Board member Jim Leskinovitch describes the results of his recent trip to Washington, D.C., as a participant in “Rural Advocacy Days.” Leskinovitch gave his report to fellow board members and Dr. Scott Kennedy (red tie) during the board’s biweekly meeting on Wednesday, Oct. 6. Sequim Gazette photo by Mark Couhig

by MARK ST.J. COUHIG

Sequim Gazette

With an annual operating budget of $131 million and more than 1,000 employees, Olympic Medical Center is the biggest, most important financial concern in Clallam County.

Unfortunately this linchpin of the local economy is facing challenging financial times.

"We may be shrinking," says CEO Eric Lewis.

Revenues are declining, he told a group of community leaders during an Oct. 27 Community Roundtable.

That’s a common theme these days for Lewis, who says the recession and issues concerning government pay or reimbursements have "brought a level of uncertainty I’ve never seen in health care." While the recession officially has been over for more than a year, Lewis said its "effect is more now than when the official recession was happening."

OMC isn’t the only health care provider facing tough times. Virtually every hospital in the U.S. is struggling to make ends meet. All are facing more cuts.

What is unique about OMC is its funding: fully 70 percent of its revenues are derived from government sources. Approximately 55 percent arrives from Washington, D.C., via Medicare, while another 15 percent comes from Olympia for Medicaid patients.

Lewis says OMC is facing big cuts in both Medicare and Medicaid payments. "With Washington, D.C., running $1.3 trillion deficits," he doesn’t see the financial situation getting better anytime soon.

Making do with Medicare

OMC board member John Nutter, a former OMC finance director, says the Medicare payments the hospital now receives cover just 84 percent of the hospital’s cost of providing the care. Lewis says Medicaid also is a losing proposition.

Because Medicare reimbursements are based on a complex system that takes into account multiple factors, including geographical issues, OMC’s Medicare reimbursement rate is now in the bottom 10 percent in the nation. Even OMC’s fellow hospitals in Forks and Port Townsend receive significantly higher funding. Because Forks Community Hospital and Jefferson Healthcare each have fewer than 25 beds, they are classified as "critical access hospitals" and therefore receive full cost reimbursement for Medicare services. Lewis calculates that if OMC received the same dollar-for-dollar reimbursements as those two hospitals, its revenues would rise by $4.5 million this year alone. OMC board member Jim Leskinovitch said, "We’d be sitting great,"

"We just want adequate funding," Lewis said.

The shortfall grows

Medicare reimbursements for OMC inpatients (those who have an overnight stay) dropped by 2.9 percent on Oct. 1 of this year and will drop another 2.9 percent on Oct. 1, 2011. Most of this year’s cut was replaced by the built-in Medicare inflation adjustment, which this year was 2.4 percent. As a result, Lewis said, Medicare reimbursements dropped by just half a percent.

 Unfortunately, costs went up more than 2 percent.

 "This is a big challenge," he said. "And we’re going to be paid less two years from now."

There’s another very big shoe that may drop at almost any moment: a 23-percent cut in Medicare reimbursements for physicians is scheduled to take place in December.

"It would be devastating to Clallam," Lewis said. Most Clallam County doctors are in private practice and voluntarily choose to take Medicare patients. With the cuts, however, the reimbursement rates "wouldn’t be sustainable," Lewis said.

Lewis said that in all likelihood, Congress "will fix this, at least in the short term" by putting off the cuts. "They might fix it for three months, maybe six. How can you play politics with this?" asks an exasperated Lewis.

Leskinovitch said the cuts to Medicare were a constant topic when he, Lewis and representatives from medical centers across the peninsula, recently visited Washington, D.C., for "Rural Advocacy Days." But he also said their pleas didn’t result in promises.

Lewis said Congress is hesitant to fix the cut in physician’s reimbursements permanently because the federal budget is calculated with these cuts in place. "A permanent fix makes the deficit look worse," he said.

Lewis also said the cuts are the result of issues that have arisen in other states, citing Florida as a prime example. In Florida, he said, the number of Medicare visits has grown rapidly and these cuts are intended to punish those doctors who are padding their appointment books.

"If this was adjusted for Washington only, we might get zero drop. Florida might get a 30-percent drop," he said.

"We focus on primary care," Lewis said. In "high-cost states," like Florida, specialists are more often utilized. "Our way costs less," Lewis said, "and using specialists doesn’t lead to better outcomes."

All told, Lewis said, Florida receives reimbursements that are 10 percent higher than those received by OMC and they "do twice as many procedures."

Lewis summed up the hospital’s circumstances during the OMC board’s biweekly meeting on Wednesday, Oct. 20, saying, "If we do everything else right, but Washington, D.C., doesn’t fund Medicare adequately, we can’t succeed."

Other concerns arise

Other issues are growing as well. In the past fiscal year, OMC provided $8.1 million in "bad debt" and charity care. In 1998, that figure was less than $1 million. Lewis said in recent years this line item has grown at a whopping 20 percent per annum.

With Medicare and Medicaid paying less than the cost of care, and with bad debt growing by leaps and bounds, OMC has turned to other sources of funding. The OMC Foundation is doing great work, he said, and in recent months OMC has nabbed some significant grants.

