This Budget Cut Would Save Medicare Patients Money. But Can Rural Hospitals Afford It?

Dan Gorenstein: Congressional Republicans are in a bind. They really want tax cuts. 

But that could put America much deeper into debt unless they also cut federal spending. 

Republican lawmakers will need to slash hundreds of billions of dollars and they are targeting health care for a lot of those savings. 

Patient advocates and medical groups are already sounding alarms. The budget fight ahead is going to be fierce.

Clip: Disability rights advocates rallied at the state house in Trenton earlier today, speaking out against potential cuts to Medicaid … 

Clip: It is mathematically impossible to cut $880 billion from that committee without touching Medicare or Medicaid. 

Clip: Would you mind telling your colleagues in Washington that when they’re burning down this house, there’s people still inside. My kid is inside. 

DG: There is one proposal, though, that seems almost … easy: Reduce the inflated payments from Medicare that go to clinics owned by hospitals.

Republicans and Democrats like it. 

The payment cut could deliver real savings … $150 billion over a decade. 

The problem: Rural hospitals — many in Republican districts — could take a financial hit that might put some out of business. 

Today, why this proposal for savings that looks so simple … isn’t. 

From the studio at the Leonard Davis Institute at the University of Pennsylvania, I’m Dan Gorenstein. This is Tradeoffs.

DG: We’re joined by Tradeoffs producer Melanie Evans, who is here to dive into this popular option Republicans have to cut spending. 

Melanie, Hello. 

ME: Hi Dan. 

DG: So usually when lawmakers want to cut spending, it’s pretty unpopular.

But this option to cut inflated payments from Medicare, which has its own wonky name – site neutral – is SUPER popular. Why?

ME: Well, let me give you the current state of play.

Medicare pays more to hospital-owned clinics than it pays to clinics not owned by hospitals.

DG: It can be a lot more, right? Sometimes double?

ME: It can be even higher than that. For some chemotherapy, it’s 300%. Allergy tests? 400%. Get this, Dan,  719 bucks, on average, at hospital clinics. Everywhere else it’s 176.

DG: Right. The fact is the allergy test is no different at the hospital clinic. Why pay 400% more?

ME: Exactly. So at its most basic, the Republican proposal would start paying pretty much all clinics the same – whether they are owned by hospitals or not.

And depending on the scope of the cut … this would save Medicare anywhere from $5.6 billion to $157 billion over the next decade.

DG: This is why so many people love this idea.

ME: This is why so many people love this idea. 

In fact, it has bipartisan support, but with Republicans in control of Congress, Democrats are effectively sidelined. 

There is one group that’s opposed, though: hospitals.

DG: No surprise.

ME: Right! Hospitals say they need higher prices from Medicare to cover their higher costs. They have expensive technology. So many regulations. And their doors are always open. Doctors and nurses are working around the clock. 

DG: Sure. All that overhead is costly …  and necessary to take care of people who are incredibly sick … patients in the emergency room and intensive care. 

But an allergy test? That overhead seems unnecessary.

ME: And that’s the issue. 

There is a lot of medical care that hospitals offer that’s pretty routine. 

So, hospitals now own clinics where patients go for check ups and common procedures. Think of colonoscopies, mammograms and heart tests. 

That’s why proposals for site neutral, to use the wonky name, are so popular.

Many lawmakers object to paying for hospital overhead for routine medical care. 

DG: And they figure most hospitals can take the hit. 

ME: Well, they are concerned about rural hospitals. These rural hospitals have the same overhead, but they typically make less money. 

DG: That’s why lots of rural hospitals are watching Congress very, very closely right now.

Which is tough for Republicans because they represent a lot of these rural hospitals.

And anytime there’s a proposal to cut their Medicare funding, rural hospitals start warning they might have to cut back on care or worse if they lose any money.

ME: That’s right.

DG: Melanie and I wanted to understand what it means to run a rural hospital on a tight budget.

So we called up Tim Rye.

