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In some ways, patients benefit from hospitals economizing practices and collaborating with other parties like home health agencies or other third parties. But in some cases, the prioritization of financial interests over the best interests of patients can be detrimental to the healthcare system and lead to increased rates of medical malpractice.
For the purposes of this article, we will highlight the prominent financial incentives for hospitals in relation to the methods of payment used to fund hospitalized patient stays. We’ll also explore nationwide attempts at healthcare reform for hospitals to reduce apparent conflicts of interest prioritized over patient needs.
There have been a number of alterations made through legislation and policy throughout the history of healthcare that have shaped the way that patients receive medical care today. One large element associated with healthcare practices and culture are costs. Costs have an incredibly impactful effect on the provision of services rendered in hospitals, emergency room wait times, and discharge rates. Since the creation and implementation of the option of various payment systems, rather than one uniform way of getting paid, many hospitals and providers may be focusing on interests that will rack in more money for the hospital, rather than emphasizing interests that would improve the health of patients.
With numerous studies showing the steadily increasing cost of healthcare, it’s evident that both hospitals and patients are suffering. Hospitals feel the repercussions of high costs because many patients can not afford to pay the out-of-pocket fees for services. While patients are suffering with care that might not be at the level of quality that it should be. For now, there is two primary methods of payment options available to pay for services rendered by hospitals: the prospective payment system and the retrospective payment system. Each option comes with a number of beneficial aspects for patients and a number of factors that would cause hospitals to focus on alternatives that would increase profits and cut costs.
The Prospective Payment System
Due to the skyrocketing costs of Medicare in the early 1980’s, the federal government decided to conjure up ways to simultaneously minimize costs while still upholding the quality of care. Its answer was to completely revolutionize the way Medicare will pay for hospitals through the implementation of the prospective payment system. At the time the system was created to figure out a way for hospitals to treat elderly patients without racking up costs, but now the system is utilized by patients young and old. The prospective payment plan works by assigning a fixed and steady payment rate to specific treatments and services. So, the performance of a triple bypass surgery by a surgeon, for example, would have a flat rate for every patient who undergoes it under this plan.
As a result, the costs of services have been simplified and made more accessible for patients everywhere. This plan even provides the opportunity for hospitals and insurance companies to estimate incoming costs and payments from patients. Insurance companies have taken used this plan to award patients on their plans by passing on savings made through this system of payment and offering less expensive annual premiums and co-payments. It can also encourage hospitals to provide proficient care. After all, the more patients that hospitals admit, the more incoming well-insured, paying customers may be able to pay for their services.
But there are some negative aspects of this system that tempt hospitals to consider their own interests and put patient’s interests on the back-burner. As of late, there have been reports on many patients’ uncertainty about some hospital’s intentions of discharging them. In retrospect, they are left wondering if they may have been discharged from the hospital too soon or too late, and they also wonder about the process hospitals and doctors take to determine when it is the right time to discharge a patient. Doctors have claimed that a variety of elements are considered when making the decision of letting a patient go home, while researchers conclude that the decision is based on one factor that has little to nothing to do with a patient’s well-being: economic incentives.
Although these incentives are not always evident and in a lot of cases, they have undeniably played a role in how long patients tend to stay in hospitals and often they are readmitted. Research conducted by the Centers for Disease Control and Prevention (CDC) reveals that hospital stays used to last significantly longer than they do today.  In 1980 – before the prospective payment plan was introduced – the average hospitalized patient wasn’t discharged until seven days passed. However, in recent times, stays last about four in a half days on average. After looking at this data one could suggest that maybe hospitalized patients are healthier these days. With all these new food alternatives and the increasing popularity of veganism and vegetarianism, maybe Americans are making more of an effort to lead healthy lifestyles. Unfortunately, that is not the case. In fact, research shows that hospitalized patients are actually older and sicker than they were in the 1980s, yet they are still being discharged earlier than prior patients.  In a sense, Medicare was now shifting the blame for financial hardships to hospitals, while simultaneously giving them the incentive to be more efficient. From the perspective of providers, the experience was very bittersweet.
