Sequester could sap $200M from Indiana health care providers

With the federal spending "sequestration" plan kicking in Friday, health care providers in Indiana are bracing for the loss of nearly $200 million in annual revenue.

The sequestration cuts will chop Medicare payments to hospitals, doctors and nursing homes by 2 percent, beginning April 1. The federal Medicare program for seniors is the largest health insurance plan in the nation, and cuts could hit low-margin rural hospitals especially hard.

Annual Medicare spending in Indiana is roughly $10 billion, according to data compiled by California-based Kaiser Health Foundation. That spending is funded via payroll tax deductions by taxpayers across the country.

Under sequestration, Hoosiers will be sending the same amount of tax revenue to Washington, but seeing a bit less of it come back to the state for health care spending.

It’s not entirely clear how much less, because the federal government has yet to detail how exactly it will implement the 2-percent cut. But the impact will be felt, because Medicare payments make up about 40 percent of the average hospital’s total revenue.

With average operating margins at hospitals running at just north of 4 percent, the Medicare cuts represent a potential 20-percent cut to hospital profits, on average.

“That means they’re going to have to respond with expense cuts. And most of their expenses are in salaries and wages, which is why most of them are looking at it dismally,” said Doug Leonard, president of the Indiana Hospital Association. He added, “The 2 percent cut is really a meat ax.”

The five hospital systems that operate in Marion County—Community Health Network, Indiana University Health, Franciscan St. Francis Health, St. Vincent Health and Wishard Health Services—stand to see revenue decline, collectively, $63.5 million, based on the percentage of revenue they derived from Medicare in 2011, according to the most recent financial data they have made public.

IU Health, which gets 24 percent of its $4.3 billion in annual revenue from Medicare, estimates it would collect $148 million less over the next decade, or about $15 million per year.

Community Health Network, which received 26 percent of its $1.3 billion in revenue from Medicare, said it expects reimbursement to decline by $1 million per month.

“We are working to try to find cost savings without impacting patient care,” wrote Lynda de Widt, a Community spokeswoman, in an e-mail.

A September study by Pittsburgh-based Tripp Umbach estimated that cuts to Indiana’s hospitals alone would lead to direct and indirect job losses of 10,700.

“There will just be a gradual reduction in services. Along with that will be a reduction in jobs,” said Don Kelso, executive director of the Indiana Rural Health Association, which represents rural hospitals that typically run at the lowest margins. “They will look at their service lines and see which ones are routinely losing money . They evaluate that and then see what would happen to their community.”

The hits to hospitals also will flow down to the thousands of physicians they employ. Independent physicians also likely will see their payments cut.

Nursing homes will be less affected by the Medicare cuts, because the program pays only for short-term stays. But with the state-run Medicaid program planning to maintain a 5 percent reimbursement cut that was passed two years ago, nursing homes are also feeling pinched.

Medicaid spending was exempted from the sequestration cuts, but the state of Indiana has kept reimbursements low in that program recently due to budget contraints induced by the recession of 2007 through 2009.

“The Medicare cuts under the sequestration combined with the proposed continued 5 percent Medicaid rate reductions in the pending Indiana budget result in a candle burning at both ends for all health care providers, especially long-term care providers who rely heavily on those funding streams to provide high-quality care to Indiana's seniors and families,” said Scott Tittle, president of the Indiana Health Care Association.

The sequestration plan will cut a total of $85 billion from all areas of the federal government, with defense and health care taking the biggest hits. The plan was adopted by Congress in 2011 as a worst-case option in order to force legislators to come up with a better deficit-reduction plan. But Republicans and Democrats in Washington could never agree on an alternate plan.