Tim Rye: I’m the chief strategic development officer for Peterson Health in Kerrville, Texas. We’re a 124 bed hospital. And, like I said, right in the heart of the Texas Hill country.

DG:  Kerrville is home to about 24,000 people. The hospital is a big deal in town and people let you know that, Tim says, like when he’s at church or Peterson’s doctors and nurses go shopping. 

TR: Kerrville is the kind of place you know you’re going to spend an extra 15, 20 minutes in the grocery store, because some little old lady that you saw in the clinic is going to want to hug your neck and tell you how great you are. 

DG: Tim calls Kerrville a unicorn. It has most things you would want and everything else is a quick 45-minute trip to San Antonio.

That holds for about everything, unless you’re having a heart attack. 

TR: We did not offer 24-seven heart attack coverage. We were doing basic, uh, outpatient cardiac procedures. 

DG: Rural hospitals have less wiggle room in their budgets, so decisions to expand or close services are risky. A misstep can take a bite out of their finances. 

About 8 years ago, Peterson decided to invest in more cardiac care. They saw it as a win-win – a way to increase revenue AND add an important service for people in a town Tim says is nicknamed ‘God’s Waiting Room.’  

TR: Over 30% of the population is over the age of 60. And in the state, I think it’s somewhere around 14%. So, my wife has become quite the estate sale junkie. It’s a town very rich for that.

DG: Offering more cardiac care, Tim says, has mattered. 

TR: A lady was, on her birthday, was, uh, making a cake and started having, uh, a heart attack. And from the time they called EMS to the time they had surgery was, like 40 some odd minutes. Helicopters are great, ambulances are great. But distance and time, you know, what do they say, time is muscle when it comes to that stuff. 

DG: Peterson Health’s ability to offer any new services – inside the hospital or across its clinics – depends on its overall financial strength, Tim says. 

Any hit to the budget can weaken Peterson’s finances.

Like during the pandemic, when money got tight, Peterson had to shelve plans to recruit a second heart specialist. 

Now, its site neutral threatening to squeeze Peterson’s budget.  

TR: It’s a killer. We’ll have to move from growth, not just in what we’re currently doing, but the things we’re not doing that we’d like to do. 

DG: So, Melanie. Talking to Tim gives us a pretty clear sense of this ‘economic edge’ they feel like they’re walking. 

ME: You know, Dan, Peterson looks like a bunch of the 900 rural hospitals that could need some financial help if site neutral proposals go forward. 

It’s on its own, with no big health system behind it to recruit doctors, buy equipment or bail it out in a bad year. Also, Medicare is the hospital’s biggest customer. 

And right now Congressional Republicans are debating whether rural hospitals need protection from site-neutral. 

DG: That would mean Medicare continuing to pay inflated prices to them.

ME: That is one of the options, yes. Dan, this decision, to exempt rural hospitals, it’s a big one for lawmakers. 

There are policy experts who think exemption would be a huge mistake. 

DG: When we come back, producer Melanie Evans runs some numbers on rural hospital finances. And we get into options the Republicans are exploring for rural hospitals and site neutral policy.   

MIDROLL

DG: Welcome back.

As we talked about at the top of the show, Republicans are on a cost-cutting mission: They’re out to slash as much federal spending as possible to make room in the budget for tax cuts they want.

One popular possible target is a move for Medicare to pay hospitals less for care in the clinics and outpatient centers they own, these so-called ‘site-neutral’ payments.

But many rural hospitals rely on this revenue. 

This lands Republicans in the middle of a decades-long debate over the survival of rural hospitals. 

To move forward, policymakers are considering a few paths. Producer Melanie Evans is back to talk us through the range of proposals that Republicans are considering. 

Melanie, hello. 

ME: Hi Dan. 

DG: So, Melanie, if you are a Republican in the House or the Senate, to afford the party’s tax cut package, you need a lot of money.

The more hospitals you shield from a site-neutral proposal, the less money for your tax cuts. 

But if Republicans push ahead without aid for distressed hospitals, some may close. 

