and reimbursement analytics, and aligning clinical and financial leadership, as providers and payers weigh the transition from fee-for-service to value-based care. Jeff, welcome to the show.

Jeff Leibach: Thanks for having me.

Mike: Jeff, why did you decide to look at the potential impact of a Medicare public option on rural hospitals?

Jeff: So we at Navigant conducted a study back in February on rural hospitals and their current financial situations and found that there were a number of hospitals at high risk of closure or limiting services just due to their current financial situation. And then earlier this summer, we had also conducted a separate study on the public option and Medicare for All and the possible impacts on all hospitals of healthcare reform and Medicare expansion. So we were actually commissioned by the Partnership for America’s Healthcare Future to look at both studies and combine them and say, “What would happen, based on the current financial risk that hospitals were under, rural hospitals in particular, if they were to then have the additional pressures of a potential public option? What would be the potential impact on those hospitals?” And so that’s really the impetus of the study, and we really focused on the public option as that middle-ground option as opposed to a broader Medicare for All option or a more limited buy-in.

Mike: And, Jeff, in the study, you looked at three possible scenarios for extending access to Medicare through public health exchanges. Tell us about those scenarios and how you went about conducting the analysis.

Jeff: Yeah. So we wanted to take an approach that was a little bit broader and that could allow us to really sensitivity test what could happen in different reform scenarios under a public option. So the three different scenarios really focused on the different levels of possible market penetration that a public option would have depending on different regulations that could accompany them. So the first scenario really focused on just the individual market shifting to the exchange and to Medicare for All– or, I’m sorry, to a public option. So this would just involve those folks who are on an individual plan through an exchange and would shift over to a Medicare reimbursement rate plan through the exchange. The options 2 and 3 were more significant, where we thought there is a higher possibility that the employer market would get involved and if a lower cost option were on the market. And so scenario 2 allowed us to look at if 25% of the commercial employer market shifted from those commercial plans to a Medicare-based public option. And the third scenario was looking at if 50% of the employer-based health coverage shifted from commercial plans to a public option. So the biggest variable in this analysis was how many people would be shifting from commercial plans to a Medicare-based reimbursement plan, because that’s really what would impact hospitals the most is if their high-priced commercial plans and volume shifted to Medicare-based plans. And it’s really hard to predict, depending on very nuanced and specific policies that could go into effect and result in either a very restrictive policy around individual plans or a broad possibility of employers shifting their plans over.

Mike: Jeff, why don’t you walk us through the results of your research.

Jeff: Sure. So the main results were really the three different scenarios. We found that in each of the three scenarios, rural hospitals were impacted at different levels by the revenue loss from moving from the commercial-based reimbursement to the Medicare-based reimbursement, and it really has varying levels of impact on those hospitals. So in scenario 1 with just the individual market, the net impact across all hospitals that we looked at was about 3.1% for critical access hospitals, 2.1% for short-term acute, and an overall impact of 2.3%. So when you add up all the hospitals, though, that 2.3% is about $4.2 billion of net impact on hospital revenues. If those individual market lives were shifted in scenario 2 and 25% of the employer market moved as well, you’ll be looking at a little more than three times the impact. And the overall impact of that scenario 2 was almost $15 billion or 8.1% of the rural hospital revenues. Scenario 3 was nearly double that impact, and it was over $25 billion and 14% of net revenue impact. So we did do this analysis at the local hospital level. And we also looked at, okay, each individual hospital, given their payer mix, given their potential impact, how much would we expect each hospital to be impacted and how would that move their financial risk? So we found that in the current baseline based on our February study, about 20% of rural hospitals were already in the high category of financial risk. And we found that in scenario 1, there was an additional 8% of hospitals, so 28% in total, that would be in high risk. And then in the two larger scenarios, 51% and 54% of hospitals were in high-risk categories, respectively, so significant impact to rural hospitals if they’re not held whole in terms of reimbursement rates and if they can’t make any changes on the cost side to maintain margins.

