CBO issues grave warning to hospitals. Here is what experts have to say.

Topics: Hospitals, Providers, Care Delivery, Care Models, Finance, Payments and Reimbursement, Payment Reform

By Heather Drost, senior editor, and Joe Infantino, senior staff writer

A recent Congressional Budget Office (CBO) analysis paints a bleak financial picture for hospitals that struggle to improve productivity or otherwise reduce cost growth—but experts say there are steps hospitals can take to survive.

For the analysis, CBO examined the potential effects that scheduled cuts to Medicare payments, the Affordable Care Act's insurance expansions, and the aging of the population would have on hospitals' bottom lines in 2025 under various scenarios.

CBO findings

CBO found that most acute care hospitals will have negative profit margins in 2025 unless they improve productivity or otherwise reduce cost growth.

As a benchmark, CBO estimated that the roughly 3,000 hospitals included in the analysis had an average profit margin of 6 percent in 2011, and that 27 percent of the organizations lost money that year.

In one scenario, CBO projected that if hospital productivity grew at the same rate as the economy—or about 0.8 per year—through 2025, the average profit margin would fall to 3.3 percent and 41 percent of hospitals would lose money in 2025. Under this scenario, CBO said hospitals would have to increase revenue or reduce costs by 0.2 percent per year to have the same average profit margin (6 percent) in 2025 as in 2011.

Under a second scenario, CBO projected that if hospitals improved their productivity by only 0.4 percent per year through 2025, the share of hospitals with negative profit margins would increase to 51 percent, while the average profit margin would be about 1.6 percent.

In the third scenario, CBO projected that if hospitals did not increase their productivity or reduce cost growth in other ways, in 2025 average profit margins would fall to negative 0.2 percent and 60 percent of hospitals would lose money.

The CBO researchers wrote, "The main implication of our analysis is that the magnitude of [hospitals' financial] challenges depends crucially on whether and to what extent hospitals can improve their productivity over time—that is, whether they can produce the same output (treatments and procedures) at the same level of quality with fewer inputs."

Ways hospitals can mitigate the effects

In an email to American Health Line, Katherine Steinberg, vice president at Avalere Health's Center for Payment and Delivery Innovation, said that productivity improvements alone "can probably not be relied on to limit anticipated cost growth."

She said, "Hospitals will likely need to employ new models of care that allow them to leverage current resources to serve more patients while at least maintaining quality of care."

CBO in its analysis also suggested that hospitals adopt new payment models, such as accountable care organizations or bundled payments, to improve their finances. "However, other providers participating in such models could also seek to generate savings by avoiding or limiting hospital admissions, which could affect hospitals' finances adversely," CBO cautioned.

Mitch Morris, vice chair and global leader for Deloitte's Health Care Sector, told American Health Line that "ACOs as we originally did it likely will not be helpful." However, he noted that under MACRA "physicians are being asked to use alternative payment models" to provide comprehensive care and "most of those things include hospitals." He cited bundled payments for a knee replacement as a good example of a risk-bearing model that could include multiple players, including those in hospital settings.

In addition, Steinberg said that policymakers must ensure that incentives are properly "aligned so that hospitals are financially encouraged to reduce unnecessary utilization while improving quality and access."

While "new payment models are helping to align incentives that could ultimately bring down the total cost of care," Steinberg noted that "most hospitals are still reimbursed for volume, and not value." She said, "Payment model changes that can encourage aligned behavior around avoiding overuse … and the unnecessary choice of higher cost services will be a start."

Chip Kahn, president and CEO of the Federation of American Hospitals, in a statement called for additional changes, arguing that "embedded Medicare cuts are taking a punishing toll on the hospitals that serve all of us." He wrote that the analysis is a "show-stopper and should give policymakers pause as they consider the future of hospital care" for U.S. residents.

A new role for hospitals?

Ultimately, CBO said that "if hospitals are unable to respond effectively to the increased financial pressures, some hospitals may close or consolidate with another hospital or hospital system."

Morris agreed with this conclusion. He argued that for hospitals to survive, their roles must change. "If I were only a hospital I don't know how I would stay in business" because "it would be very difficult to have a sustainable margin with the pressures being pushed," Morris said. An acute care business can achieve only so much productivity, he added.

However, Morris speculated, "If hospitals did not need to generate a profit or margin because that margin comes from other activities" within a health system, such as ambulatory care centers or physicians' offices, "then as a whole that works out as a business entity."

He said, "To me, by 2025 hospitals will be a commodity and most of health care will occur outside of the hospital, because health systems will, and do, control some of those other pieces."