Is Our Nation's Health Care System Collapsing?

December 1, 2000

Charles River Hospital, a 62-bed psychiatric facility in Wellesley, Mass., followed the trend of dozens of institutions, medical groups and some insurance companies last June. The hospital filed for bankruptcy.

Charles River Hospital, a 62-bed psychiatric facility in Wellesley, Mass., followed the trend of dozens of institutions, medical groups and some insurance companies last June. The hospital filed for bankruptcy.

By itself, one small hospital's financial woes would not be significant. But, Charles River typifies America's health care system, which many analysts believe is on the brink of financial disaster.

Thirty-five years of federal regulation through Medicare and a decade of radical cost-cutting by managed care companies have left many physician groups, hospitals and nursing homes struggling for survival. Some of the nation's largest health providers have been forced to seek protection in the bankruptcy courts.

" Thirty percent of the nation's hospitals are operating in the red," said Rick Wade, senior vice president of the American Hospital Association, in an interview with Psychiatric Times.

In California, the state medical society maintains a watch list of practice groups and medical groups that are teetering on the brink of collapse. In 1999, 19 groups representing 9,173 physicians filed for bankruptcy, closed their doors or were sold. Through the first nine months of 2000, six more medical groups have filed for bankruptcy, and two more have closed. Another merged, and still one other left its home county.

In New Jersey, more than 2,000 physicians are finally scheduled to begin receiving payments from a state-administered fund set up after the 1998 failures of two of the state's HMOs. Other HMOs have filed suit to block distributions from the fund, which is dependent in part on assessments levied against the industry.

Since the beginning of 1999, 1,857 skilled nursing facilities-more than 10% of the nation's total-have filed for bankruptcy. According to U.S. congressional testimony, almost half of the nursing homes in New Mexico and Nevada are operating in bankruptcy, and 12 other states have more than 20% of their nursing homes operating in bankruptcy.

Not far from Charles River Hospital, once-powerful Harvard Pilgrim Health Care, built on the framework of the famed nonprofit Harvard Community Health Plan, lost its financial battle at the end of 1999, when it was forced into receivership.

University of California, Los Angeles Healthcare acknowledged to the Wall Street Journal that its net income dropped to

5 million in fiscal 2000, down from 51 million two years earlier. The institution has been engaged in a protracted dispute with many local physicians over its efforts to survive through expansion.

Meanwhile, health care providers in California pressured the state's legislature into creating a state department of managed care, designed to serve as a watchdog over the industry. The new agency will have the power to force managed care organizations to pay providers promptly and to arbitrate disputes between providers and third-party payors. The state's hospital association said that its 450 members had more than

1 billion in bills more than 60 days old that were owed by health plans.

In short, the health care system is in trouble. Widespread bankruptcies and financial failures are leading to mergers in some regions and shutdowns in others. Communities are facing the closure of hospitals and nursing homes, and local physicians are questioning the sense in continuing to practice.

Managed care receives a substantial amount of the blame for the dire straits of health care institutions and providers, but it is not the only culprit. Analysts also blame the government's decision to reduce payments under the federal Medicare program as part of the Balanced Budget Act of 1997(BBA). More devastating was the government's decision to recapture money that had been paid under the old rules, money that officials claimed was overpaid by applying the 1997 act.

" Another factor is all of the fraud and abuse investigations," Nancy Peterman, co-chair of the American Bankruptcy Institute's (ABI) Healthcare Insolvency Subcommittee, told PT. " The government is coming in and levying a lot of fines or requiring payback of overpayments. The BBA of 1997 established new rates and then said providers had been overpaid for three years and would have to pay it back. It just wasn't feasible for most of these companies."

Peterman said that the rate of bankruptcies grew so rapidly that the ABI published a handbook on how to handle health care insolvencies. " We saw the government start slashing reimbursement rates for Medicare. But there were also what you would call normal reasons. A lot of health care companies started thinking they needed to get bigger, either by going public or through acquisitions, and then having difficulty integrating the businesses. In some states, nursing homes had too many beds, and some hospitals did, too."

Glenn Melnick, an economist at the RAND Corp. in Santa Monica, Calif., and a professor of economics at the University of Southern California, explained to PT that the wave of bankruptcies and financial instability-like managed care itself-started in California and is spreading east.

" We believe that California is the bellwether and laboratory for the rest of the country," Melnick explained. " Some of these trends are fairly extreme right here in California and have been for the last few years. Now we're seeing similar events in other parts of the country.

" The wave is finally hitting the East Coast shores," he said. " Managed care is starting to take a bite out of the health care establishment on the East Coast, where there still is a lot of excess in the system in terms of higher utilization, higher per capita costs. We're going to see much bigger impacts than here, because California was always a fairly slimmed health care system. It was a low-utilized state. As you move east you find a much richer utilization of services."

Melnick added that a combination of factors led to California's woes.

