Changes in Tricare payments to eat at hospital budgets

A change in the way the government pays for outpatient military health care will save Washington nearly half a billion dollars a year, but it will bite millions out of Hampton Roads hospitals' budgets.

Bon Secours Hampton Roads Health System estimates the change will cost its hospitals a total of $22 million a year.

Sentara Healthcare has predicted a similar total annual decrease for its Hampton Roads hospitals. That $22.5 million represents an estimated 1.5 percent of the hospitals' annual revenue, executives said.

Government officials said the new rates reimburse hospital costs with enough extra for "a reasonable profit" and give incentives for hospitals to be more efficient, but local hospital executives said the new rates fall short of covering their expenses.

"This is the first time that we've seen the federal government do something like this: force the hospitals to take care of people at a negative margin for something other than entitlement programs," said Robert Broermann, Sentara's chief financial officer.

Until May 2009, Tricare, the government health insurance for active-duty military, their dependents and retirees, paid for outpatient services based on what facilities billed or on agreements with network hospitals to pay a percentage of the billed charge.

Then, the program began a switch to fixed rates, based on rates for Medicare, the government insurance program for seniors and the disabled.

Tricare's Outpatient Prospective Payment System is being phased in over three to four years, depending on whether the hospital is in Tricare's network.

Tricare officials said the change happened because Medicare had recently implemented the new rates and the military insurance program is required to mirror Medicare's reimbursement rules to the extent possible.

The new system will trim an estimated $458 million a year, or 25 percent, off Tricare outpatient payments. The savings come at a time when rapidly rising military health care costs are under increasing scrutiny.

"If you're paying bill charges, as we were, then clearly there's no incentive for a hospital to do anything to control their charges," said Michael O'Bar, deputy chief of Tricare policy and operations with Tricare Management Activity.

Two Hampton Roads facilities will be among the hardest hit in the nation, according to officials with the local health systems.

At Bon Secours Mary Immaculate Hospital in Newport News, more than 20 percent of outpatient claims come from Tricare. Hospital executives anticipate a drop of $11 million a year.

At Sentara Bayside Hospital in Virginia Beach, where Tricare represents more than 19 percent of the facility's outpatient claims, a trim of $6 million annually is expected.

Hospital executives said the reductions alone won't force them to cut services, but such measures could become necessary if payers, such as Tricare and Medicaid, continue chopping rates.

"As all of the reimbursement shrinks, we have to look at more and more invasive ways of cutting our expenses," said Michael K. Kerner, CEO of Bon Secours Hampton Roads. "Which means at some point all hospitals have to look at, 'Do we provide the services that we provided in the past?' "

Before the new payment system, Mary Immaculate was charging Tricare over 80 percent more on average than other Hampton Roads hospitals, O'Bar said.

Kerner said Tricare hadn't shared with him the basis for that conclusion, but he hoped to meet with officials there to discuss it.

Mary Immaculate's outpatient Tricare claims rose sharply after the November 2008 closure of Fort Eustis' urgent care center, according to Bon Secours. Within a year, the number of claims jumped by 70 percent to about 17,000.

To accommodate the rising number of patients - both military and civilian - the hospital spent about $1 million on its emergency department, adding four registered nurses and completing a renovation in October 2009.

But as the number of Tricare patients rose, reimbursement fell - from $11.6 million the year before the new payment system to $6.7 million the year after.

At Bayside, the number of outpatient Tricare claims has grown more slowly, to about 25,600 in the 12 months ending last April. Because of its location near Oceana Naval Air Station and Joint Expeditionary Base Little Creek and its focus on outpatient services, Bayside felt the impact of Tricare's changes more than Sentara's other facilities, officials said.

With the new system, payments to Bayside dropped to $11.8 million from $12.9 million, while the number of claims rose by about 10 percent.

Bon Secours and Sentara both had hoped to receive additional money from the defense department to cushion the impact on their hardest-hit hospitals.

The health systems were informed that Bayside would receive about $450,000 in the first year, and Mary Immaculate would be granted $800,000.

However, Tricare officials later said the criteria for that award were unclear as published and as a result, the hospitals had submitted the wrong data in their applications. They said Tricare couldn't give out the money unless the hospitals qualified under the clarified criteria.

Local hospital officials are scheduled to meet on the issue with Tricare and defense officials, as well as staff members for Virginia's U.S. senators, on Dec. 20.

Though extra money this year wouldn't make up for smaller allocations in the future, Kerner said, it would give Bon Secours some time to adjust.

"We can't just sit still and complain that we expect to be paid more," Kerner said. "It's just reality that we're going to have to look at ways to reduce our cost."

Amy Jeter, (757) 446-2730, amy.jeter@pilotonline.com