ME: Correct. So how do Republicans skate that line? I spoke with Carrie Cochran-McClain at the National Rural Health Association. She is arguing for a broad exemption for rural hospitals. 

Carrie Cochran-McClain: We’ve seen over 190 rural hospitals, close their doors or discontinue inpatient services in the last 15 years. And a movement towards site neutrality, we think would close, you know, a significant number of facilities across the country.

ME: So here’s the thing: a broad exemption, Dan, would apply to about 900 hospitals.

But I know from all the reporting I’ve done on hospitals for about 20 years now, the financial picture at hospitals can look pretty different from one to the next. 

So I did something you know I love to do – dig into data. 

DG: What data did you dig into? 

ME: Dan, I looked at two indicators of financial strength. 

The first was credit ratings. This is just like a personal credit score, but for companies. Strong finances typically mean a great rating. 

I was curious how many rural hospitals are owned by wealthy organizations with great credit.

DG: Yeah, what’s the answer? 

ME: There are nearly 150 spread across 36 states. 

You probably know some of these owners: Mayo Clinic. Kaiser Permanente. Intermountain Health.

DG: I might have heard of them. 

ME: Dan, these systems have some of the highest ratings from two credit agencies: Moody’s Investors Service and S&P Global Ratings. 

S&P shows the median savings for the top tier hospital systems is between $3 billion and $9 billion. This is cash these hospital systems typically hold and invest, which makes them more money.

DG: Ok, so presumably these 150 rurals are best positioned to withstand a financial hit.

ME: Yeah. The average operating margin for these 150 is 3.4%. 

For the full 900 rural hospitals we looked at, the average is less than 1%. It’s basically break-even. 

DG: Wow, that’s pretty different, Melanie. 

So that’s credit ratings. What’s the other measure you looked at, Melanie? 

ME: Market power. Whether rural hospitals face any competition. When hospitals lack competitors, it’s easier to raise prices. Higher prices, more revenue. 

DG: Sure, but, of course, some rural hospitals in remote regions of the country don’t have much competition, because they are in remote regions of the country. 

ME: That’s absolutely true. 

But I looked at research from Yale and the University of Wisconsin, Dan, and I found two things.

One: more than two-thirds of the hospitals owned by these wealthy systems have monopolies.

And two: Some of these hospitals are in remote corners of the country, but many are not.

DG: Ok. So what I hear you saying, Melanie Evans, is that not all rural hospitals are created equal.

And at least based on your analysis – there are some that certainly look like they  can afford to lose these bigger Medicare payments.

ME: Yeah, that’s right.

DG: Now, Republicans in Congress have a few paths they could take for site neutral proposals, right? The options would expose rural hospitals to Medicare cuts to varying degrees. 

Melanie, what are the options on the table? 

ME: Let’s start with one point I heard over and over, from health economists and  policy experts. 

They think Medicare continuing  to overpay for outpatient care is a terrible way to keep rural hospitals open. Here’s Loren Adler of the Brookings Institution.

Loren Adler: In my eyes there are two separate issues here that aren’t actually really that intertwined. So, right, there is the issue that Medicare pays too much for services. And then separately, there is the issue that it is often difficult to make a rural or safety net hospital profitable.

ME: Loren has spent a lot of time studying Medicare and hospital markets. 

He really wants Medicare to stop these payments. 

The thing to remember is that some Medicare patients have to pay up to 20% of their own bills. So when Medicare keeps paying hospitals more, so do patients.

DG: Right. So the status quo means patients keep spending more of their own money on medical care.

ME: A lot more, Dan.  And another problem with the status quo … consolidation.

As we talked about earlier, Dan, Medicare pays more to clinics owned by hospitals.

DG: Yeah, like sometimes 300%, 400% more.

ME: Right. And that kind of difference has given hospitals a big reason to buy up physician practices.

Ali Moghtaderi: I mean, it is a no brainer, right? Let’s assume that you have a stand right next to a street and you’re selling something. And I tell you, just keep and move your stuff across the street on the other side and you can charge people three times more. What would you do?

