By David S. Hilzenrath
Washington Post Staff Writer
Monday, June 6, 1994; Page A01

When Charles W. Turner underwent a coronary triple bypass at Georgetown University Hospital in December 1992, the hospital was paid $28,113.

When Shelby A. Fowler had the same operation at the same hospital less than three months later, the hospital was paid only $10,987.

Turner, a retired road construction worker from rural Lonaconing, Md., was covered by a traditional fee-for-services insurance plan, which paid the hospital's full charges. Fowler, an engineer at a high-tech company in Tysons Corner, was covered by a health maintenance organization, which paid a negotiated fee.

The hospital said it made a profit of $12,481 on Turner but lost $7,160 on Fowler because the deal it made with Fowler's HMO amounted to a below-cost discount. Georgetown lost $6.2 million during its last fiscal year on inpatients covered by HMOs and other managed care plans that received discounts, the hospital said.

The story of Turner and Fowler, and a broader analysis of Georgetown Hospital's finances over a one-year period, show how many HMOs and other health insurance plans that are cited as models of cost effectiveness save money largely by shifting costs to other insurers.

Private insurance companies have long complained about cost-shifting, by which they mean the extra charges they pay to make up for the money hospitals lose treating uninsured patients and those covered by government insurance programs for the elderly, poor and disabled.

Now, many private health plans -- chiefly those run by managed care companies and big employers -- benefit from a new form of cost-shifting in which they receive discounts while other private insurers pay inflated rates for health-care services.

The discounts may look as if they are helping to solve the nation's problem of rising medical costs, but many analysts, including the Congressional Budget Office, say they merely redistribute the burden of paying for health care.

"You can't give everyone a discount," as health economist Harold S. Luft of the University of California, San Francisco, put it.

The pursuit of discount prices works only as long as hospitals can compensate by cutting costs, lowering profits or raising somebody else's charges, industry analysts and executives said. And hospitals are running out of potential somebody elses, because HMOs and other types of managed care are rapidly expanding their share of people covered by private insurance.

Health Care Challenges

If the Georgetown example is any guide, the reliance of many health plans on discount prices poses two challenges for health care in the United States:

As HMOs and other plans that benefit from discounts grow, people already enrolled in those plans could find their insurance costs rising in relation to other people's premiums, because they could be forced to assume costs now shifted to others.

For the same reason, a new national health care system designed to save money by steering people into large purchasing groups, such as the systems proposed by President Clinton and many lawmakers, could experience an element of diminishing returns.

Unlike traditional insurance plans, which provide the same coverage wherever their members seek treatment, HMOs and other managed care plans steer patients to approved doctors and hospitals that accept discounted rates.

Advocates of HMOs, which coordinate patients' care through medical gatekeepers, say discounts can lead to lasting savings for all patients because they drive hospitals to operate more efficiently.

They say HMOs also save in other ways, such as by emphasizing preventive medicine, controlling patients' access to expensive medical specialists, cutting down on unnecessary surgery, reducing hospital stays, and by urging the use of more cost-effective treatments.

"There is a tremendous potential savings from quality management and emphasis on prevention," said Karen Ignani, president of Group Health Association of America Inc., an HMO lobby.

However, a recent study by the Healthcare Leadership Council, a health care industry group that supports managed care, found that those medical management techniques account for only about a fifth of the savings that the most popular form of HMO offers over typical fee-for-service insurance.

The remaining 78.9 percent of the network-style HMOs' savings result from discounts from doctors and hospitals, according to the study, prepared by the research firm Lewin-VHI Inc. and based on internal data from Aetna Health Businesses.

Many health care networks known as preferred provider organizations rely almost entirely on discounts for their cost advantage.

Georgetown, a large teaching hospital, knows all too well what discounts do in the new world of cost-shifting.

Georgetown finished its most recent fiscal year, which ended June 30, $4.8 million in the red, even though it made a profit of $17.9 million on inpatients who had fee-for-service insurance. That profit was erased by the $6.2 million the hospital lost on managed care inpatients, combined with millions of dollars of losses on Medicare, Medicaid, Blue Cross/Blue Shield and charity care inpatients.

While the hospital made an average profit of $4,681 each time it admitted a fee-for-service patient, it lost an average of $1,159 each time it admitted a managed care patient, the hospital said.

Georgetown lost almost three times as much money on inpatient managed care as the $2.1 million it lost on inpatient charity care.

Differences in patients' needs or treatments may account for part of the gap between Georgetown's profit on fee-for-service business and its loss on managed care. But the overriding explanation appears to be that the two groups paid different prices, as reflected in data on more than 700 surgery cases that Georgetown provided at The Washington Post's request.

For example, among 232 Georgetown patients undergoing the coronary bypass operation without cardiac catheterization (a diagnostic test), managed care and fee-for-service patients spent almost the same length of time in the hospital (an average of 7.41 days for managed care patients and 7.12 days for fee-for-service patients), and the hospital's average cost of caring for the two groups was nearly the same ($16,904 for managed care patients and $16,939 for fee-for-service patients).

But the average payment to the hospital was $11,252 for the 97 managed care patients, compared with $30,501 for the 25 fee-for-service patients. The hospital computed that it has an average loss of $5,651 on managed care patients and made an average profit of $13,562 on fee-for-service patients.

Even Medicare paid more for the operation than managed care did -- an average of $24,169 for each of 82 cases, yielding an average profit to Georgetown of $1,464.

