BBA 'givebacks': too little, too late?

As teaching hospitals crunch the numbers, many expect more cost cutting

From the January 2000 ACP-ASIM Observer, copyright 1999 by the American College of Physicians-American Society of Internal Medicine.

By Phyllis Maguire

Related Article:

When legislators last year agreed to put a hold on some Medicare cuts mandated by the Balanced Budget Act

of 1997 (BBA), the nation's teaching hospitals breathed a collective sigh of relief. Medicare reductions had pushed some academic medical centers close to financial ruin, and most hoped that BBA "givebacks" would pull them back from the brink.

Now, however, as teaching hospitals calculate exactly what they'll gain from last year's legislation, many are finding that the restorations for which medicine fought so hard will provide little relief. Instead of celebrating a new stability, academic medical centers are making a somber inventory of programs and services and preparing new rounds of cost cuts.

Officials at a number of institutions say that to survive, they will continue to scrutinize costs and overhaul services. While most teaching hospitals are currently making incremental program cuts, some worry that financial woes might jeopardize academic medicine's many missions.

Refining the BBA

When the BBA was originally enacted, the goal was simple: slash $103 billion in Medicare payments over five years, beginning in fiscal year 1997, to help balance the federal budget. Yet cuts went far deeper than legislators anticipated, and by the middle of last year, the BBA was projected to save Medicare $191 billion—an extra $88 billion—by 2002.

While all hospitals suffered reductions, academic medical centers lost twice as much as their non-teaching counterparts. By the time Congress decided to review BBA cuts, there was a growing list of academic health centers in real trouble.

Many factors made Congress amenable to some BBA restorations, including a federal surplus and last year's unprecedented decline in Medicare spending. As a result, lawmakers last November passed a bill restoring more than $16 billion in Medicare payments. Less than half of that amount—$7.3 billion—will go to all hospitals, according to the Association of American Medical Colleges (AAMC); the exact portion of that amount that will go to teaching hospitals had not yet been determined at press time.

BBA refinements immediately helped teaching hospitals in a number of ways. They delayed implementation of the outpatient prospective payment system until July and eliminated a proposed 5.7% reduction in all outpatient payments. They restored $600 million in cuts to indirect medical expenses (IME), which help cover teaching hospitals' educational costs, and roughly $100 million of disproportionate share hospital (DSH) payments, which underwrite indigent care. Roughly two-thirds of that $100 million will go to academic health centers.

The law also increased the number of housestaff Medicare will subsidize at rural institutions, and it changed the prospective payment systems for skilled nursing centers and home health agencies nationwide, a slight break for teaching hospitals that own such facilities.

At the last minute, legislators also added language redistributing Medicare payments for direct medical expenses (DME), which cover resident stipends. As a result, HCFA will cut DME reimbursements to institutions that receive payments that are more than 140% of the national average and raise them for centers receiving less than 70% of the national average. About 300 of the nation's 1,100 teaching hospitals will see their DME payments go up, while 100 will have their DME reduced.

The fallout

When the BBA givebacks were first announced, most academic medical centers were publicly grateful for the help. As their financial analysts did the math, however, it quickly became apparent that for most teaching hospitals, the restorations would fall far short.


At New York Presbyterian Hospital in Manhattan, for instance, one of the nation's largest teaching hospitals, the $45 million it expects in BBA givebacks over the next six years won't begin to cover the $288 million in BBA cuts the hospital was originally projected to sustain. "I think ours is the largest BBA hit in the country," claimed David B. Skinner, MD, New York Presbyterian's chief executive officer and president. "In terms of our health system, which includes another 15 corporately-linked institutions, it's closer to a half billion."

At Vanderbilt University Medical Center in Nashville, the $5 million the hospital will receive in givebacks will shave the total BBA damage from $46 million to $41 million. Within weeks of the restorations, Vanderbilt had its first wave of nursing, technical and clerical staff layoffs, a scenario that is becoming common at teaching hospitals. Because of BBA reductions, Vanderbilt is also considering closing both its poison control center—the only one in the state—and its skilled nursing facility.