ME: That’s Ali Moghtaderi, a health economist at George Washington University.

So Ali and his colleagues published a paper that offers some of the strongest evidence I’ve seen that this policy is driving up consolidation. 

They found that, over about  20 years, Medicare continued to pay  hospital-owned facilities more for heart-disease testing … and the percentage of cardiologists working for hospitals climbed from 20% to 60%, Dan.

DG: Because hospitals could charge so much more per test they figured it was worth buying up the practice.

And as a result hospitals went on a spending spree scooping up every independently -owned cardiology practice in the land.

ME: Indeed.

And this was bad for Medicare … Ali and his colleagues calculated this added $600 million a year to Medicare spending. 

But more than that … when hospitals buy up the competition there are fewer options for patients to shop around.

And that’s bad for everybody.

AM: It creates market concentration, it creates market power, and it just increases the overall cost because the price increases as a result of that. And then there is not much evidence that there is any downstream benefit in terms of gaining efficiency or gain in the quality of care.

ME: We know from lots of research that consolidation leads to higher prices that we all pay.  

For me, Dan, this study is the connective tissue between why site neutral matters for Medicare and why the policy also matters for everyone else who pays for healthcare. 

To underscore this point, this is why so many employers are lobbying so hard for site-neutral. The more hospitals buy up doctors the more market power they have to raise prices for private insurance.

DG: Ok, so the status quo sounds pretty costly for patients, Melanie. But the upside, at least, is there is less of a threat to vulnerable rural hospitals, which has got to mean something to Republican lawmakers in Congress, because they, in fact, represent a lot of these places. 

ME: Correct. A second option, Dan, is that Congress lowers these Medicare payment rates for most hospitals, but exempts rural hospitals. 

But a full exemption would leave billions on the table as Republicans are looking for every last penny – if those are still in circulation. 

DG: It’s hard to imagine Republicans leaving any money on the table right now.

ME: That’s right. Republicans are looking for as much as $880 billion from health care for their tax package.  

That’s tough math and it’s unclear whether Congress will give rural hospitals a pass. 

DG: Ok, so if full exemption is unlikely, what’s more likely. 

ME: That brings us to a third option, Dan. A kind of targeted approach to help rural hospitals with more financial aid. 

Senators Bill Cassidy, a Republican, and Maggie Hassan, a Democrat, put out a framework for their proposal. 

Dean Clancy, at Americans for Prosperity, a conservative group, told me the framework won endorsement from across the political spectrum. 

DC: I mean, you got the AFP on the right and Families USA on the left. We don’t agree on very much. But on this one we do.

ME: I am trying to imagine the group’s WhatsApp chat. 

DG: Wait, do they have one? 

ME: No, They don’t. 

DG: What does this very popular plan involve, Melanie? 

ME: There are many services that are frequently done in a doctor’s office Chemotherapy. Scans.

Hassan and Cassidy’s proposal would require Medicare to pay hospital-owned clinics the same as everyone else for these services.

This is also how Medicare’s own advisors identified medical care that can be safely done away from hospitals.

DG: Right. Hospitals have tried to justify the higher prices at their clinics because if there’s a problem, patients are plugged into the hospital.

But since these services can be done safely outside a hospital, there’s no reason to pay for that overhead.

ME: Yes. And there’s more to Cassidy and Hassan’s proposal. They want Medicare to pay the same for every service for all off-campus clinics. 

DG: Sure. Let’s define that, quickly. Hospitals have some outpatient centers inside their walls, or on campus, but many also have clinics and imaging and surgery centers miles away, these are off-campus.  

ME: Exactly. 

DG: So where does this targeting come in? By that I mean, how would the plan get rural hospitals some money? 

ME: So Hassan and Cassidy are proposing to subsidize struggling rural hospitals and pay them to provide certain services. Think about obstetrics. 

Dan, the idea is to incentivize hospitals to offer critical services that can sometimes lose money and push rural hospitals into innovative ways to charge for their services.

