Why do hospitals go broke?

CarePoint asks for a fair rate of insurance reimbursement

If you own or operate an urban hospital, you aren’t likely to survive long under the system of insurance reimbursement that currently exists. This is one of the main reasons that hospitals, particularly urban hospitals, are struggling financially.
Even as hospitals create networks and add services to try to overcome the cash shortfalls the current insurance system creates, hospitals will continue to go broke until someone, most likely the state or federal government, changes the way insurance companies do business.
This is essentially the message being broadcast by owners of the CarePoint Health network, which owns three for-profit hospitals in Hudson County.
Before being taken over by the company, Bayonne Medical Center, Christ Hospital in Jersey City and Hoboken University Medical Center fell into bankruptcy, noted Dennis Kelly, CEO of CarePoint, because of unfair reimbursement from insurance companies and the government.
Officials from CarePoint and other hospitals in Hudson County have long argued against insurance companies having control over the level of reimbursements. But the current system, insurance companies argue, came as a result of massive overcharging in the 1970s and early 1980s when healthcare providers increased prices because insurance companies tended to foot the bill.
To become an in-network provider for an insurance company, a hospital agrees to discount its services. In exchange, insurance companies steer their enrollees to them.
Yet, as hospital costs for staff, doctors, medicine, and equipment remain fixed, the margin of profit on services may be slim for an in-network provider.

“We’re committed to providing the best care we can for residents of our community at the lost possible cost.” – Dennis Kelly
In addition, local hospital officials say, insurance companies routinely deny claims, forcing hospitals to hire legal representatives to prove even clearly legitimate claims. This increases costs to the hospital and often causes delays in receiving insurance payments. Some claims take years to resolve. Often, insurance companies will offer to resolve claims at an additional discount, generally far below what it cost the hospital to provide the service in the first place. For years, hospitals desperate for cash flow took bad deals.
Hospitals like the original Bayonne Medical Center (before CarePoint took over) were forced to draw down the hospital’s endowment to cover the loss. When the endowment expired, the hospital went bankrupt.
Urban hospitals get hurt more because insurance companies demand a bigger discount on services from them than from suburban hospitals, even though urban hospitals deal with some of the poorest people in the state, many of whom are uninsured. And under state and federal law, hospitals are forced treat them.
According to former Assemblyman Louis Manzo, who tried to make changes in legislation a decade ago, funding for acute care hospitals in New Jersey is rated as the worst in the nation. That’s partly because insurance companies and government agencies funding medical procedures set the prices, and sometimes don’t even pay the low prices they set.
A bad deal for urban hospitals
Under a market rate system established as a result of the state deregulating healthcare insurance in 1993, insurance companies negotiate payment rates that vary from hospital to hospital around the state.
Hospitals agree to them hoping to make up for the low rates with increased volume. Manzo noted that the state has no objective estimate of what the insurance carriers make in profits since under the current system insurance carriers audit themselves.
“Insurance carriers hold the purse strings for the market,” Manzo said.
At the same time, insurance companies earn record profits. The first quarter earnings for Aetna this year, said Kelly, were $770 million, a rise of more than 22 percent from the first quarter a year earlier.
Urban hospitals often have fewer patients covered by commercial insurance and a greater percentage covered by Charity Care, which is paid for at only 1 or 2 percent above the cost of Medicare.
CarePoint made national medical history when Bayonne Medical Center, and later its other two hospitals, refused to renew its contracts with insurance carriers until the insurance carriers provided what they believed to be an equitable reimbursement rate. CarePoint has since come to an agreement with Horizon Blue Cross, the state’s largest insurance carrier. The hospital is out of network with some of the other big insurers.
The answer lies in the legislature
The real solution, Kelly argued, is legislative action that would establish a single standard for all hospitals.
Legislative solutions have been proposed in the past, including a package of insurance reforms proposed by Manzo. But the insurance lobby in Trenton derailed it. Among the changes Manzo proposed was for the state insurance department to evaluate insurance claims, not the insurance carriers. He also proposed that the state set the rate for reimbursement.
However, Kelly said, the latest discussions ignore insurance company profits, and focus on hospitals. He said that if the legislature wants to set rates, these must be done for all hospitals, not just a select few, and it must take into account the profits insurance companies are making.
What’s needed is “a system where providers are paid an equivalent reimbursement rate for services rendered in all settings for all patients, and the cost of providing care for our state’s 1.3 million uninsured is shared by all,” Kelly said.
If the system isn’t made fair, hospitals, especially urban hospitals, will continue to fail.
“The current legislative debate regarding out of network has focused on only one aspect of a broken system,” Kelly said. “If you legislate direct rate setting on out-of-network charges or indirectly through arbitration (as is being considered), the legislature will be removing the only aspect of a free market system that providers have to ensure adequate reimbursements. By capping out-of-network reimbursements without ensuring a reciprocal increase in payments for Medicaid, uninsured, and in-network, many urban hospitals will not survive and in CarePoint Health’s case, our hospitals may be forced to close.”
Capping prices could
be a bad move
Apparently bowing to pressure from the insurance lobby, legislators are also looking to prevent community hospitals from making up for lost reimbursements by capping all costs.
CarePoint and other hospitals have used a loophole in the current reimbursement law to help offset some of the shortfall in reimbursements. Insurance companies often have to pay the hospital’s full rates for patients who come through the hospital emergency rooms whether or not the hospital has a contract with the insurance company.
CarePoint’s Bayonne Medical Center has been listed as having the highest prices in the nation for services. While this affects very few patients that use CarePoint hospitals, insurance companies are irate over it and apparently have been putting pressure on legislators to establish caps on services.
The proposed Out-of-Network Consumer Protection, Transparency, Cost Containment and Accountability Act, introduced by Senate Health, Human Services and Senior Citizens Committee Chair Joseph F. Vitale and Assembly Democrats Craig Coughlin, Gary S. Schaer, and Troy Singleton this week appears to close the loophole. The legislation is supposedly is intended to eliminate surprise out-of-network health care charges.
Kelly said that 93 percent of the services CarePoint provides go to undocumented self-paying patients, the uninsured, those receiving Medicaid and Medicare, and in-network patients. This leaves about 7 percent of its revenues to help make up the shortfalls caused by the system.
CarePoint’s core responsibility, Kelly said, is care of the poorest, and this is partly done through the hospital networks’ Neighborhood Health Centers and affiliated physician practices. These act as a safety net. Last year, CarePoint saw 300,000 patients in its network.
“We’re committed to providing the best care we can for residents of our community at the lost possible cost of care,” he said.
Instead of capping prices, the legislature should be focused on establishing a fair system of reimbursements, Kelly said.
“A system with equivalent reimbursements would allow hospitals, physicians and other healthcare providers adequate payments to cover the real costs of providing care while ensuring increased access to both primary and specialty providers for the residents of our state,” he said.
“Regulated and standardized reimbursement rates only work when they apply across the board to all patient encounters. There cannot be a reduction on the commercial payments (whether contracted or out of network) without an equal offsetting increase for the uncompensated care.”
CarePoint, Kelly said, will be reaching out to stakeholders to help build a consensus behind a fairer system.
“We’re trying to stimulate the debate,” Kelly said.

Al Sullivan may be reached at asullivan@hudsonreporter.com.

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