"We're dying here," said Warren E. Beck, director of finance for Vanderbilt Hospital. "We've depleted large components of our cash reserves, and a lot of our plans—for a musculoskeletal institute, a woman's center, the first freestanding children's hospital in central Tennessee—have been put on hold."

Teaching hospitals' traditional mission of caring for the poor has been especially hard hit. The $5 million in BBA givebacks going to University of Texas Medical Branch (UTMB) at Galveston will barely dent its $50 million in projected BBA reductions, and the institution is struggling. Since Texas has a larger uninsured population than any other state, UTMB saw its spending on uncompensated care rise 12% between 1997 and 1998 to $158 million. Those escalating costs, combined with BBA reductions, contributed to operating losses of $50 million a year in both 1998 and 1999.

While UTMB has not backed down from its indigent care commitment, it has made major changes. It cut its beds from 950 to 800 and laid off several hundred staff members, including clinical faculty. It merged urgent care sites and expanded telemedicine facilities. And it closed several primary care outpatient community clinics, sending faculty and residents to staff county-run clinics instead.

In some instances, BBA reductions have aggravated existing reimbursement problems. As Tennessee's largest provider for TennCare, the state program for Medicaid recipients and the chronically ill, Vanderbilt is losing $20 million a year on its TennCare contracts. Those losses, combined with BBA cuts, are forcing the teaching hospital to consider ways to limit its indigent and Medicaid care. It now has to decide whether to opt out of Kentucky's Medicaid program; which elective procedures to curtail for TennCare enrollees; and how to restrict access for TennCare members from managed care companies that do not have contracts with Vanderbilt.

The University of Washington Medical Center (UWMC) in Seattle, which expects to see $2.1 million restored in IME payments, still faces BBA cuts in IME funding of $36 million. To lower per-case costs, it is increasing its use of short-stay and ambulatory procedures, as well as less invasive, endoscopic surgical techniques. But the UWMC's level of BBA reductions "is unsustainable," said executive director Robert H. Muilenberg, who claims that curtailment in any one area of academic medicine will ripple through all of its training and clinical services.

"I liken these facilities to a large ship," Mr. Muilenberg said. "If the vessel remains intact, it continues to float, but if there's a gash put into any part, it can start to devolve pretty rapidly."

Converging forces

For many teaching hospitals, BBA reductions could not have come at a worse time. Shifting demographics and other adverse trends have compounded the BBA's financial toll.

Managed care companies, for example, have stopped using high-priced teaching hospitals for routine patient care, leaving academic medical centers with a larger mix of sicker, poorer patients. According to the AAMC, the country's 300 major teaching hospitals—which are only 6% of the total number of hospitals—account for 20% of all hospital admissions, but 44% of all inpatient indigent care. At the same time, Medicaid reimbursements in many states have dropped, leaving facilities that care for the poor in a particularly precarious position.

Making matters worse, many academic health centers deployed business strategies that backfired. Vanderbilt tried unsuccessfully to run a health plan that it now wants to sell. Others purchased post-acute care facilities to increase revenue streams, only to be slammed by BBA reductions to those sectors as well.

Still others bought physician practices that proved to be unprofitable, a factor in the University of Pennsylvania Health System's almost $300 million two-year loss. (The system is projected to lose $175 million in BBA reductions over five years; at press time officials had not yet calculated how much of that will be restored.) To deal with its shortfalls, the system has eliminated 2,800 positions and doesn't plan to renew contracts of primary care practices that are not breaking even.

And mergers have been a mixed bag. Some institutions gained financial protection from mergers made during the 1990s: Dr. Skinner from New York Presbyterian, for example, said that the merger of New York and Columbia Presbyterian hospitals helped offset $50 million in losses during the first year of BBA cuts. For others however, mergers have been disastrous: The union between the University of California, San Francisco, and the Stanford medical centers is being dissolved after two years and a $50 million annual loss.

