During the 1940′s employee insurance became the standard model by which health care clients begin to pay their medical bills. Offering employee health insurance became a primary method of attracting employees in part because it was an inexpensive benefit. Another reason employer’s began offering medical coverage was because during World War II employers were barred from raising wages. Employers needed to attract good employees and offering health coverage was one of these methods. Under this fee-for-service model it was still a standard for clinicians to receive payment of services rendered. However, Medicare was enacted in 1965 and signed into law by the president of the United States then, Linden Johnson. Medicare provided fee for service or charge based payments until 1989. During the 1970′s Medicare payments were especially generous to hospitals, with patient deductible for Medicare part A, which covers inpatient hospital visits being 40 dollars a year and the part B, or clinical insurance portion being 3 dollars a month.
With most health insurances, employers must pay a fixed amount toward the employee benefits even if the employee has not used many health services. This was too the case with employees and the premiums that they must pay each month. Because healthcare originally was so inexpensive, health care providers, health care insurers and patients did not need to worry about costs, thus consumption drove prices ever-higher. As cost skyrocketed health insurers sought to control costs and the annual increases in them. Everyone, including health insurers, employers, Medicare and Medicaid all were forced to adjust their billing methods to control expenditures.
With Medicare and Medicaid in the book Health Economics and Financing, the author Thomas Getzen writes that the relative freedom that doctors and hospitals had to select procedures and bill for them was replaced by a much more ridged oversight and price control structure run administratively. In 1983, the prospective payment system for Medicare and Medicaid replaced the previous reimbursement processes. The new prospective payment system provided health care facilities reimbursements based on performed procedures based on diagnosis related groups or DRG’s. What was significant about the new billing procedures was that the reimbursements for procedures were pre-determined amounts without flexibility. In 1985, these reimbursement levels were capped for inpatient hospital care. In 1989 limits to balance billing were enacted further limiting the ability of hospitals and doctors billing flexibility to cover costs incurred. In 2005 the Medicare deductible for part A was 912 dollars and the Part B monthly premium was 78.20 dollars.
Medicare and Medicaid adopted the ICD-9-DM and ICD-10-DM coding structure which unlike the fee for service billing methods before paid standardized rates, which were considered usually and customary. These rates also began to be bundled where separate services that had been billed separately under the fee for service were now billed as one service dependent on the types of procedures performed during the treatment of the client. During the late 1970′s and early 1980′s with the rise of health maintenance organizations, and employee/employer based insurance which was managed, health management organizations began to adopt the ICMS-9 codes that Medicare and Medicaid had implemented years earlier. They did this in large part because of the IDC-9-CM code simplicity and the cost savings involved with the way Medicare and Medicaid billed using IDC-9-CM codes. Medicare and Medicaid began to cut payment schedules during the early 1980′s as part of the budget reconciliation act; this coupled with the surge in HMO contracting with healthcare customers, caused a recoiled defensive reaction by Hospitals and other healthcare facilities.
Mergers of health care insurer’s began to exercise market advantage and cut reimbursement rates. Hospitals and other health care agencies did not reduce the amount of services they provided to compensate for the reduction income hospitals did receive. What did occur was the bending of services to meet contractual obligations. Physicians viewed these payment cutbacks, the bundling of services and these new management techniques as a threat to their ability to be autonomous, with the way they treated patients. This set off a wave of healthcare facility mergers, where hospitals in regional areas combined under single governance, and where hospitals combined and merged with other health care facilities such as clinics and outpatient firms in order to broaden their reach and protect what they viewed as now compromised payment streams. This along with swift advances in the technology of patient treatment created complexity that hospitals were not accustomed to in the past.
