Medicare Cuts Place Hospitals on Critical List : Many Rural Facilities That Treat Poor Patients May Be Forced to Close

WASHINGTON — Nearly half of the nation’s 6,000 hospitals lost money treating Medicare patients last year, and many of the financially battered smaller hospitals in rural areas are in danger of shutting down, federal officials said Monday.

“Some of these hospitals cannot provide much better care than a first-aid station” and should be closed for both poor service and financial problems, Richard P. Kusserow, inspector general of the department of Health and Human Services, told a House Budget Committee task force.

Congressional efforts to control spending for Medicare have cut steadily into hospital profit margins, Kusserow and other officials said. Some 43% of the hospitals lost money on their Medicare admissions during fiscal 1987, he said.

The big teaching hospitals, institutions usually located in major metropolitan areas, enjoyed profit margins of 16% on their Medicare cases in 1987, while rural hospitals suffered an average loss of 1% on the same category of patients, said Glenn Hackbarth, deputy administrator of the Health Care Financing Administration, which runs Medicare.

The 1987 financial results, disclosed for the first time on Monday, underline the hard choices facing members of Congress, who are worrying about preserving the quality of service to the 32 million Medicare beneficiaries without worsening the federal budget deficit. Medicare, which pays the bills for those over age 65 and the disabled of all ages, costs about $80 billion a year, and its total spending has been rising faster than the general rate of inflation.

The hospital industry is complaining vigorously that hospitals have been short-changed by Congress and deserve a bigger annual increase for inflation. However, in its efforts to deal with budget austerity, Congress has provided each year an increase less than the cost of inflation.

“To suggest that the only problem is that the government does not pay enough is unfair,” said Rep. Fortney (Pete) Stark (D-Oakland), chairman of the health subcommittee of the House Ways and Means Committee. “The cry of wolf is loud,” said Stark, arguing that the industry is inefficient at controlling costs. “An unconscionable 50% of the beds are empty,” he said.

In California, where hospitals operate at about 60% of capacity, the average cost of treating a Medicare patient is almost twice as high as in New York, where more than 90% of the beds are filled on any given day, Stark said. “I’m embarrassed for my home state.” Monday’s hearing was conducted by members of the House Budget Committee who deal with health issues. They are worried about the impact of shrinking profits on the quality and availability of hospital services, said Rep. Martin Frost (D-Tex.), chairman of the task force.

Rep. Nancy K. Johnson (R-Conn.), the ranking Republican, said: “If we allow a hospital with a high percentage of senior and indigent patients to close its doors because government reimbursement is consistently less than the cost of providing care to the poor and elderly, then not only the Medicare and Medicaid systems have failed, but our entire health-care system is not far behind.”

Hospital profits have been shrinking since 1983, when the federal government adopted a new system of payment under which hospitals are paid a fixed amount for each of 467 categories of illness and treatment. If the hospital can provide care for less than the fixed amount, it can keep the resulting profit. If the treatment expenses exceed the payment schedule, the hospital suffers a financial loss.

Shutdowns Urged

The average profit margin for a Medicare case was 14% in 1983 and declined to 6.3% last year, Kusserow said. Profitability varied dramatically among institutions. “If you are large and urban, you tend to make profits; if you are a teaching hospital, you make profits; if you have a high occupancy rate, you make a profit,” Kusserow said. Kusserow and Hackbarth predicted that profits will keep shrinking.

“What are we to do?” asked Frost. Close the inefficient hospitals, while making special allowances for those that are vital to a particular geographic area, the officials responded.

“How many other industries with such a low utilization rate can expect to make profits?” Hackbarth asked.

Shutting hospitals “is a political decision,” Kusserow said. “Mom will want to see dad in a smaller hospital that is just a mile away” even if the care is better at a larger institution 15 miles away,” he said.

Nevertheless, he said, some hospitals “should go out of business for quality of care and fiscal reasons.”

An general increase in federal reimbursement rates aimed at helping the struggling hospitals would provide an “inordinate windfall” to the hospitals already enjoying profits, he said.