'Payer mix' playing role in hospital merger

October 20, 2010

Morgan Hospital & Medical Center is on the brink of merging with Clarian Health for a variety of reasons, but one of the biggest is one that all hospitals are facing in one way or another: a declining payer mix.

Payer mix is health care jargon for the percentage of revenue coming from private insurance versus government insurance versus self-paying individuals.

The mix is important because Medicare and Medicaid pay hospitals less than what it costs to treat patients. Medicare runs about 80 percent of costs. Medicaid payments runs about 60 percent of costs.

The trouble for Morgan Hospital is that its percentages of patient bills being paid by Medicare or Medicaid is rising—sharply.

In 2006, those two programs accounted for about 48 percent of Morgan’s revenue. Last year, it was nearly 60 percent.

Revenue coming from private health insurers has fallen from 45 percent to nearly 33 percent during the same time span.

At an informational meeting Oct. 14, Morgan Hospital CEO Tom Laux said health care reform threatens to make this situation even worse, according to a story in the Reporter-Times of Martinsville.

The new law passed in March would extend insurance coverage to 32 million more people—but half of those would be covered by Medicaid, and would be money losers for the hospital.

The law also required $193 billion in cuts to hospitals.

And with the first baby boomers turning 65 in January, more and more hospital patients will be covered by Medicare.

At Clarian, 56 percent of its revenue comes from Medicare, Medicaid and other government programs.

Laux said health care reform could soon reduce government payments to Morgan and other hospitals to 70 percent or less of their direct costs.

One big benefit of joining with Clarian would be greater buying power. Clarian has 80 times more revenue than Morgan.

Laux said the hospitals think greater buying power would save Morgan about $2 million off its annual expenses of $48 million. That might be enough to help Morgan gain access to the funding needed to go forward on a planned renovation of its emergency room.

“That’s enough to access capital of around $20 million, which would allow us potentially ... (to) phase in this new facility plan,” Laux said at last week’s meeting, according to the Reporter-Times.

The paper reported that Morgan and Clarian expect to have a merger agreement drafted by Nov. 1. Morgan, a county-owned hospital, must then hold public meetings about the proposed deal.

Morgan is one of many smaller hospitals looking to merge recently. They hope such deals give them access to hard-to-find specialist physicians and to help cover the heavy cost of electronic medical-record systems, which have been effectively mandated by the federal Medicare program.


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