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Dealmaking in D.C.: Obama and the American Hospital Association
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Dealmaking in D.C.: Obama and the American Hospital Association

hospitalsBig News: The three major groups that represent hospitals- the American Hospital Association (AHA), the Federation of American Hospitals, and the Catholic Health Association- just made a friendly pact with the President to accept $155 billion in payment cuts over the next decade.

The savings will result mostly from lower Medicare and Medicaid payments to hospitals, and from smaller government subsidies to provide care for the uninsured.

This news might come as a surprise to our readers.  

About six weeks ago, President Obama announced his plan to trim government payments to hospitals.  He argued that such payment reductions would result in substantial savings that could then be used to finance healthcare reform.

We reported on the AHA’s response at the time.  Predictably enough, the organization immediately expressed “deep disappointment” upon hearing of the plans.

To be clear: Hospitals have long voiced concern about government payment rates.

The AHA claims that hospitals lose money on each and every Medicare/Medicaid patient that they treat.  Hospital associations often argue that payment rates should be raised, not lowered, as a result.

The economic recession has also taken a toll on hospitals, which gives the AHA additional fuel in its argument against payment cuts.

In January, 2009, the AHA put out a detailed report documenting the negative impact that the financial downturn has had on hospitals.

  • The report notes that a majority of hospitals are:
  1. Cutting administrative costs (59%),
  2. Reducing staff (53%), and
  3. Reconsidering or postponing new capacity or renovation projects (56%).
  • The report also shows that a majority of hospitals are seeing an increase in the number of folks who need “uncompensated” care as the ranks of the uninsured grow.

So what changed?

Why did hospital reps suddenly join hands with the administration to voluntarily accept payment cuts?

Well first, the hospital associations were able to negotiate down the size of the proposed cuts.  The President had wanted to save $220 billion over the next ten years, but then agreed to reduce that sum.

Secondly, the administration decided to hold off on the payment cuts until significant insurance expansion occurs.  Once new insurance programs are in place to cover the roughly 50 million uninsured Americans, hospitals can expect to see their volume of paying customers increase.  This will help to make up lost revenue.

But there are political issues at-play here as well.

To help sweeten the deal, President Obama promised the hospital associations that restraints on physician-owned hospitals will be included in any healthcare reform package passed this year.

The AHA and the Federation of American Hospitals have longed lobbied for limits on these types of hospitals.

Physician-owned hospitals are infamous for focusing on the number of add-ons, such as gourmet meals, wine and private rooms, that they provide to lure customers, while often lacking adequate emergency facilities, and/or onsite physicians to oversee procedures.

The hospital associations believe that these facilities represent a conflict of interest, and that physician-owned hospitals are partly responsible for driving up healthcare spending.


Physicians are allowed to refer patients for tests and procedures at the hospitals that they also own and operate.  As a result, the doctors recommend unnecessary procedures to their patients just to generate revenue for their facilities.

Physician-owned hospitals also contribute to our growing use of medical technology.  They offer, and encourage, the overuse of specialty procedures and equipment.

Finally, physician-owned hospitals are known for cherry-picking patients based on ability to pay.  This puts a greater burden on other hospitals when it comes to caring for indigent and/or uninsured patients.

The legislation up for consideration states that hospitals owned by physicians that do not yet have their Medicare Provider Numbers would not receive such certification if the physician-owners continue to refer patients to their hospitals.  The legislation would apply to any hospitals seeking certification after January 1, 2009.

Medicare Provider Numbers enable hospitals to accept Medicare patients, and government payments for such care.

  • The January AHA report showed that community hospitals receive fully 56% of their revenue from Medicare and Medicaid combined.
  • While private hospitals likely receive less of their revenue from these sources, these payments are still a vital part of their operations.

The proposed change means that the physician-owners would have to either:

  1. Give up the practice of driving patients (and revenue) into their own facilities, or
  2. Give up their government-subsidized patients.

In either scenario, substantial revenue would be lost, thus limiting the expansion or construction of these hospitals.

The industry trade group, Physician Hospitals of America, is angry about the proposed change, but the AHA and the other hospital associations couldn’t be happier.

Check back tomorrow for more on the political back-story.

{ 2 comments… add one }
  • Dan July 27, 2009, 11:06 am

    The hospitals agreed to this with the stipulation that if a public health plan is implemented, these hospitals would be reimbursed overall at a higher rate.

  • Emily Cleath July 27, 2009, 11:49 am

    Great job breaking down a complicated development in the morass of health care reform.

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