Obama is Making Big Changes to Medicare


Beginning today, almost 800 hospitals across the country will be impacted by the Obama Administration’s change to how Medicare pays for some of the most common health care procedures.

This change will create “bundle payments” for hip and knee replacement procedures – meaning hospitals will receive just one flat-rate payment for the costs associated with a patient’s surgery and recovery. This represents a significant move by the Obama Administration, which claims that bundle payments will help curb the costs of health care for those 65 years or older.

But not surprisingly, many hospitals are unprepared for this massive transition– meaning there could be big problems down the road.

What exactly is the change?

While this change seems simple, it will have big consequences, and could cause a ripple effect that impacts consumers.

The Center for Medicare and Medicaid Services (CMS) currently allows hospitals and health care providers to submit separate bills for surgeries and recoveries. This often makes sense, given that recovery times and costs can vary greatly from patient to patient. While some patients are able to recover quickly (and inexpensively) at their homes, many others need to stay in the hospital or at a rehab clinic for several days. Submitting separate bills allows providers to be reimbursed for all the services they perform, and all of the costs they incur.

But starting today, Medicare will be bundling the payments it sends to hospitals for knee and hip replacement surgery, and paying a flat-rate fee for all the surgical and recovery services.

So, for 90 days after a patient’s surgery, the hospital will be responsible for all the services performed on a patient. If the cost of all those services is less than the flat-rate amount, the hospital receives the difference from CMS. If the cost is more, the hospital will be forced to pay the difference to CMS, and reimburse them for the excessive costs.

Unfortunately, many hospitals have not started preparing for this change, and have failed to develop new care models. According to experts, many hospitals will be unprepared for these new payments, and have done very little to control for costs. They run the risk of continuing with their expensive care, and then owing a significant amount of money to the federal government.

This would force them to either raise prices in other areas, in order to increase revenue, or decrease their spending, and use these savings to pay back the federal government. All of this could not only result in higher prices for patients, but it decreases the quality of care, compounding the widespread problems already facing our health care industry.

What does this mean?

To put this payment change into perspective, imagine that the amount that Medicare pays for one of these surgeries and all related procedures is X dollars. No matter how much physical therapy a patient receives, or whether the patient goes to a rehab clinic, a skilled nursing home, or just goes home to recover, the hospital is only given X dollars back for the costs related to these services.

The actual amount that the hospital spends on care will be called Y. It follows that the hospital would want to minimize Y, in order to ensure that X – Y is as large as possible, and that the hospital continues making money.

This creates a tremendous incentive to shift post-operative patients to low-cost care, or send them home as soon as possible. It encourages the hospital to avoid costly recovery services and procedures, unless they are absolutely necessary. It also encourages hospitals to put off recovery procedures until after the 90-day window has passed – so that they can be billed separately and not fall under the flat-rate fee.

Admittedly, all of this does encourage hospitals to cut costs, and be more efficient. But it also represents a move away from a free-market system where there is a direct fee for services provided. And rather than having a transparent system with patients responsible for the costs, we have even more of a big-government oriented system that is based upon time, rather than dollars.

But hopefully these hospitals– and their patients—are prepared for this big transition, and are able to cope with Obama’s Medicare changes. If not, they could be responsible for big payments to the federal government, which would only make our health care system even more expensive.