But if Congress goes down this path, Dan you can expect a fight. 

DG: Makes sense. Some kind of targeted approach means Congress would have to devise a formula to decide who needs help … and who doesn’t. There will be winners and losers. 

ME: And a big part of the fight would be how do you decide which hospitals can afford to take a hit and which ones need more help. 

The analysis we did is one way to think about ‘winners,’ and ‘losers,’ right? We looked at hospitals’ financial and market strength. 

DG: Right hospitals’ credit rating. And, again, a strong rating typically means they’re making a profit and have a bunch of savings. We also looked at which hospitals have more power to raise prices from what looks more like a monopoly.

ME: When I talked with health policy experts, they said it is harder to justify subsidizing hospitals with the best credit ratings and a lot of market power.  

Loren Adler at Brookings summed it up well. 

LA: There are a number of rural hospitals that look very much like what you would consider a suburban hospital in an area that is not particularly low income and are doing just fine. 

ME: Carrie Cochran-McClain at the National Rural Health Association told me that she recognizes that some rural hospitals have more resources.

CCM: We acknowledge all you have to do, to your point, is look at, kind of, income earning statements for some of the large hospital systems and see that there are definitely facilities in this country that are doing quite, quite well. Right? And and then there are facilities like a lot of the ones we work with that are barely keeping their doors open.

ME: But there’s a nuance that she is worried lawmakers may forget. 

She says it’s possible that wealthy owners may hit a point where they decide the rural hospital in their portfolio is losing too much money.

CCM: It’s not just a guarantee that if a system has, um, profit and success otherwise, other places, that they would pull from that to invest in the rural or that that rural eventually wouldn’t become such a loss leader that they would be, you know, again, financially forced to close it.

ME:  Dan, Carrie laid out for me the basic economic problem of many rural hospitals. They often take care of fewer patients. Many of those patients have public insurance that pays less than other health plans. But they still have all the expensive overhead of running a hospital. 

DG: We’ve reported this on before, Melanie; these arguments seem reasonable. 

ME: Yes. Look, there’s a lot of concern for rural hospitals. We heard it in the top half of the show. 

But Republicans are rushing this plan to slash federal spending. And to reach their savings targets, they are going to have to make cuts to Medicare or Medicaid.

That crunch is an opening for proponents of Medicare payment reforms. 

DG: But that doesn’t leave much room for debate on safeguards for vulnerable hospitals. 

ME: Not much. We should know soon where Republicans land. 

DG: Thanks for your reporting, Melanie. And for all that number crunching!

ME: You’re welcome, Dan. 

DG: Back in Kerrville, Texas at Peterson Health, Tim Rye projects a $1 million dollar hit from a possible Republican site-neutral payment proposal.

It sounds small for a hospital with more than $200 million in annual revenue.

It’s not.

TR: You just took our margin. Right. So a good year, our margin might be 1 or 2 million bucks. And so you impacted my ability to invest in capital equipment and all those types of things.

DG: Peterson faces budget pressure from Medicare in other ways, too. Revenue has declined as more Medicare patients switch to the managed care option, called Medicare Advantage, he says. 

When budgets get too tight, hospitals often close services.

Tim says he has an idea of where Peterson would look. 

TR: I think I know, but I’m just afraid of the answer, and it’s probably something like OB that is very Medicaid heavy and already a loss. I don’t know that I could look people in the eye if we had to make a decision like that and say, this is what we had to do to, you know, to our community.

DG: Tim estimates the hospital delivers about 500 babies a year.

He says people in town take pride in the hospital. It’s part of what makes the community feel whole.

But he’s worried less Medicare money will force his hand.

TR: Something’s got to give. You can’t keep squeezing, especially rural hospitals, and expect that you’re going to have a lot of them left if you keep cutting Medicare.

DG: Tim says that’s the message he has for the hospital’s Congressman, Republican Chip Roy.

It’s the message lots of rural hospitals are sending to their members of Congress.

I’m Dan Gorenstein, this is Tradeoffs.