Obamacare’s Structure Leading to Hospital Cuts, Experts Say

Indiscriminate payment cuts, Medicaid expansion cutting into hospitals’ bottom line

Doctor listens to patient's heartbeat / AP


The Cleveland Clinic’s announcement this week that it is reducing its payroll to cut costs in response to Obamacare reveals the squeeze that President Barack Obama’s signature domestic legislation is putting on doctors and hospitals, health care experts say.

The Cleveland Clinic is ranked as one of the best hospitals in America and has been a model of health care innovation, with both presidential candidates praising it last year in a debate.

The Cleveland Clinic tried to reduce its expenses and improve quality through several measures in anticipation of the full rollout of the Affordable Care Act, commonly called Obamacare, according to a statement released by the hospital on Wednesday.

However, these efforts failed to cut enough before Obamacare rolls out this fall.

“Although we have made progress, we need to further reduce costs to the organization by $330 million in 2014,” the hospital said in a statement. “We are carefully evaluating all aspects of our system to accomplish this. Some of the initiatives include offering early retirement to 3,000 eligible employees, reducing operational costs, stricter review of filling vacant positions, and lastly workforce reductions.”

The Cleveland Clinic is not alone. Hospitals across the country are laying off workers and eliminating services because of Obamacare and other budgetary constrictions, as the Washington Free Beacon reported previously.

“I think we’re going to see a lot more reduction in labor force at hospitals because of Obamacare,” said Sally Pipes, a health care expert at the Pacific Research Institute.

One major reason is mandatory cuts in Medicare reimbursement rates under Obamacare, said James Capretta, a health care expert at the Ethics and Public Policy Center. Medicare, the government’s health insurance program for the elderly, covers over a fifth of health care costs in the United States, meaning it makes up a significant portion of hospital revenue.

The government reimburses hospitals for Medicare patients at a fixed rate based on the diagnosis, and the government increases these rates each year to cover the rising costs of health care. The federal government cuts these annual increases by about 1.1 percent under Obamacare, Capretta said.

“This is the main reason why the Cleveland Clinic and others are going to have to tighten their belts,” Capretta said.

Obamacare is also increasing the number of people who are receiving insurance from the government, which will reduce hospital profits, noted Avik Roy, a health care policy expert at the Manhattan Institute.

The costs of Medicare and Medicaid, the government’s health insurance program for the poor, have continued to rise over the years, making reform of the programs necessary. However, the programs are hard to touch politically because they are so popular.

As a result, the federal government simply pays doctors and hospitals less than private insurers for the services they provide. Today, for every dollar a private insurer pays a doctor or hospital, Medicare pays 70 or 80 cents, and Medicaid pays 50 cents or less (with the precise rates varying by the specific area), Roy said.

“This has squeezed the system,” Roy says—and Obamacare exacerbates the problem by expanding Medicaid, increasing the number of patients that hospitals and doctors will see who rely on underpaying federal insurance.

This Medicaid expansion formed a large part of the administration’s initial estimates for the new people to whom the law would provide coverage. A campaign to expand Medicaid is currently underway in the Cleveland Clinic’s home state of Ohio.

The reduction in Medicare reimbursement rates alone will hurt hospitals dramatically, Capretta said. By the end of the decade, 15 percent of hospitals will have to drop out of Medicare in order to stay in business, actuaries predict. A quarter of all hospitals will reject patients with Medicare by 2030.

“This is just the tip of the iceberg for those kinds of cuts coming down the pipes,” Capretta said.

“If that actually happens over the next five, six, seven years, then [Medicare] enrollees, seniors citizens, are going to have a harder time accessing hospital services when they need them,” Capretta said.

The quality of medical care could also go down under Obamacare, experts said.

Obamacare emphasizes Accountable Care Organizations (ACOs), which are networks of doctors and hospitals that coordinate care in order to reduce costs, said Pipes. The goal of ACOs is for insurers to pay for quality of care, and as a result, the government will only pay a certain amount for services—and penalize doctors and hospitals if they go over that amount.

“Hospitals are going to be rewarded only if they keep costs down, so they’ll be looking for ways to reduce costs,” Pipes said.

The result could be rationed care so doctors and hospitals can keep their costs down, Pipes said. She compared ACOs to Health Maintenance Organizations (HMOs), which Americans have rejected in the past.

Capretta also noted the shift toward ACOs, although he did not predict that care could be rationed under them. Because of Obamacare’s incentives, hospitals are buying up independent doctors, which is reducing the overall number of independent doctors in America, Capretta noted.

The cut in the annual reimbursement rate could also hurt the quality of care, Capretta said, because they are universal and do not distinguish between good and bad care.

“It’s not really clear that this is going to result in a great efficiency gain across the system,” Capretta said.

Andrew Evans   Email Andrew | Full Bio | RSS
Andrew Evans is an assistant editor at National Affairs and a former reporter for the Washington Free Beacon, where he covered government accountability and healthcare issues.

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