"The BBA has been just one of multiple body blows," said D. Craig Brater, FACP, president of the Association of Professors of Medicine and chair of the department of medicine at Indiana University School of Medicine. "But in this inexorable downhill spiral, the BBA has certainly made that slope a lot steeper."

More tenuous missions

It is against this bleak financial backdrop that teaching hospitals are trying to figure out how the BBA restorations—and the cuts that survived—will force them to change.

First and foremost, analysts say, institutions need to realize that last year's piecemeal revisions do not signal any shift away from the government's goal of a lean, mean Medicare. "BBA refinements take some heat off particularly troublesome areas, but they don't make any basic structural changes," pointed out Stuart Guterman, principal research associate with The Urban Institute in Washington. "The question is, will there be further attempts to examine the issues that these little refinements and delays don't really address?"

One major concern is that teaching hospitals' research mission is being undermined by falling federal, state and commercial reimbursements—and that federal lawmakers assume that flush National Institutes of Health (NIH) funding automatically translates into an academic bonanza. "It's easy to think that that's a cash cow for academic medical centers," Dr. Brater said. "But that could not be farther from the truth."

Because of fewer subsidies from Medicare and commercial payers, fewer researchers get the training they need to apply for NIH grants. Academic health centers are also finding that they don't have the funds to maintain their research facilities, let alone build new ones. If Medicare doesn't maintain its level of commitment, Dr. Brater continued, teaching hospitals can't take advantage of booming NIH budgets.

Another concern is that specialty education will soon collide with economic realities. Some procedures—such as those performed by cardiology fellows—remain well paid, while others like children's services are less financially beneficial to teaching institutions. If teaching hospitals continue to sustain operating losses, some worry that academic medical centers may tailor their mix of training programs to take advantage of higher reimbursements.

It has also been suggested that resident stipends should be capped so as not to exceed DME payments. Yet analysts fear that if hospitals cut stipends, housestaff may unionize and negotiate shorter hours with better pay—another threat to the solvency of teaching hospitals.

Behind all of these factors is a growing debate: Should Medicare remain academic medicine's principal partner for educational subsidies and care for the poor? Many in Congress and the business community believe that the $7-plus billion that the federal government gives to teaching hospitals for training and indigent care every year should be divorced from Medicare.

Republicans want to create a fund from general revenues and deal with medical education through annual appropriations; Democrats favor an all-payer system with a tax on insurance premiums, an approach the College supports but employers and insurers oppose. There is as yet no sign of consensus, but there is growing recognition that other payment mechanisms are needed since Medicare's long-term financial health remains in doubt.


One factor could be decisive for teaching hospital funds: raw politics. If the Democratic Party wins a majority in the House of Representatives this year, the committee that oversees Medicare payments may be more sympathetic to teaching hospitals' indigent care mission. The upcoming elections are one more element academic health centers are watching closely as they try to capitalize on the little time BBA refinements have bought.

"Both the Congress and the administration were persuaded that there really was a need to address the plight of teaching hospitals in a very specific way," said Jordan J. Cohen, MACP, president of the AAMC. "Our challenge now is to maintain that focus and to continue to convince Congress that a fundamental solution is ultimately going to be needed."

When does Dr. Cohen plan to gear up again to approach legislators for more revisions? "What makes you think," he replied with a question of his own, "that we intend to gear down?"

This is a printer-friendly version of this page

Print this page  |  Close the preview




Internist Archives Quick Links

Not an ACP Member?

Join today and discover the benefits waiting for you.

Not an ACP Member? Join today and discover the benefits waiting for you

ACP offers different categories of membership depending on your career stage and professional status. View options, pricing and benefits.

A New Way to Ace the Boards!

A New Way to Ace the Boards!

Ensure you're board-exam ready with ACP's Board Prep Ace - a multifaceted, self-study program that prepares you to pass the ABIM Certification Exam in internal medicine. Learn more.