California Hospitals Reducing Costs

California hospitals are using Medicare reimbursement to set cost base. What are you doing?

In healthcare, like in many other industries, what happens in California tends to happen in the rest of the country shortly after that. It seems that a number of leading hospitals in California have decided that their cost base should be the same as Medicare reimbursement. In other words, they want to have a low-cost operation that “breaks even” on Medicare and that they would make their margin on commercial and employer-based reimbursement. Given that Medicare reimbursement is significantly (25 to 30%) below commercial rates, this requires California hospitals to run lean operations.

While this philosophy is an admirable one, Medicare reimbursement will likely be reduced as a result of the coming healthcare reform – as it is one of the very few levers, if not the only one, that the Federal government can pull to reduce healthcare costs.

Hence, the prudent thing for hospitals to do is to use the current Medicare reimbursement rates as a starting point but set the goal at some lower percentage reflecting best estimates of how much further reduction is the Federal government likely to impose on Medicare.

I would be very interested in other’s thoughts about this philosophy, likely further reduction in Medicare reimbursement and what strategies are being put in place as organizations contemplate the implications of reform?

Saad Allawi