" In California, we have tremendous competition among health insurance companies. They've been competing on price for the last five to eight years. Their profit margins fell and turned negative in a lot of cases, so they put the squeeze on the providers, both hospitals and medical groups.

" There were two sets of reactions. In the hospital sector, the squeeze hit first. We saw hospital financial performance really deteriorate. Since that time, there have been a lot of mergers and consolidations to maintain leverage, and some leveling out of the financial performance of hospitals. The BBA of 1997 cuts to Medicare and other programs hit hospitals pretty hard. Now the government is considering giving back additional funds.

" On the medical group side," Melnick continued, " We initially had very large medical management companies moving into California, buying practices, consolidating the market, trying to gain leverage with managed care plans. It was a spectacular failure. Most of the companies were not well-managed, not well-conceptualized and never really able to achieve efficiency or pricing goals. One group had literally thousands of doctors who were affected by its bankruptcy, as well as over a million enrollees."

Melnick said that the collapse of MedPartners, an Alabama-based practice management company that was taken over by the California Department of Corporations in March 1999, was " almost like an earthquake or a ricochet. It broke up into a lot of smaller groups. A number of them are still floundering. The situation hasn't yet stabilized. We continue to see additional pressure and the failure of additional medical groups in the state."

Practice management companies, like MedPartners, were formed by outside investors to provide doctors with some leverage in dealing with managed care companies. By combining several regional groups of physicians, they were able to negotiate capitation payments for large patient populations.

A Kaiser Family Foundation briefing paper noted, " Capitation payments...generated higher net revenue for many of these groups than what they had received through fee-for-service reimbursement, since larger medical groups could retain greater savings from their utilization management practices."

When the pressures for cutting costs swept through the managed care companies in the early 1990s, the practice management companies bore the brunt. The Kaiser report concluded, " Increasing numbers of managed care enrollees and lower capitation payments has made full-risk contracting a high-risk venture for many provider groups....The insolvency of physician organizations may jeopardize the quality of care patients receive and threaten the stability of the health care system."

Peterman explained that the cumulative effect of managed care and government reimbursement cuts has been to shift risk from the insurance companies to providers. " Normally a company's cash flow is impacted by its relationship with a lender, such as a bank. The federal government also is putting cash into these companies. If they change the rates they're paying, it's like you're losing a loan. You have that much less. With the BBA of 1997-and, before that, the new model of managed care-all the risk is being shifted away from insurance companies and onto physician practice management companies, which were getting capitation payments. With the cuts, the capitation payments were not high enough, so the companies weren't able to service all their enrollees. That change, that risk-shift, also impacted the industry."

Wade argued, however, that there is a more fundamental problem in treating health care as a traditional business. " We're not an industry," he stressed. " We don't manufacture anything. For the most part, we don't choose the hours at which we operate, and some of our customers don't have any money. We're social institutions that have a strong business imperative to operate well and profitably-even nonprofits, which have to stay in the black-to operate in a business-like manner. We operate many services that lose money in our communities and cross-subsidize with services that pay well.

" Meanwhile, every level of government is trying to find a way to pay us less. The insurance companies and the managed care companies use three strategies to save money: low pay, slow pay and no pay. They can do this because they know a hospital has an obligation to stay and serve its community and to solve these problems. Insurance companies and managed care companies can move in and out of markets at will. Hospitals don't have that option, nor would they want to."

" Physicians are severely impacted," said Peterman. " In a lot of these cases, doctors have contracted with the practice management companies or sold their practices outright. They really own nothing. They're supposed to be getting these payments back, but the payment streams are going to be drying up. It has been very tough on the physicians."

Melnick agreed that there is not much optimism for the immediate future. " For doctors, it is not a rosy picture. To the extent managed care does move across the country, it reduces utilization of services. That in turn reduces the demand for providers giving those services. The demand for services will go down while supply, in the short run, is relatively fixed. Physicians will continue to see little or negative growth in incomes, depending on the local situation. A number of physicians' associations have proposed legislation to allow doctors to collectively bargain because they see the trend continuing and maybe accelerating if managed care gets steam across country."

Ultimately, most experts believe government will have to step in to solve the financial woes of the health care delivery system. Wade said, " A number of people acknowledge the scope of problem, but the level of agreement that you could get on the scope of a solution is hard, because it could take you toward rationing and some other things that are very difficult to develop a national consensus on. We don't have a national health program at the moment. We're careening without a direction. Is it national health policy that we should have coverage for everyone, like a national health insurance? That's beginning to be talked about as a positive, but there's not much support for it yet."

Peterman also pointed out another group that could be impacted by the financial crises in the health care system. " In a bankruptcy, the one group that's not represented in these cases are the patients," she noted. " There have been a lot of controversies over that issue. If a company is in bankruptcy, if it is no longer paying the physician the capitation amount, is the physician no longer required to see patients? The patients have no standing in these cases."