For one, this method of payment forced hospitals to economize. Since the prospective payment system gave hospitals the same amount of money whether a patient stayed five or four days, hospitals no longer felt the need to keep them longer than needed. Extra days now put hospitals at risk of adding on “unnecessary costs” in the eyes of hospital owners. And as a result, hospitals are encouraging doctors to discharge patients sooner to avoid piling up costs. But these decisions may not be in the best interest of hospitalized patients. In all actuality, it could harm them. There have been cases when a hospitalized patient has been told to go home, only to have to be readmitted days later for a severe injury as a result. In the event that this happens, the hospital and doctor who cleared the discharge could be liable for medical malpractice.
A research study published in Health Care Management Science concluded that patients that are discharged during the busiest times in hospitals are 50% more likely to come back within a span of three days.  This is simply because, in times when more patients are being admitted, it is more cost-effective to make room for new ones. Researchers reviewed staffing levels, occupancy rates, and days of the week, along with surgical volume at large. They suggest that planning ahead and using “logistical alternatives” to sending patients home too soon would minimize the rates of readmissions.  But the likelihood of the latter occurring depends on how much money hospitals are willing to sacrifice to ensure the alternatives are effective. The only other option that many doctors have chosen is to send patients to skilled nursing facilities instead of allowing them to just go home. That way, patients will be carefully supervised and well taken care of and doctors won’t have to feel the social pressure of keeping patients longer than their counterparts. But this decision doesn’t necessarily benefit hospitalized patients. They are forced to deal with the hassle of moving to another facility when they could have stayed in the hospital. Not to mention the additional costs of staying in such a facility may cause financial issues for patients as well.
Up until recently, a patient being readmitted into a hospital would provide hospitals with additional revenue. Hospitals were not suffering financially, so these medical facilities were given the upper hand despite the health of a patient. Reducing the length of stays would also increase the rates of readmissions as well as cut costs for each stay. But other important parties like Medicare and private insurance companies were suffering because they were forced to pick up the tab for medical expenses. the federal government caught wind of the high grossing profits hospitals made off of readmitted patients and the horrible deal these companies were forced to deal with as a result, legislation suggesting that hospitals be penalized for readmission have been proposed and implemented.
In 2011, Medicare created a Hospital Readmissions Reduction Program to enforce new rules for hospitals to abide by. According to the program, hospitals will lose 3% of their total Medicare payments if the rates of readmitted patients is high within a month’s span.  The program examines the rates of patients who are admitted for conditions such as heart failure, heart attacks, pneumonia, chronic lung problems and elective hip and knee replacements. These are all conditions that require expensive treatment options and charge very expensive for stays. For example, Medicare would typically pay a hospital $15,000 just for one kidney failure patient. If the Readmissions Reduction Program finds that too many kidney failure patients are coming back for more treatment and care, the hospital will face deductions for payments from Medicare. As a result of these guidelines, Medicare will collect a whopping $420 million from 2,592 hospitals that had readmission rates deemed higher than appropriate.  And to put things in perspective, these are the total funds Medicare is due to collect solely for one fiscal year.
With the enforcement of this legislation, the number of hospitalized patient readmissions have significantly declined. In 2010 – one year before the program was established – approximately one in five Medicare hospital patients returned within a 30-day span. Now, the rates have improved, but skeptics of the progress made claim that instead of hospitals changing their way of doing things, they may be finding ways to game the system. For example, placing a patient under an “observation status” – which has been declared indistinguishable from inpatient admissions – is not examined by Medicare. Under this status, patients are receiving the same kind of care and treatments, but they are just under a different label. Therefore, if observational patients “had been hospitalized 30 days prior to the observational status treatment, that treatment wouldn’t be counted as readmission.  New studies are declaring that as readmissions decline, the number of observational-status patients who return to the emergency departments after discharge are continuing to go up. With the ousting of these alarming findings, many people are posing this question to hospitals: Are financial incentives more important to hospitals than the best interest of the patient?
The Retrospective Payment System
Before the prospective payment system was implemented, there was one primary method of payment called the retrospective payment system. It was established in 1965 and is still offered today as an option for hospitals to accept. Although many health providers, including state-provided health providers, are choosing to convert to prospective payment plans for the reasons mentioned above and Medicare has abandoned this payment method, there are still some latent financial incentives within this plan.
