July 14, 2010 09:00 ET

Health Providers Must Cut Costs by 14% per Case to Break Even If Paid at Medicare Rates

New Legislation, Declining Insurance Reimbursement Rates and an Aging Population Will Force Health Care Organizations to Improve Cost Management of Medicare Patients

SKOKIE, IL--(Marketwire - July 14, 2010) -  According to Sg2, a future-focused health care information company, a hospital would need to reduce its direct costs by an average of $1,082 per case, or 14%, to sustain its current operating margins if average inpatient payments were paid at today's Medicare rates. This finding comes on the heels of recent economic trends that indicate commercial payers may begin decreasing their reimbursement rates in the near term.

Sg2's analysis suggests that providers must assume more accountability across the care continuum by improving clinical performance and significantly reducing costs to better manage to Medicare margins. With MedPAC projections of overall Medicare margins to be -5.9% in 2010 and performance-based penalties looming, the threat of commercial insurance reimbursement rates approaching Medicare levels in some markets adds tremendous financial pressure to health providers.

The number of Medicare patients will nearly double between 2005 and 2030 as the 78 million members of the Baby Boomer generation begin turning 65 in 2011. Additionally, tough economic conditions continue to make it increasingly difficult for employers to afford health insurance coverage, thereby placing more pressure on commercial payers to reduce premium costs. This, in turn, forces payers to reduce reimbursement rates to providers -- rates that could eventually approach Medicare levels in some regions.

According to the Centers for Medicare & Medicaid Services (CMS), 40% of total Medicare spending is "waste" caused by issues including provider error, unnecessary care, avoidable admissions and lack of care coordination. This new playing field sets the stage for health providers to dramatically cut costs and improve clinical performance to meet market dynamics. One strategy that providers can implement is a disease-centered clinical approach that will help organizations identify the top Medicare severity diagnosis-related groups (MS-DRGs) with the highest cost reduction opportunities. Another effective measure is for hospitals to improve their level of clinical integration by assessing their performance across all inpatient and outpatient settings. This is effectively addressed through Sg2's Systems of CARE™ (Clinical Alignment and Resource Effectiveness) methodology, which measures and monitors key health reform performance metrics such as potentially avoidable admissions and 30-day readmissions.

"This changing environment requires a radical shift in behavior. The onus firmly resides with the provider," says Sg2 Chairman and CEO Michael Sachs. "The health care leader of the future must recognize incremental and long-term cost saving strategies today, while still delivering cost-effective, quality care. In order to survive and thrive, it is imperative for all organizations -- regardless of size -- to create a clinically integrated framework and understand financial implications of the growing Medicare population and performance-based incentives. Now is the time to implement a disease-centered approach that not only uncovers financial opportunities, but addresses clinical performance across both inpatient and outpatient settings."

Sg2's analysis is grounded in its Sg2 INSIGHT™ Clinical Performance Management System comparative database and the National Inpatient Sample (NIS). A hospital's potential cost reduction exposure varies by market, provider type and size, with large community hospitals requiring the greatest percentage cost reduction at 17% to maintain overall operating margins at today's Medicare reimbursement rates. For small- to medium-sized community hospitals, the average cost reduction is $849 per case and for academic medical centers it is $1,168 per case. Case mix, payer mix and relative payment levels drive the differences. For more information on this analysis, contact Sg2.

About Sg2
Sg2 is a health care information company that provides expert-led, future-focused systems for growth and clinical performance. Our advanced analytics, business intelligence, education and publications deliver measurable value across the full continuum of health care services. Sg2 works with more than 1,000 hospitals and health care organizations in the US and around the globe. For more information, visit

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