Why the Proposed CMS Civil Monetary Penalties Imposed on Hospitals is DOOMED for Failure

By Bernard F. Pettingill Jr PhD and Federico R. Tewes, BA


All hospitals in the United States are now required to make a public machine-readable online file to include all four standard charges: gross charges, payer's specific negotiated charges, discounted cash charges, and de-identified minimum and maximal negotiation charges for every hospitalprocedure. In fact, most hospitals nationwide are not complying with these requirements, but instead, the government has issued warning notices requesting action plans or else they will impose civil monetary penalties of $300 per day for hospitals with fewer than 30 beds, upward of $5500 a day for large hospitalsthat exceed 30 beds. Hospitals with 30 beds have total maximum penalties of $109,500 per hospital for a full year of noncompliance. Large hospitals, with greater than 30 beds, will have a total maximumpenalty of $2,007,500 per hospital for a full year of noncompliance (1).

Without trying to dissect the language embedded in the proposal such as 'shoppable services', 'machine readable files' or 'limited set' services, the following article focuses on the absurdity of these CMS civil monetary penalties. The authors performed a financial analysisof three largest 'for profit' hospitals for demonstrate the absurdity of these minimalist penalties.

First, the authors clarify the central problem that the Biden and future administrations face. Aging Baby Boomerswill exceed 80 million demanding Medicare Services by year 2030. In fact, Medicare will require $1.54 Trillion to service these 80 million enrollees. Future Medicare financial obligations will only increase because its expenditures are driven by a variety of factors, i.e., demand for care, the complexity of medical services, high medical inflation, and increasingly longer life expectancies.

Second, we examine the inner workings of the Medicare system from a financial analysis viewpoint. There are two separate trust funds in the Medicare System, namely Hospital Insurance Trust Fund (HI Trust Fund) and Supplementary Medical Insurance Trust Fund (SMI Trust Fund). Prior to COVID-19, the latest financial projections projected the HI Trust Fund insolvent by the year 2026. It is a fact that the Medicare HI Trust Fund has never been insolvent because there are no provisions in the Social Security Act that govern what would happen if insolvency were to occur. Ten of thelast twelve years have witnessed expenditure outflows outpacing the HI Trust inflows, resulting in total Medicare spending obligations out pacing the increasing demands on the Federal budget as the number of beneficiaries and the per capita healthcare costs increase each year (2).

Third, we educate readers on the only state to receive a waiver from the CMS because their statewide healthcare system has consistently saved money to Medicare. This state is Maryland, and their statewide data transparency has been in place since 1970. The CMS waiver has allowed their Health Services Cost Review Commission (Maryland HSCRC) to set hospital prices for all services statewide, and these prices include an adjustment for uncompensated care that is shared by all stakeholders equally. In fact, the Maryland HSCRC created a state law whereby all stakeholders are required to comply with the detailed auditing and data submission requirements which allow the agency to restrict hospital costs without limiting hospital profits, accurately measure patient volume, and predict the financial condition of all inpatien tand outpatient servicesin Maryland. Because the Maryland HSCRC is accountable to the public, the hospital savings are as follow: Maryland markups for hospital services increased from 18 percent in 1980 to only 22 percent in 2008. During the same period,the average nationwide markup for hospital services has skyrocketed from less than 20 percent in 1980 to over 187 percent by 2008. It is because of these significant savings to the Medicare program that the Maryland HSCRC continues to receive a CMS waiver every year. In terms of prices, Maryland hospitals are prohibited from givingvolume discounts and shifting costs to other payers. The Maryland commission enforces a clear mandate: same prices for the same service at the same hospital, no exceptions (3).

Without a doubt, the Maryland system should be replicated under the Biden administrations and future administrations. However, the "Price Transparency Final Rule" fails to simplify the pricing data of all hospitals; it fails to realize that price is only one factor of a multidimensional problem. The CMS fails to provide solutions about how the four separate machine-readable prices will finance uncompensated care, which was the primary problem solved by the forefathers of the Maryland HSCRC system. After the authors studied the CMSproposal, it became clear that single-handedly imposing penalties for noncompliance is only one factor of this multidimensional problem. Unlike the Maryland system, which is far better than any designed to date, more effective and efficient than any state in the union, CMS has threatened all hospitals with what will be shown below, to be ineffective measures that yield worthless results.

The authors performed this financial analysison the three largest publicly traded hospitals and calculated the financial impact of the proposed CMS civil monetary penalties on these 'for profit' hospitals. Recall that the "Price Transparency Final Rule" penalizes hospitals with fewer than 30 beds at $300 daily for small hospitals, and large hospitals (more than 30 beds) at $10 per day per licensed bed, which cannot exceed the daily penalty of $5,500. Both numbers are completely ineffective in bringing about any significant change to the obscure pricing model that the hospital industry currently employs, and which the Biden administration promises to change after January 1, 2022. The maximum penaltiesfor small hospitals (fewer than 30 beds) is $109,500 for a full year of noncompliance. Large hospitals (more than 30 beds) will have to pay nearly $2.007 million for a full year of noncompliance from the starting date of January1, 2022. These monetary amounts may seem fair to the uninformed public, but after examining the 2020 10-K reports (2020 annual reports), it becomes clear that the CMS penalties are equivalent to a minuscule slap on the wrist for a full year of noncompliance.