Retrospective payment plans pretty much put the opportunity for profit in insurance company’s hands. Since this system is based on actual charges – including medical device usage, treatments, and other services rendered – hospitals generally treat patients and submit a bill of all these services to an insurance company. In turn, the insurance company has the option of either opting to pay or refusing to pay for specific services on the list or denying the entire bill. But in most cases, the payments are received for the full amount specified on the bill without any issues from insurance companies. But within this payment method are several financial incentives that some hospitals have and most likely will continue to prioritize over the best interest of a patient.
Although retrospective payment plans (fee-for-fee service) were created to benefit patients by providing them with individualized treatments and services, their method of payment creates ample opportunity for hospitals to rake in the big bucks. Some hospitals may attempt to abuse the nature of this system by recommending treatment options and services that are on the expensive side in an effort to maximize profits. And as it’s been exhibited several times, when costs for hospitals significantly decline, it seems as if they rise for patients and insurance companies. Patients suffer when they are given unnecessary treatments and are encouraged to undergo unneeded procedures to accrue more costs, while insurance companies are forced to pick up the tab for this ridiculously costly list of expenses. The abuse of the retrospective payment system also is detrimental for the healthcare industry in general. When hospitals spike up costs for insurance companies and patients, medical resources become scarce, affecting the quality of care. In turn, patients are deprived of the services, medical devices and treatments they need to recover from ailments and maintain good health.
Healthcare Reform for Hospitals
In 1997, there was a major push to expose the incentives of hospitals who were receiving profits from referring discharged patients to affiliated home health agencies. The restrictions obligated hospitals to report to The Health Care Finance Administration (HFCA) if it has a “financial interest” in a home health agency or vice versa. Details regarding the nature of the interests, the number of discharged patients who required home health services, and the percentage of patients who were referred to a home health agency in which the hospital had a financial interest in. The whole point of the act was to ensure that hospitals were being transparent and were making referrals based on the individualized needs of the patient.
Since then, there has been plenty of legislation implemented both statewide and nationwide in an effort to minimize the conflicts of interest and unfair practices of hospitals. One of the most recent attempts at reform mentioned above was Medicare’s attempt to reduce readmissions. But now, since the Affordable Care Act is still intact, insurance has massively expanded, causing new insured patients to check themselves into hospitals. The demand for care has grown so high that hospitals are seeing larger amounts of revenue than they’ve seen in years. In the wake of these changes, the government has come up with legislation to keep hospitals in check and to ensure they do not indulge in the many opportunities for hospitals to prioritize financial incentives over the best interests of the patient.
 “Hospital Stays Grow Shorter.” Centers for Disease Control and Prevention. Centers for Disease Control and Prevention, 01 Feb. 2010. Web. 22 Mar. 2017.
 Khazan, Olga. “Why It Was Easier to Be Skinny in the 1980s.” The Atlantic. Atlantic Media Company, 30 Sept. 2015. Web. 23 Mar. 2017.
 “Busy Hospitals Discharge Patients Too Soon, See Higher Readmissions.” FierceHealthcare. CGI, 14 May 2012. Web. 23 Mar. 2017.
 Rau, Jordan. “A Guide To Medicare’s Readmissions Penalties And Data.” Kaiser Health News. N.p., 28 July 2016. Web. 24 Mar. 2017.
 “Readmissions-Reduction-Program.” CMS.gov Centers for Medicare & Medicaid Services. Centers for Medicare & Medicaid Services, 18 Apr. 2016. Web. 28 Mar. 2017.
 Rau, Jordan. “Half Of Nation’s Hospitals Fail Again To Escape Medicare’s Readmission Penalties.” Kaiser Health News. N.p., 28 July 2016. Web. 24 Mar. 2017.
 Carlson, Joe. “Hospital Observation Patients Are Up, Which May Skew Medicare Readmissions Numbers.” Modern Healthcare. Fisher Investments, 8 June 2013. Web. 24 Mar. 2017.