Putting Lids on Medicare Costs

By Claudia Wallis.

A new federal program tries to make hospitals more efficient

In recent years the nation's Medicare system has been moving on a high-speed course toward financial disaster. Inflation, the high cost of new medical technology and the rapid growth of the nation's elderly population are draining the resources of the program, which pays the hospital expenses of people 65 and over. By 1988, if there is no letup in the rise in medical costs, Medicare's $8.8 billion hospital insurance trust fund will be depleted. By 1995 it would be in the red by as much as $400 billion. Last March, in a desperate effort to stem the hemorrhaging of Medicare dollars, Congress, working with the Administration, approved a major and controversial reform of the program. The new rules went into effect last week. They are, says Health and Human Services Secretary Margaret Heckler, "the most important improvement in the history of Medicare."

The reform was designed to correct a fundamental flaw in the system: the Government had set no limit on what it would pay for hospital care. "The incentive was perverse," explains Carolyne Davis, head of the Health Care Financing Administration, which runs Medicare. "The more hospitals spent, the more we paid." The new regulations place a ceiling on the amount a hospital receives for treating each ailment. Upon admission, Medicare patients will be assigned to one of 467 newly de fined "diagnosis-related groups," or DRGs, home on the nature of their jeopardizing Each DRG carries a specific rate of reimbursement. If the hospital treats the patient for less, it can keep the profit; if it charges more, it must absorb the loss.

Reimbursement rates will be adjusted annually to reflect inflation and medical advances, and will vary regionally to accommodate the higher costs of running hospitals in urban areas. (The rate for a simple appendectomy in Chicago: $3,825; the same operation in Lawton, Okla.: $2,773.) Psychiatric hospitals, long-term care facilities and rehabilitation centers are exempt from the new regulations. So are hospitals in Maryland, New Jersey, New York and Massachusetts, which have their own cost-containment programs.

To ease the adjustment of hospitals to the new arrangement, which is called the prospective payment plan, the Government will phase it in over three years. In ;he first year, Medicare reimbursements for each patient will be based 75% on the hospital's usual cost for treating the ailment in question and 25% on the new federal rate. One year later, the formula will be 50/50. After three years, hospitals will be reimbursed entirely on the basis of the federal rate.

Medicare currently accounts for 40% of revenues at the average American hospital, and most of these institutions will be forced to become more efficient. The American Hospital Association has been running seminars in recent months to teach administrators how to cope with the new rules. Though the A.H.A. generally supports the regulations, it also believes that they will radically alter the nature of care. Predicts A.H.A. President Alex Mc-Mahon: "Hospitals may tend to specialize in the services they perform most efficiently." In areas where there are too many maternity beds, for example, some hospitals may drop their obstetrics units. Hospitals that lose money on such complicated procedures as open-heart surgery may refer cardiac patients elsewhere.

For doctors, the new rules mean a crash course in the one aspect of medicine that most never learned in medical school: finance. Over the past few months, hospitals have been distributing pamphlets to physicians, detailing the exact cost of every test, operation and medication, and offering instructions on how to cut out unnecessary expenses. Says Ben Bronstein, communications director of the Hospital Association of Pennsylvania: the Hospital Association of Pennsylvania: "Doctors are going to have to bite the bullet and ask themselves if they really need all those tests." Physicians who routinely order nose-to-toes X rays or prescribe the latest and most costly antibiotic may be taken to task by department heads. Those who refuse to repent, warns A.H.A. President McMahon, may eventually lose their admitting privileges.

Nearly everyone recognizes the need for greater efficiency in U.S. hospitals. The challenge is to achieve this without jeopardizing patients. The American Medical Association fears that some hospitals will cut back on vital services or refuse to admit those who cannot be treated profitably. Part of the problem, notes Karen Davis, a health economist at Johns Hopkins, is that there is no allowance for the complexity of a case: "For example, you may have two patients with a broken hip, but one could have senile dementia and need a high level of nursing care." Under the new Medicare laws, hospitals would be reimbursed the same amount for both patients. Categorizing each patient into a single DRG may also present problems. Patients over 75, points out Gerontologist Laurence Rubenstein of U.C.L.A., "have an average of eight to ten chronic health problems." Rubenstein and others also worry lest patients be sent home prematurely, only to return under another DRG. This, he says, would cost the Government more than if patients had been thoroughly cared for during their initial stay.

Perhaps the greatest concern is that hospitals that are unable to turn a profit under Medicare guidelines will shift their costs to patients covered by private insurers. Blue Cross and Blue Shield of Kansas have already headed off that possibility by establishing their own statewide prospective payment plans, to begin in January. Other private insurers are expected to follow suit.

No one knows how much will be saved under the new program. The similar plans now in force in four Eastern states have kept the inflation rate for hospital costs 2% to 4% below the national average. Even if the program does save $100 billion by 1995, as the Congressional Budget Office has projected, the Medicare trust fund would still be $300 billion in the red. An HHS advisory council is now looking into more radical surgery to save the ailing system. The prognosis, says former Indiana Governor Otis Bo wen, who heads the council, "is very bleak," and the treatment "will be very painful." --By Claudia Wallis.

Reported by Anne Constable/Washington and Sheila Gribben/Chicago

With reporting by Anne Constable, Sheila Gribben This file is automatically generated by a robot program, so viewer discretion is required.