The waves of new medications, life saving machines and the rising costs of health care premiums that employees and privately insured individuals now had to pay in the late 1980′s and continuing, forced a poor mix of ever newer technologies with ever sicker patients together. The quantity of Medicare patients increased, but it became less profitable to treat them once DRG’s were implemented. This was because fewer people could afford health care insurance and so either qualified for the lower paying Medicare or Medicaid insurances, due to the DRGs billed through the ICM-9-DM codes, or went without insurance all together. In all three of these outcomes the persons admitted to hospitals were sicker and required more time in the hospital, greater technology including medications to become better, and a greater number of doctors and nurses to have them stabilized. This is because many were poorer, which was why they qualified for Medicaid, were older, which would by why the qualified for Medicare, or failed to go to the doctor when needed, until their health became critical, which was because many did not have health insurance.
Poor payment schedules and the burgeoning class of elderly baby-boomers created ever rising hospital admits, with the same or less hospital bed numbers (some due to the earlier merging) and fewer nurses, in part because of a shortage doctors or nurses, in part because of healthcare facilities lack of ability to pay an increased staff size. The AMA estimates that in the next 15 years, because of the retirement of baby-boomers, there use of Medicare and the reduced rates of Medicare payments when they use healthcare services, there will be a shortage of up to 100,000 doctors and nurses in the next 15 years. Medicare DRGs been an effective method of controlling government expenditures and was adopted by many other health insurers thus cost controls were effective across the health insurance spectrum. An AMA survey found that the many other insurers would be using the Medicare conversion ratios enacted at the time in 2007, which cut up to 20 percent of the previous Medicare rates.
All this history combined to form hospital systems where a large number of very sick patients entered the hospital, with too few clinicians to treat them, too much technology that was poorly implemented and integrated together, with a lack of funds with which the health care systems could use to rectify these issues. Most of a hospitals expenses are in the form of labor costs, up to 75 percent, thus when revenue declines cutting jobs is essential. This is politically is unpopular. With the cuts in Medicare and Medicaid, cost shifting could not continue to occur whereby care for charitable cases formally had been paid for with Medicare funds. With the explosive rise in health care costs and the breaking of the social consensus of taking care of the indigent, whereby the view of paying for oneself and no other cream skimming began to occur. This caused a rush of physician entrepreneurs to take the healthiest patients with the best coverage to specialized facilities outside of inner city hospitals. This left inner city hospitals with no ability to cost shift for the poor and needy. This all resulted in an increase in medication errors because too many patients with multiple needs and multiple medication needs required more hands than are available, with nurses and doctors using half implemented technologies. Hospitals in Boston, Cleveland, Syracuse, and Phoenix among others have had such emergency room overcrowding that they have had to close their ER’s several times a week and divert ambulance patients to other facilities. This has caused serious threats to how patient’s illnesses are treated in these hospitals.
Physicians have begun to rebuke insurers for cutting reimbursement rates. In 2002, the Blue Ridge Emergency Group in South Carolina dropped its contract with Blue Cross and Blue Shield of South Carolina. They faced dropping payments for services while Blue Cross of South Carolina made 50 million dollars in profit in 2000. Those insured by Blue Cross of Pennsylvania that year faced soaring costs while paying, unadjusted for inflation, 9% less for care than in 1993. Those doctors and physicians who worked for hospitals in the Medical Mutual network but were not a part of their HMO reimbursements were cut by up to 50%. This was enacted retroactively, while those in Medical Mutual’s network accepted the cuts in expectation of Medical Mutual’s market influence in moving patients toward the doctors and health care facilities in their network.
Unfortunately, the lowering and leveling of health care service reimbursements had been accelerating since 2004, and before with Medicare and Medicaid DRG payments. Tufts a teaching hospital in Massachusetts has lost 25 million treating Blue Cross patients in from 2005 to 2009. Tuft’s officials have remarked that the hospital has been funded significantly less than other such hospitals, it barely survives and must end its contracting with Blue Cross. Many such hospitals that are not large enough to force their positions for higher reimbursement rates have been hemorrhaging money because of deregulation and the treatment of many more Medicaid patients, which have much lower reimbursement rates than HMO or PPO employer based insurance.