Published in the June 2011 issue of Today’s Hospitalist
Most successful business ventures start with a business plan. Some plans are terrible and yet still result in a very profitable company. And countless others have been built around great ideas that have either never gotten off the ground or, if they were funded, crashed spectacularly due to consumer fickleness or unforeseen changes in the financial landscape. Sometimes it is better to be lucky than good.
Business plans, not surprisingly, are created by companies that wish to make money or, in the case of nonprofits, make less money while promoting their mission. (All of us who work for nonprofits are very familiar with the "no-margin-no-mission" mantra.) Needless to say, when hospital medicine made its debut, there was no dark and smoky board room filled with members of Hospitalist Inc., laying out a business plan to a panel of potential investors. Our business model evolved through hard work, need and happenstance.
But if you didn’t know better and were an outside observer, you might easily assume that Wachter, Wellikson and Nelson et al. must have plotted this whole thing out. Here’s why I say that: Our specialty’s financial success seems to have been too boldly and brilliantly conceived to have been based on serendipity alone. This is particularly true when you realize that our business plan led directly to the fastest growing medical specialty ever (and likely forever). One might even say that we are the Google of the medical world.
"Two buckets are better than one" So what is this vaunted business plan? It is, for lack of a less unassuming epithet, the "Two Buckets are Better than One" plan. Let me explain.
Until hospitalists arrived on the scene, doctors traditionally received most of their compensation from professional fees. When the payer was the government, physicians were paid via Medicare Part B, in which Medicare’s physician fee schedule continues to base payments on the familiar relative value unit (RVU). Private insurers have generally followed the government’s lead and modeled their reimbursement the same way.
All this was complicated, of course, in 1998 when Congress passed the sustainable growth rate formula to account for the fact that we physicians are an expensive lot. In 2002, that formula resulted in a 4.8% reduction in physician reimbursement “and it has led to eleventh-hour negotiations to stave off cuts every year since. The Medicare B bucket is no get-rich-quick scheme, especially when you compare reimbursement for patient encounters to more lucrative physician payments for procedures.
Where the money is
This is where Medicare A comes into play. Medicare A is a prospective payment system based on diagnosis related groups. This system pays the hospital a set amount for each diagnosis “and it is a much bigger bucket. Of the $426 billion spent in 2007 on Medicare benefits, part A accounted for 41% compared to 28% from part B.
Some of you may remember Sutton’s Law from medical school, the maxim that advises young physicians to first do the test that is most likely to confirm the diagnosis. The law was named for Willie Sutton, the prolific mid-century bank robber who, when asked why he robbed banks, answered: "Because that’s where the money is."
The money has for quite a while been in Medicare Part A, and that is exactly where hospitalists went a-looting. The average hospitalist subsidy is now allegedly more than $130,000, all of it taken from a hospital’s Part A coffer. Now, I am not suggesting that we are stealing this money. Like Sutton, we knew where the money was; unlike Sutton’s pillaged banks, hospitals are more than willing to hand us that cash. Value-added may be expensive, but if our rapid rise is any indication, it has been money well spent.
It’s unfortunate that we cannot copyright our business plan, because it certainly has not gone unnoticed. I suspect your hospital is much like mine: Everyone now wants a piece of the Part A pie. Subspecialists of every stripe look at the hospital less as a free market in which to sell their goods and more as an arena where they need to be paid just to walk through the doors.
Where does all this lead? Of course, no one really knows. Hospitals’ Part A bucket will continue to come under growing financial pressure from all the practitioners looking for their share. (Part A reimbursement will also come under pressure when value-based purchasing arrives in a few years.) Fortunately for our specialty, I would argue, the complete acceptance of our business plan has cemented our costs within hospitals’ operating expenses. Even with belt-tightening, it is very unlikely that a hospital could reduce our take (or even try), given how vitally important we’ve become in just about every aspect of patient care.
So back to our friend, Mr. Sutton. If he had been born in a different era, perhaps he might have gone on to become Dr. Sutton, a founding father of the hospital medicine movement and one of the authors of our current, unwritten business plan. Given his apparent pragmatism, it is not hard to imagine him explaining the simple logic of the hospitalist business model, which is so dependent on Medicare Part A, by stating the obvious: "Because that’s where the money is."
Erik DeLue, MD, MBA, is medical director of the hospitalist program at Virtua Memorial in Mt. Holly, N.J. Check out Dr. DeLue’s blog and others on the Today’s Hospitalist Web site at www.todayshospitalist.com.