Exploring Human Potential

The 62 Billion Dollar Question: Can Health Care Overcome Geography?

Posted on | February 21, 2014 | Comments Off on The 62 Billion Dollar Question: Can Health Care Overcome Geography?

Mike Magee

Sixty-two billion. That is what Medicare spent in 2012 on post-acute care. (1,2)

“Post-Acute Care” is the term applied to various types of intermediate care provided to newly released patients from an acute care hospital. The care is provided by home health agencies in the home or by brick and mortar employees at skilled nursing facilities (SNF’s), inpatient rehabilitation hospitals and long-term care hospitals and nursing homes.

Believe it or not, expenditures for these types of services for a patient with Congestive Heart Failure in the 30 days after an acute hospitalization rival the original cost of the hospitalization itself. The same is true, but to a lesser extent, for post-surgical care, let’s say for a joint replacement patient discharged rapidly from the acute care setting into a SNF for more prolonged recovery with therapy – and more Medicare payments.

Over the past 15 years, Medicare payments for acute episodes have been increasing at a rate of approximately 2% a year. During the same period, payments for post-acute intermediate care have risen at an annual rate between 4.5% and 8.5%.(2)

A quick look at the roll up payments for various DRG’s in 2008 tells the story:

DRG 470: Major Joint Replacement – Total Cost, $18,414 (in – $11,000, out – 7,414)

DRG 194: Pneumonia – Total Cost, $9,732 (in – $5000, out – $4,732)

DRG292: Heart Failure – Total Cost, $10,636 (in – $5,500, out – $5,136)

DRG 683: Renal Failure – Total Cost, $12,456 (in – $6,500, out – $5,944)

DRG 190: COPD – Total Cost $10,470 (in – $6300, out – $6,170)

Historically, it has been a clean hand off. This is because there exists a flat payment for each in-patient DRG independent of the numbers of days in the hospital. Therefore, the quicker the release, the fewer dollars spent in supplies and services, and the greater the profit per DRG. In addition, when the patient is shipped to the intermediate unit (many of which are owned and/or controlled by the vertical system which the hospital operates) payments begin again by a new set of rules.

When Medicare established financial penalties a few years ago tied to the rates of readmission, hospital administrators began to take notice. System re-engineering became the message of the day, and discharge planning as well as continuity care and mobile resource allocation received a mild boost. As we now enter the era of accountable care organizations, medical necessity and bundled payments, the system is looking harder at waste, and in some cases fraud.

Take the case of Congestive Heart Failure. In 2008, the 30 day readmission rate for Medicare patients with this DRG was 22%. The average hospital cost for that readmission was $10,800 which (in some cases) the hospital will now have to eat. To bring the readmission rate down requires better planning, individualization and resource allocation. For some, the answer is consistent home based care from day of discharge using a concrete plan and supported by mobile, technology-reinforced, workforces. For others, the strategic use of an intermediate SNF facility may be the most efficient approach.

All of this requires a range of “meaningful partnerships”, team based approaches, and technology enhanced communications and planning. That’s different. An example: In the old days, an elderly hip fracture patient might have a hip replacement on day 2 of hospitalization and be shipped to a SNF or Rehab facility on day 4 for a 30 day stay. If that patient complained of chest pain on day 10, an ambulance would be called, and the patient would be readmitted for evaluation. Under the new system, 24 hour physician coverage, with onsite physician evaluation in the intermediate unit would be required, and hospitalization avoided.

If you were running a hospital system, and the nursing home/long term care provider had a 23% 30 day readmission rate (as did 1/4 of the nursing homes in 2011), would you stay with that partner or switch to the institution with a 15% readmission rate (which 1/4 of the nursing homes had in 2011)?

Variabilities in quality performance of intermediate facilities is increasingly transparent. New Medicare Advantage programs are legally permitted to require the use of only “preferred” step-down facilities and services.(2) While this does not apply to traditional Medicare patients, current trends tell us that these patients will soon be directed toward efficiency and effectiveness by their clinicians who are increasingly Health System employees rather than independent operators.

Bottom line: The gaming of this portion of Medicare (rapid acute care discharge to a subsidiary or services where the ticker is reset), the tolerance for high levels of variability and charges in step-down services, and the non-coordinate hand-offs between slow and inefficient, brick and mortar laden institutions of care, are all coming to an end.

In their place? Highly coordinated, customized, mobile, technology enabled and informed patient care plans that deliver predictability, efficiency and quality.

For Health Commentary, I’m Mike Magee


1. IOM. Variation in health care spending: target decision making, not geography.. Washington, DC. National Academies Press. 2013.

2. Mechanic R. Post-Acute Care – The Next Frontier For Controlling Medicare Spending. NEJM. 370;8 February 20, 2014


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