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Hospital Industry Pledges Cuts to Help Cover Uninsured

The industry players are bargaining with the Obama Administration for financial deals in return for their qualified support of whatever reform legislation comes out of Congress. First, it was the pharmaceutical industry, which promised $80 billion in lower costs over 10 years--mainly to help seniors who wind up in the "doughnut hole" of the Medicare prescription drug benefit. Now, the hospital industry has said it will accept $155 billion in government reimbursement cuts--a better deal than the $200 billion that President Obama recently proposed. The money is expected to help pay for coverage of the uninsured.

About $100 billion of that amount would represent lower Medicare and Medicaid payments to hospitals. Another $40 billion would be saved by paying hospitals less for caring for the uninsured--but only after the number of people without coverage drops as a result of the reform legislation. Nevertheless, some safety-net hospitals fear that this cutback will hurt them.

Another quid pro quo concerns the so-called "public option." Hospital representatives have reportedly been assured that if the final reform package includes a public plan, it will pay them more than Medicare does. Hospitals have long complained that Medicare and Medicaid reimburse them less than it costs to provide care.

The amount that the hospital associations--including the American Hospital Association, the Federation of American Hospitals, and the Catholic Health Association--have committed to saving is pitifully small compared with the amount spent each year on hospital care. Out of the $2.378 trillion devoted to health care in 2008, $746 billion, or nearly a third, went to hospitals. In 2018, Medicare's actuaries project, hospital care alone will cost $1.374 trillion. To put it another way, the $155 billion that the hospitals promised to save the government over 10 years is less than the projected increase in their total reimbursement between now and 2013.

On the other hand, many hospitals have fallen on hard times. Standard & Poors reports that hospitals' median operating margin dropped to 1.8 percent in fiscal 2008 from 3.5 percent in fiscal 2007; moreover, 70 percent of the surveyed hospitals closed their books on September 30, before the effects of the recession had been fully felt.

Hospitals' S&P ratings also reflect the reversal of fortune. In 2008, S&P downgraded 60 hospitals and health systems and updated 15. This year, 23 have been downgraded, and only four upgraded.

On balance, the Administration's deals with the drug companies and hospitals--probably to be followed by similar bargains with insurers and physicians--are more show than substance. The idea seems to be to minimize opposition and build support for the Democratic reform agenda while avoiding--or perhaps postponing--the hard decisions that will be required for effective healthcare reform.