To fully understand the severity of Grady Memorial Hospital's financial problems, it helps to have a short course in medical economics.
The first and most important lesson involves an examination of who pays the bills — or what's known as the "patient mix." This is what distinguishes Grady from almost every other hospital in Georgia.
The public perception about Grady is that the hospital is drowning in red ink because most of its patients are poor and uninsured. That's only half correct. Many of the 25,000 to 30,000 patients in the hospital every year indeed are poor, but the majority of them are covered by an insurance plan — Medicaid.
Simply put, Medicaid is crippling Grady.
Almost every hospital in the state — even those operated by for-profit corporations — provides free care for patients who show up in emergency rooms without insurance or ability to pay. Many of them also extend some level of free care for indigent patients who need to be hospitalized for acute illnesses.
Other large, urban hospitals in Macon, Savannah and Augusta struggle to stay in the black by marketing profitable services, like obstetrics, cardiovascular medicine, orthopedic and cancer care that generate revenue to offset the cost of the charity care they provide. They are much better than Grady at getting Medicare and privately insured patients to come in for these services.
But what distinguishes Grady from most other hospitals is its volume of Medicaid patients. Just over half of the patients in Grady's acute care wards are covered by Medicaid — a staggering percentage compared to other Georgia hospitals, even those so-called "safety net" public hospitals.
The compounding problem — the one that hurts all these hospitals but impacts Grady the most — is that Medicaid only pays for about 85 percent of the hospital's cost for providing patient care. In other words, for every $1,000 in patient costs Grady incurs for treating a Medicaid patient, the hospital has to eat $150.
In 2005, according to information Grady certified to the state Department of Community Health, the hospital wrote off $144 million in charges for the 12,836 Medicaid patients it admitted. (By way of comparison, the Medicaid write-off is roughly twice what Grady certified that it lost caring for poor patients without insurance of any kind.)
In the 1990s, Georgia and other states established two programs that attempted to deal with the pay disparity hospitals like Grady faced. One was designed to provide additional Medicaid funding for "disproportionate share" hospitals that took in more Medicaid patients than others. The second program, called the Indigent Care Trust Fund, is a more complex formula. It holds state taxes and other funds in interest-bearing accounts, allowing the state to draw down more federal dollars than it would normally get for Medicaid. (The federal government pays about 60 percent of Medicaid's cost, while the state pays the rest.)
Both programs worked for while, but — as is often the case with health-care financing — use of the two funds has become the routine, rather than the exception, for most Georgia hospitals. When the federal government starting giving states less money for Medicaid, the Legislature didn't increase its share.
And Grady, which has an unfortunate history of fiscal mismanagement and poor record keeping, hasn't always been good about providing the state with information it needs to justify the higher payment levels. The result of all this is that Grady's Medicaid reimbursement has varied widely from one year to the next, but it is no longer close to what the hospital needs to provide adequate services to half its patient population.
In recent weeks, the state has seemed, finally, to recognize the issue — proposing to increase the Medicaid reimbursement rate for hospitals like Grady that operate expensive trauma units. Let's hope that's the first step toward re-establishing a separate Medicaid payment structure for those hospitals that can legitimately lay claim to being the "safety net" for Georgia's poorest patients.
Changing how much Medicaid pays is probably the most important decision the state will need to make to ensure Grady's long-term survival.
HOSPITAL ECONOMICS: A GLOSSARY
- Medicare: This is the federal program that pays for hospital care for the elderly. Medicare sets payment rates based on the patient's diagnosis looking at the average cost, length of stay and other factors. Hospitals get a flat fee for most patients. If it costs less to pay for the care of the patient, the hospital keeps the difference. If it costs more, the hospital must absorb the loss. Medicare is a primary payment source for most hospitals, but Medicare patients make up about 18 percent to 20 percent of patients at Grady.
- Medicaid: This is the federal and state program that pays for health care for very low-income and disabled Georgia residents. Medicaid sets payment rates for hospitals through a formula similar to Medicare, but with one important difference. It slices about 15 percent of the payment off the top. That makes it difficult, almost impossible, for hospitals to cover their costs. For Grady, this is a huge problem because Medicaid patients make up about half the patients in the hospital on any given day.
- Private insurance: Most private insurance plans negotiate reimbursement rates with hospitals or pay a fixed percentage of what the hospital charges. These plans generally take into account an agreed-upon profit for the hospital, which means that privately insured patients become a hospital's most sought-after customers. But privately insured patients make up less than 10 percent of Grady's patients.
- Indigent/charity care (Patients without any insurance): Patients in this group have no obvious means of paying for their care. They sometimes go on a payment plan that helps offset some, but not all, of the charges they incur. About 20 percent of the patients at Grady are in this group.