The three hospitalsexamined were:

1. Hospital Corporation of America (stock symbol: HCA)

2. Community Health Systems(stock symbol: CYH)

3. Tenet Healthcare Corporation (stock symbol: THC)


For example, HCA healthcare owns and operates178 general and acute care hospitals with over 48,492 licensed beds as reported in their 10-K statement for December 31, 2020. Community Health Systems owns and operates 89 hospitals with aggregated 114,110 licensed beds and Tenet Healthcare Corporation owns and operates 65 hospitals with 17,178 licensed beds as of December 31, 2020. Our financial analysis focuses on Free Cash Flow because it represents the cash that a company can generate after expending the money requiredto maintain its asset base and pursue opportunities that enhance shareholder value.


Below are the calculations for thethree hospitals:

1. Hospital Corporationof America (HCA): 48,492 licensed beds multiplied by $10 per bed per day is equivalent to $484,920 daily civil penalties, which annualizes to $177 million. As of December 31, 2020 the Free Cash Flow reportedby HCA was $6,400 million. Compared to the CMS Total Maximum penalty ofnearly only$2 million,the CMS penaltyis

significantly lessthan 1% of the 2020 Free Cash Flow (4).


2. Community Health Systems (CYH): 14,110 licensed beds multiplied by $10 per bed per day is equivalent to $141,100 daily civil penalties, which annualizes to $51.5 million. As of December 31, 2020 the Free Cash Flow reported by CYH was $1,740 million. Compared to the CMS Total Maximum penalty of $2 million, the CMS penalty is also significantly less than 1% of the 2020 Free Cash Flow (5).


3. Tenet Healthcare Corporation (THC): 17,178 licensed beds multiplied by $10 per bed per day is equivalent to $171,780 daily civil penalties, which annualizes to $62.7 million. As of December 31, 2020 the Free Cash Flow reported by THC was $2,870 million. Comparedto the CMS Total Maximumpenalty of $2 million, the CMS penalty is significantly less than 1% of the 2020 Free Cash Flow (6).


As the calculations show, the CMS civil penalty is significantly less than 1% of the 2020 Free Cash Flow for each of these three 'for profit' hospital companies. This miniscule slap on the wrist for a full year of noncompliance starting on January 1, 2022 is absurd; we suspect that it is the main reason why most of the 6,210 hospitals in the nation continue to not post their prices on the Internet as the CMS "Price Transparency Final Rule" requires. Instead, the CMS should adopt a penalty of 10 percent of Free Cash Flow on each company, which would equate to $640 million on HCA, $5 million on CYH, and $6 million on THC. In the case that a hospital reports negative Free Cash Flow, the CMS should impose their current maximum total civil penalties of nearly $2 million and adjust this figure for medical inflation annually.

By imposing much stricter guidelines and yielding far greater monies for CMS to impose further penalties on hospitals that do not comply with the requirements, a greater amount of spending will be availableto each state, which is forced to balance budgets in the long run, and which will make more resources available for education, infrastructure, and other sources of needs now lacking in these state-funded areas.


Endnotes:

  1. 1"Fact Sheet CY 2022 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical CenterPaymentSystemProposedRule(CMS-1753-P)."CMS,https://www.cms.gov/newsroom/fact-sheets/cy-2022-medicare-hospital-outpatient-prospective-payment-system-and-ambulatory-surgical-center.

  2. Pettingill, Bernard F, and Federico R Tewes. "Analysis and Forecast of Nursing Care Costs." Pettingill Analytics, 30 Sept. 2020, https://www.pettingillanalytics.com/post/vaping-class-actions-damages-in-the-shadow-of-tobacco.

  3. Pettingill, Bernard F, and Federico R Tewes. "Orthopedic Surgery for Elderly Requires Universal Adoption of Maryland's Total Cost of Care Model." Pettingill Analytics, 10 Mar. 2021, https://www.pettingillanalytics.com/post/orthopedic-surgery-for-elderly-requires-universal-adoption-of­ maryland-s-total-cost-of-care-model.

  4. HCA Healthcare Inc. "10-K Annual Report FRI Feb 19 2021.'' Lastl0K.Com, Lastl0K.Com, 19 Feb. 2021, https://lastl0k.com/sec-fiIings/hca.

  5. Community Health Systems Inc. "10-K Annual Report Thu Feb 18 2021." Lastl0K.Com, Lastl0K.Com, 18 Feb. 2021, https://lastlOk.com/sec-filings/cyh.

  6. Tenet Healthcare Corp. "10-K Annual Report FRI Feb 19 2021." Lastl0K.Com, Lastl0K.Com, 19 Feb. 2021, https://lastl0k.com/sec-filings/the.









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