Providers Coping with Sequestration

Date Posted: July 5, 2013

July 5, 2013 - Despite dire predictions at the end of last year about sequestration’s effects on the healthcare industry, hospitals and providers have taken steps to cope while feeling the pain of reimbursement changes associated with the Budget Control Act of 2011.

Andrew Ritcheson: the sequester is reinforcing lean operations.
Andrew Ritcheson said the sequester is not introducing anything new, just reinforcing the need to operate more leanly.

“The sequester was expected to be extremely disruptive to the healthcare market and the federal space, but it’s been difficult to ascertain where the negative impacts have been,” said Andrew Ritcheson, PhD, senior consulting psychologist and program manager with Dynamics Research Corp. in Andover, Mass.

“It’s not introducing anything new,” he added. “The healthcare space is beholding to do more with less, continuously improving and to deliver safer, more effective and cost-controlled care. The sequester has cast more light on an existing sensitivity and set of operations to make sure we are doing all we can in a value and data-driven way.”

Ritcheson said that healthcare entities must continually evaluate the effectiveness of their programs and make hard choices to improve or dismantle low-performers. There’s nothing wrong with being lean.

A report from the American Hospital Association, the American Medical Association and the American Nurses Association estimated 766,000 healthcare and related jobs could be lost by 2021, with more than 496,000 jobs lost during the first year, as a result of the 2 percent sequester of Medicare spending mandated. For the most part, mass layoffs have not happened.

Ron Seifert: sequestration is causing lower margins for hospitals.
Ron Seifert said even high-performing hospitals have experienced lower margins.

“It is clearly something [integrated delivery systems] were planning for and most worked very hard to do what they could to minimize jobs,” said Ron Seifert, a vice president in the healthcare practice at Hay Group in Philadelphia. “Without a doubt it has hurt them. There are hospitals and health systems that have had to make staffing reductions to meet their budget more appropriately.”

South Nassau Communities Hospital in Oceanside, N.Y., anticipated the sequester cuts and adjusted its budget accordingly. The $400-million operation will lose $2.6 million this year due to cuts associated with the sequester.

“What sequestration forced us to do, along with the other cuts that started with the fiscal year, is start a planning process to shrink to accommodate the significant cuts in our 2013 budget,” said Mark Bogen, senior vice president of finance and chief financial officer at South Nassau Communities Hospital. “In many cases, that’s how hospitals dealt with it.”

South Nassau has curtailed some hiring, bringing on only those new employees truly needed. From April 2011 to 2012, the hospital added 100 employees, but from April 2012 to 2013, it only added 10 people.

To compensate in part for the sequestration-associated loss, South Nassau froze its defined benefit pension plan to eliminate expenses in 2013.

Mark Bogen: has been important to plan for sequestration's effects.
Mark Bogen said South Nassau Communities Hospital planned for sequestration’s effects.

“We did not reduce access to care or programs,” Bogen said. But “we had to reduce a significant benefit to employees.”

Those types of options are a temporary fix and hospitals still need talented clinicians, warned Seifert.

“Taking things away to balance the budget is not a permanent fix,” Seifert cautioned. “A lot of systems are looking at a fundamental shift in their business.”

Physician practices, particularly community oncology practices, also are feeling the pinch. A survey by the Community Oncology Alliance found that 21 percent of practices reported laying off staff, with 38 percent planning to do so if the sequester cuts remain in place through July 31, 2013.

Medicare reimbursement for oncology drugs dropped from 6 percent, plus the average sales price, to 4 percent, which will cost the average independent community oncology practice $250,000 each year, according to global sales and marketing firm ZS Associates in Evanston, Ill.

Ganesh Vedarajan, principal and leader of the oncology and specialty therapeutics practice at ZS Associates, added that some of these drugs may now be reimbursed at a rate less than the cost of the drug. This has forced many oncologists to stop practicing, join hospital systems or send Medicare patients elsewhere for treatment. Vedarajan said he “anticipates tough choices lay ahead for these practices if the cuts stay in place.”

Sequestration cuts are just one of many providers are facing. The confluence of reimbursement changes at the federal and state levels and pressure from commercial insurers and managed care plans create challenges for healthcare providers.

“Even higher-performing hospitals have reduced margins,” Seifert said. “This is a paradigm shift, which isn’t temporary. … It’s going to impact hospitals and health systems in a profound way.”

Bogen estimated South Nassau will lose $100 million in reimbursement during the next decade due to changes associated with the Affordable Care Act and the remodeling of the healthcare system and cuts to medical teaching programs.

“This becomes a cumulative effect, and when you get no relief year after year is when things start to truly fall apart,” Bogen said. “Sequestration looks to be the best of a terrible situation.”

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