4 Disproportionate Share Hospital Survival Strategies From UW Medicine

UW Medicine has employed the following strategies to stay afloat with steep pay cuts and other fiscal pressures on the horizon.

It's a tumultuous time for Seattle-based University of Washington Medicine. The academic health system and safety-net provider — which owns or operates four hospitals and a network of nine neighborhood clinics, among other care outlets — has endured several years of state Medicaid payment cuts and economic pressure from the recent recession in the form of unemployed and uninsured people.

"We're struggling with all of that," says Michael Vanderlinde, UW Medicine director of government financial relations and reimbursement. The system's hospitals — all located in Seattle — include Harborview Medical Center, Northwest Hospital & Medical Center, Valley Medical Center and University of Washington Medical Center.

In 2014 and beyond, the industry landscape will only get rockier, especially for providers like UW Medicine that provide high levels of charity care and treat high volumes of Medicaid patients. Under the Patient Protection and Affordable Care Act, Medicare and Medicaid disproportionate share hospital payments will be reduced by $64 billion over the next six years.

The situation is worse for providers in states that have decided not to expand Medicaid, which means there won't be as many newly insured people under the reform law in 2014 to compensate for the pay cuts. Washington is moving ahead with expanding Medicaid, but Mr. Vanderlinde says it will only help so much, although UW Medicine prefers Medicaid reimbursement to no payment at all.

"Medicaid still doesn't pay anywhere near cost of the services we provide," he says.

The pay cuts and lack of Medicaid expansion in 25 states will strain safety-net providers already fighting to keep their heads above water, says Xiaoyi Huang, assistant vice president of policy for America's Essential Hospitals, a 200-member association of healthcare providers that serve the most vulnerable patient populations.

"Average margins are at 2 percent," she says of the association's members. "Once you take Medicaid disproportionate share hospital payments away, that average margin goes to -6 percent."

In response to that grim outlook, AEH member UW Medicine is using the following strategies to stay as strong as possible, according to Mr. Vanderlinde. 

1. Reducing internal costs through the supply chain and administrative overhead. UW has reacted to external financial pressures primarily by reducing internal costs, says Mr. Vanderlinde.

"We've spent a lot of time looking specifically at our supply costs and standardizing a lot of our procedures," he says.

For instance, the system has invested in a back-office billing system and other systems to reduce administrative overhead. Additionally, UW leaders have looked at group purchasing arrangements as a way to tighten up the supply chain.

Overall, he says the system has identified $10 million to $15 million in savings out of its cost base annually for the past five or six years.

2. Making process improvement identification part of budgeting. In order to realize those internal savings, Mr. Vanderlinde says the health system has made identifying process improvements part of its annual budget. This involves scrutinizing operations and looking for places where the provider can squeeze out redundancies and cut raw material costs.

"Every year we do our exercise," he says. "We've got a $10 [million] to $20 million deficit we've got to close." 

3. Maintaining quality of care through coordinated care arrangements and delivery reform. System leaders are also looking at ways to make care more cost-effective while simultaneously improving quality. Mr. Vanderlinde says UW Medicine is considering working with Washington State in several accountable care organization arrangements.

Additionally, the system has participated in various pilot projects to enact delivery reform. For instance, last year, CMS awarded a nearly $18 million grant to a group of providers, including UW Medicine, to fund the three-year implementation of an evidence-based collaborative care management model for patients with depression and diabetes or cardiovascular disease in primary care. 

4. Accepting uncertainty about funding. In the end, UW Medicine can't wait to be sure about future reimbursement levels before making decisions about its operations and finances, Mr. Vanderlinde says.

Last month, Sen. Roger Wicker (R-Miss.) introduced the DSH Relief Act of 2013, a companion bill to Rep. John Lewis' (D-Ga.) bill from earlier this year. If signed, DSH payment cuts would be delayed two years to fiscal year 2016. Although Mr. Vanderlinde says his system would like to see the legislation pass, UW Medicine isn't going to assume anything. Providers have to make decisions right now, without waiting for federal lawmakers or even the state to solve the problem, he says.

"This is a critical point here, and the demand is out there but, at the same time, the funding is unsure," he says. "That creates a lot of planning and financial heartache."

Similarly, Ms. Huang of America's Essential Hospitals says disproportionate share hospitals face unavoidable uncertainty about their financial future.

"They rely so much on government sources of funding," she says. "Changes in Medicaid and state budgets are hard to predict. You don't know exactly what's going to happen." 

More Articles on Disproportionate Share Hospitals:
Hospital Groups Urge Senators to Pass Legislation Delaying DSH Cuts 
CMS Modifies Medicare DSH Payment Rule
CMS Issues Final Rule Cutting $1.1B in Medicaid DSH Payments