Stanley Feld M.D., FACP,MACE
On the last two blog posts I covered the new paradigm Medicare had in the Federal Register for Hospital reimbursement. The goal was to base DRGs on hospital costs and not hospital charges. The reduction in revenue to certain hospitals would be as much as 33%. Specialty services such as Cardiac, Neurosurgical and Orthopedic services would be much affected. It turns out that 70% of hospital profits are derived from these three services.
“We are on the eve of a seismic change in revenue reimbursement for hospitals with the expected reconfiguration of diagnostic related groups as recalibrated by the Centers for Medicare and Medicaid Services”.
Paradigm Lost: The Strategic Impact of Revised DRG Payments
By Preston Gee, for HealthLeaders News, July 13, 2006
On July 26, 2006 HCA announced that it was going public and being bought out by KKR for 31 billion dollars. However, KKR, the Frist family, and Bain venture capital were going to put up only 5 billion dollars in cash and finance the rest along with the assumption of 11 billion dollars in debt.
The first question in my mind was perhaps KKR did not think this purchase through. KKR is a pretty smart outfit. I was sure they had thought it out from a cash flow standpoint. There is probably something in the new Medicare payment system that they know and we are not considering.
Private hospitals are not tax exempt. Non profit hospitals are tax exempt. Non profit hospitals have a cost advantage from the start because of the tax exemption. Private hospitals have big debt payments. Non profit hospitals have minimal to moderate debt service obligations adding to their cost advantage.
In the buyout, it looks like HCA- KKR is going to assume a debt service obligation of 25 plus billion dollars. The fees paid by Medicare are constantly being reduced. The new DRG payment system is going to be set up to pay inpatient hospital care by costs and not charges. With the new fee schedule it is hard to visualize how the debt will be serviced by KKR. It is worthwhile looking at HCA’s financial statements. If the debt is serviced, how are they going to generate profits for the LPs in the JV fund? Medicare hope is to reduce payments to hospitals for care by 30% of present levels with the new DRG formula.
The only way I can see HCA-KKR remaining viable is if there is a defect in Medicare’s new paradigm of payment for DRGs. The cost of care in the HCA institutions will go up because of the doubling of their debt. If they are paid on their cost of care and not the community cost of care, they will be able to maintain their profit margin while Medicare in effect is servicing their debt. The net result would be an increase in cost to the government. Since private insurance mimics Medicare private insurance payment to HCA-KKR will also increase. The pass through for this increase would ultimately be to the consumer and tax payer to the benefit of KKR.
If I am correct, rather then decreasing the cost of care through efficiency of care and an increased quality of care to decrease complications of chronic disease, we will see an increase in cost of care.
HCA has many hospitals in each large city. Let’s say 50% of the hospital beds in a city belong to HCAs hospitals. If patients do not choose to use HCA’s beds because of the increased hospital costs, then 100% of hospitalized patients will be competing for the remaining 50% of the beds in the city. This will create a bed shortage. This leverage can force the increase in payment for care to HCA. I have not seen one article about the consequences of this buyout to the cost of medical care.
It is just as I said. “Today’s solutions are tomorrow’s problems.”