Medicare's Squeeze Play

New cost-cutting rules are socking a host of care providers

On June 30, the Visiting Nurse Association of Southeastern Indiana let go the last of its 175 employees and cleared out its offices in Jeffersonville. Facing sharply lower Medicare payments, agency managers felt they could not stay in business. "It just was not possible to cut enough to operate at those levels," says former Executive Director N. Bennett Jesse.

There's more pain where that came from. Last year's Balanced Budget Act laid the groundwork for a sweeping overhaul of Medicare, with the promise of $115 billion in savings over five years. That, says Paul W. Dennett, vice-president for health policy at the Association of Private Pension & Welfare Plans, "has the potential to cause tremendous change in American health care."

Now, the health-care industry is starting to sense just how profound--and costly--those changes will be. Already, hospitals are enduring a freeze on Medicare reimbursements for inpatient care, while a new payment mechanism for health maintenance organizations has left many insurers grateful to get even 2% annual premium increases on Medicare coverage. Hardest hit, though, are so-called post-acute-care providers--nursing homes, home-health services, and others that handle patients after they leave the hospital.

"WIDE-OPEN MARKET." Such providers were sitting ducks for budget-cutters: Their reimbursements have soared since 1990--fivefold for home-care agencies--as they have taken on more patients who have been discharged sicker and sooner from hospitals. Reports of mismanagement and abuse, especially in the little-regulated home-health industry, didn't help. "It's been a wide-open market--too open," says Stephen M. Wood, a national director at benefits consultant Towers Perrin.

The new law reduces home-care reimbursement 25% to 40% by imposing lower per-visit price ceilings and an annual per-patient benefit limit. As a result, the National Association for Home Care says some 800 providers have closed or sold out since last October. On June 29, Olsten Corp., the largest home-health provider, said it will close 60 of its 400 offices and take a $23 million charge to get costs in line with the new system.

Now, nursing homes face similar pressures. The Health Care Financing Administration, which runs Medicare, on July 1 put in place a "prospective payment system" that sets predetermined, per-day rates based on the condition of patients and the care needed, adjusted for regional differences--rather than paying for actual costs plus overhead.

Some executives argue the strategy will squeeze fat from the system. "Nursing homes' cost of care has been artificially inflated for years" because of overstaffing, says Timothy E. Foster, CEO of NovaCare Inc., which supplies homes with therapists. Smaller companies will have the most trouble adjusting--but even big ones are buckling. Vencor Inc., a 303-home chain, blamed Medicare changes when it announced on June 18 that it would cut 1,000 jobs and delay construction of a $60 million headquarters in Louisville.

Beverly Enterprises Inc., the No.1 chain, will lose millions from rate cuts. But the company may do O.K.: The new payment system was based on care costs in 1995--a year when Beverly's were quite high. Since then, the company has consolidated purchasing and saved $100 million by bringing most physical therapy in-house. "We expect to be rewarded by prospective payment for our efficiencies," says a spokesman.

Ultimately, industry executives and analysts expect the new system to prompt more consolidation--with a few giants emerging as dominant. How will that affect patients? In nursing homes, they may get longer stays since operators collect revenue for each day they keep a bed filled. But home-care clients could get fewer visits. In Fort Worth, 77-year-old Eva Cohen, paralyzed by a stroke, has just been told that her home-care agency probably can't afford to provide the 60 days of care Medicare has authorized--or supply as many diapers as she needs.

Such cuts could drive more patients back into hospitals or, when they run out of money, onto Medicaid. But the budget-cutters are determined to put a tourniquet on Medicare costs.

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