Mike: Yeah. Definitely a significant impact there. Jeff, what would you say some of the implications are for rural hospitals, given your study results?

Jeff: Yeah. So I think the implications for rural hospitals are a fewfold. The first is, as reform is really a political one, as reform scenarios get presented and discussed, really having an understanding of what would it take for a rural hospital to be held whole in a public option scenario. And our analysis here showed that whether it’s scenario 1, a 40% rate premium would be needed, versus scenarios 2 and 3, closer to 60% rate premium to Medicare would be needed to keep those rural hospitals whole. So as you’re evaluating plans and policies of reform scenarios, I think it’s important to keep those numbers in mind to say if there’s a current proposal out there that says that a public option would be paid at 25% above Medicare rates, and while that would help close the gap that we found in these scenarios, it still falls short even in the most narrow scenario. The second implication is really one of being mindful of costs and kind of the care model of the future. I think rural hospitals are already doing that and evaluating kind of how they are going to survive, recognizing they’re already undergoing payer mix shifts and other revenue challenges out there in the market. So this kind of adds a little bit of fuel to the fire to rural hospitals to kind of think about their care model, their revenue model, and their cost model as they go forward. And I think the third is just for policymakers and for patients and for community members to really have an understanding of not good or bad, that changes have additional consequences on different parts of the care model. And so, as we’re contemplating solutions to access or total cost of care gaps, there are revenue impacts in there and then, subsequently, business and margin and admission decisions that hospitals and their stakeholders have to make in order to figure out how to maintain a high level of care, a high level of service, and be able to care for the patients in their communities. So I think there’s a lot to consider. We knew this would be a complex topic, a controversial topic, and we really wanted to take a fact-based approach so that folks, whether they’re in favor of reform, whether they’re against reform, whether they’re working for a hospital or a payer or a community, if they’re a community stakeholder, they could really evaluate and understand the implications of a potential reform scenario on their business and their care in their communities.

Mike: And, Jeff, you touched on this a little bit here in your previous answer, but I’m curious. Do you have any additional thoughts around what rural hospitals could be doing right now to prepare for potential shifts in coverage?

Jeff: Yeah. So I think rural hospitals are already experiencing these shifts in coverage, and they’re experiencing it from a payer mix shift. So every time somebody turns 65, they’re a part of a payer mix shift. They’re turning from a commercial plan to a Medicare plan. And hospitals, not just rural hospitals, but hospitals across the country have had to deal with those payer mix shifts and their impact on revenue. And so I think hospitals take a few different approaches. I think the first is to look at their overall picture as a portfolio and understand that at different times your portfolio of revenue changes, and there’s different elements of risk and different ways that you can manage the growth or the trajectory of your portfolio. And so some of that is understanding what’s going to be necessary for commercial payers in order to maintain your overall margins. I think the other is looking at those cost opportunities to see where are there opportunities for us to reduce costs and improve efficiencies. And then the third is really looking at other ways to partner with payers and other stakeholders on total cost of care initiatives. So that’s where that shift to value can come in. And hospitals that have got in the habit of the trends in terms of value and Medicare Advantage can share in some of those savings. As they reduce costs, as they reduce cost of care, there’s an opportunity to kind of create some win-win opportunities with payers and patients and doctors out there. So there are a number of ways that hospitals can look at it. I don’t think that they all have to hit the panic button and close or reduce services. But there are a lot of risks that if they aren’t prepared to manage them, that those more drastic situations or decisions might come sooner rather than later.

Mike: Jeff, if someone wanted to get a copy of the full study results, where can they go?

Jeff: So the copy of the study is available on the Navigant website. And they can just go to navigant.com and search for rural hospitals, and they should be able to find it right there under our Thought Leadership section. So if they have any questions, people can certainly contact me or the other co-author of the study, Jeff Goldsmith. And we’ll look forward to answering questions and continuing to engage in a thoughtful dialogue on this issue and many others as they come up.

Mike: Jeff, thanks so much for joining us on the Hospital Finance Podcast today.

Jeff: Thanks for having me.

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