Hospitals that treat Medicare beneficiaries may soon pay a price for reducing their costs.

If Congress and the Clinton Administration decide to endorse a recommendation from the agency that advises Congress on health-related issues, the government will impose a multiyear freeze on Medicare fees for inpatient treatment.

Pointing out that hospitals have succeeded in reducing the per-patient treatment costs by just over 1 percent a year for 1994 and 1995, the Prospective Payment Assessment Commission is urging Congress to halt through 2002 the annual inflationary increases that have been an integral part of the diagnosis-related group (DRG) payment scheme that has governed the fiscal relationship between hospitals and the federal government since 1984.

The average hospital profit margin was up to 7.9 percent in 1995, from just 1 percent two years earlier. Profit margins are at their highest levels since the third year of the DRG reimbursement plan, when they were just under 9 percent. Hospitals affiliated with major medical schools are enjoying some of the largest profit margins of late, in part because they are eligible for Medicare payments tied to their training functions. In contrast, the commission reports, about 39 percent of hospitals show a net loss on their inpatient Medicare services, though this percentage has been declining since the advent of DRG's.

For 1998 alone, such a proposed freeze on Medicare inpatient reimbursement rates would save the government $2 billion; savings through Fiscal 2002 would be about $10 billion, the commission estimates.

This route for reining in Medicare's costs may turn out to have considerable appeal to both branches of government because it would not directly take money from the pockets of beneficiaries and would impact fewer Americans than a boost in Medicare premiums or copayments or indexing premiums to income.

This strategy, however, still leaves the Medicare budget far short of the reductions both the Clinton Administration and Congress have vowed to enact and will have to be accompanied by other cost-saving tactics to head off the Medicare funding disaster that almost all parties are predicting for sometime in the next century when the nation's baby-boom generation reaches age 65. While 1996 Medicare spending was $194 billion, the Congressional Budget Office (CBO) recently estimated that it will balloon to more than $3 billion in 2001 and $469 billion in 2007.

The White House has been talking about identifying approximately $100 billion in Medicare savings over five years, and the Republicans in Congress have been promising even larger savings.

In addition to the hospital fees, many economists and health officials have identified provider and HMO reimbursements as likely targets for government cost cutters. The government now pays HMO's 95 percent of what it would have cost to treat a beneficiary who had remained in the fee-for-service system. The Clinton Administration has suggested a reduction to 90 percent. HMO's now enroll about 12 percent of Medicare beneficiaries; the CBO expects that to nearly double by 2002. The American Medical Association is among those urging a boost in the eligibility age from 65 to 67 as a way to save Medicare substantial dollars. Home health care, one of Medicare's fastest-growing expense categories, is another area in which policymakers are taking a hard look at major budget cuts.

The Clinton Administration is also committed to expanding the range of managed care choices available to Medicare enrollees, Health Care Financing Administration director Bruce Vladeck told a Congressional health subcommittee in February, as a way to make alternatives to fee-for-service medicine more appealing to beneficiaries.

(Psychiatric News, March 7, 1997)