But the most important source of additional operating revenue comes from patients with private insurance. "Thank God for these," Lewis said, "but it’s unfair. It requires a cost-shifting."

The recently passed federal health care reform law provides some needed changes to the system, but "it has no cost controls," Lewis said. "If you can’t control costs, access doesn’t matter. No one can afford it."

Lewis says good reform would ensure that "geographic differences" would be better examined when establishing reimbursement rates. He also wants to see a change from paying for procedures – which leads to more procedures — to rewarding good outcomes.

Leskinovitch on the record

Tort reform is another priority.

Leskinovitch said he feels very strongly about the ads for lawyers "ambulance chasing. We’re spending lots of time and money on lawyers just to keep solvent," he said.

He said when he and others from OMC visit D.C., "We’re told tort reform is a ‘non-issue.’ Congressman (Norm) Dicks said it doesn’t work.

"I beg to differ."

He said tort reform has to occur "for us to get some semblance of control." He blamed congressional inaction on political action committees and other lobbying efforts. He also said "with Congress being mostly lawyers … there’s undue influence by lawyers."

Leskinovitch specifically noted the rising cost of medical apparatus: "Everywhere you look the cost is being driven as high as possible – partly in preparation for lawsuits," he said.

He also pointed to the rising cost of pharmaceuticals. "They’ve gone up to 2,000 … 3,000 times more than the cost of producing these things."

The hospital has seen an 8- to 10-percent increase in expenditures on pharmaceuticals since the federal medical care reform law was passed. "How can you control costs?" Leskinovitch asked.

Capital idea

Lewis says if the hospital is to remain financially healthy, it must maintain its commitment to capital expenditures.

"Some people have asked why don’t we stop spending on capital and put it to employees," Lewis said. "That would mean the end of Olympic."

Lewis noted the hospital spends most of its budget – 56 percent — "on people." But you have to spend 10 percent on capital, Lewis said, "or you won’t survive."

"Our priority will be to maintain our personnel but raises will definitely be lower than in the past."

To have enough funding for capital expenditures, you have to have a healthy bottom line, Lewis said. That’s why OMC shoots for a 4-percent margin. The first bit goes to interest payments, with the rest spent on capital expenditures. This year OMC is falling short of its goal, with a margin of just more than 2 percent.

Each year hospital

management asks the staff to compile capital requests and each year the figure comes out to about $15 million. That’s considerably more than the center can afford, Lewis said.

OMC has made significant investments in new equipment in recent months. The new MRI at the Port Angeles hospital cost more than $1.3 million. The 16-slice CT scanner now at the Sequim cancer center topped $750,000.

The biggest recent investment, the new TrueBeam Linear Accelerator, should be online at the cancer center by April 2011. It has a price tag of $2.7 million, plus tax. Another $500,000 will be spent providing "seamless service" during the installation of the new machine. Extended warranty costs for the first 12 months are included in the purchase price but then will cost $225,000 per year for years two through five.

Add it all up, and the tab comes to more than $4.1 million.

The new accelerator is the most advanced in the Pacific Northwest. Hospital officials hope it will make the OMC Cancer Center a regional magnet for those seeking state-of-the-art cancer treatment.

Nutter called the purchase "probably our biggest single capital expenditure in many years." He said the expenditure is well-justified, noting, "Our cancer center has been our single best (revenue) contributor – this is how we survive in years to come."

Lewis says the CT, MRI and cancer treatment services are "some of the few areas where we are making a nice margin, so we want to invest there."

Paperwork worries

Leskinovitch also is outspoken regarding the burden put on the hospital by government regulators, calling some of the new rules "very punitive measures." He notes OMC was among the first hospital systems to hire a full-time compliance officer. "There’s a lot of fraud in Florida, so they passed national measures," he said. "They are devising these really draconian measures. These add to our costs."

As a further example, Leskinovitch said the 42,000 codes hospitals now must use to classify the various procedures that are performed soon will be expanded to 180,000. "We will have to retrain all seven of our coders."

Under another set of recent federal rules, the hospital finds itself undergoing a permanent audit, receiving 10-15 requests a week from D.C. for more information. "It all costs money, driving up health care costs," Leskinovitch said.

"We work hard at compliance. Financially this just takes the rug from under us."

Lewis also lamented the fact that OMC isn’t eligible for the federal government’s 340B program, which helps critical access hospitals purchase pharmaceuticals at a discount. "Chemotherapy is so expensive," he said. Lewis said he hopes that hospitals like OMC, which are disqualified because they have more than 25 beds, soon will have access to these same discounts. "I want them to do the right thing," he said. "I expect them to do the right thing."

Leskinovitch said Congress also needs to address hospital care of illegal aliens. "They require us to provide the treatment. Is that fair? If they want us to do that, give us the money."

He also raised the issue of end-of-life care, noting "around 70 percent of money spent by an individual is spent on the last year of life. There comes a point where we have to decide. Do you give a 90-year-old man a heart transplant? We agree you can’t do that. We need to talk about this but we’re afraid. I-1000 (the Washington Death with Dignity Act Initiative) was a consequence of that," he said.

Reach Mark Couhig at mcouhig@gmail.com.