Competitive Advantages

Academic hospitals such as Georgetown typically have higher operating costs than do hospitals that do not support teaching programs. But if academic hospitals can make money on anything in managed care, it should be on sophisticated procedures like coronary bypass operations, which play to their competitive advantages, economists said.

The bypass operation, the procedure that Turner and Fowler underwent, is performed to remedy potentially fatal clogging of arteries that carry blood to the heart. Surgeons use veins or arteries removed from somewhere else in the body to reroute the blood flow around the blockages.

Turner, a 63-year-old former heavy equipment operator who rolled blacktop on roads and highways, said he was "disgusted" that his monthly premium payments for an insurance plan run by his union, the International Union of Operating Engineers Local 37 in Baltimore, helped support below-cost discounts for other privately insured patients.

"I don't think it's fair," said Turner, whose premiums exceed his income from a pension.

Fowler, a 50-year-old engineer at Mitre Corp. working on ways to protect computer data from security breaches, expressed incredulity when he was told that his HMO, Kaiser Permanente, had a contract with Georgetown under which it paid less than the cost of his hospitalization. "That sounds really strange," he said.

Georgetown administrators said they began deliberately entering contracts to serve managed care patients for less than cost when managed care accounted for only a small segment of the market.

Administrators said they divided the hospital's expenses into two categories: incremental costs, such as food and medical supplies, that increase with each patient; and fixed costs, such as plant and equipment and administrative salaries, that remain constant regardless of how many patients the hospital admits.

Administrators reasoned that the institution would come out ahead if payments for managed care patients exceeded incremental costs and helped defray fixed costs, even if the payments covered less than an equal share of fixed costs. If the managed care plans took their business to another hospital, each of Georgetown's remaining patients would be saddled with more of the fixed costs, they reasoned.

It was easier to let managed care companies carry less than their share of the load in the mid-1980s, when they accounted for 5 percent of the hospital's revenue and other private insurers represented 40 percent, said Gerald P. Beaulieu, Georgetown Hospital's associate administrator for finance.

Now that managed care accounts for a quarter of the revenue and other private insurers represent less than a fifth, it is harder to treat managed care as incremental business -- and it will be even harder in the future, when managed care represents nearly the entire private insurance market, Beaulieu said.

"The key point is, you can't keep doing that and stay in business," Beaulieu said. "We have to work at reducing our costs, and eventually everyone has to step up to the plate to pay what those costs are."

Health insurers can demand discounts because the nation has an oversupply of hospitals. With about a third of the beds empty at any time, if insurers don't get what they want at one hospital, they can usually go to another.

Many hospitals are closing or merging, and the downward pressure on prices is feeding the trend. The shakeout will reduce wasteful overhead expenses, but the surviving hospitals will be left in a stronger bargaining position, potentially making it harder for insurers to extract concessions.

Managed care executives said the main reason their plans get discounts is that hospitals want the patient volume they can deliver. "It's purchasing power. Strength in numbers," said Jim Jochum, sales director for Alliance, a preferred provider network run by Rockville-based Mid Atlantic Medical Services Inc.

When Georgetown agreed on heart surgery prices with Kaiser Permanente, Fowler's HMO, it gained an important quid pro quo. Kaiser, which has about 300,000 members in the Washington metropolitan area, agreed to send nearly all its cardiac cases to Georgetown.

But even Alan J. Silverstone, Kaiser's regional manager, said he was surprised that Georgetown said it lost money on Kaiser patients. "I don't know how you can stay in business losing 40 percent on each case," he said.

Discounted Services

Discounts are hardly unique to Georgetown, as illustrated by data from Mid Atlantic Medical Services. Members of Mid Atlantic's Alliance network paid much less than full price at many hospitals last year. The savings totaled 44 percent at Washington Hospital Center; 47 percent at Georgetown; 47 percent at Reston Hospital Center; 48 percent at Howard University Hospital; 48 percent at Columbia Hospital for Women; 49 percent at Northern Virginia Doctors Hospital; 59 percent at George Washington University Medical Center; and 61 percent at Greater Southeast Community Hospital.

Clinton and many members of Congress aim to create a system in which everyone pays about the average price for health care. One administration official said that under Clinton's plan, enough savings can be squeezed out that the average price will decline to the level of today's discount prices, making almost everyone a winner.

"The point is that, on average, what we'll do is allow everyone to pay at essentially the most favorable rates," said Kenneth E. Thorpe, deputy assistant secretary for health policy at the Department of Health and Human Services. Covering the uninsured, as Clinton proposes, would help ease costs for the privately insured by relieving them of the burden of subsidizing charity care, Thorpe added.

However, Clinton's Health Security Act relies heavily on spending caps to enforce the savings and generally leaves it to individual insurers to figure out how to keep their spending within the caps.

The caps would limit insurers' ability to shift costs, and that would make it harder than it is now for insurers to reduce spending.

In the absence of such restrictions, hospitals might shift even more of their costs to the dwindling number of people in traditional insurance plans. But that would prove self-defeating, because it would accelerate the movement from traditional insurance to managed care, analysts said.

Charles Turner is a case in point. Although he did his part to help Georgetown's bottom line when he checked out of the hospital in January 1993, the hospital won't be able to count on his financial support in the future. Several months ago, Turner's union health plan joined a managed care network run by Mid Atlantic Medical.

If Turner underwent the same treatment today, Georgetown would collect about $12,000 instead of the $28,113 that the union paid last year, Beaulieu said.