Hospitals are in dire shape. 31% of US health care costs are from hospitals, and by almost any measure, they are hurting badly.
Revenues are declining, profitable services are way down, layoffs are announced weekly (layoffs, in healthcare!!), more and more patients are uninsured, and donations have declined dramatically. Those hospital systems that are reporting decent results seem to be doing so through one-time asset sales and other non-operating measures.
As to what’s driving the crisis; if you’ll forgive the creative math, here’s how the calculus works:
Rising unemployment -> more uninsured -> fewer profitable admissions + more charitable (i.e. non compensated) care + more Medicaid (i.e. money-losing) care = big financial trouble for hospitals
Almost all hospitals make their margins on private pay patients. According to Tenet Health’s CEO, (paraphrasing) ‘Tenet’s profits come from the 27% of patients who have commercial managed-care coverage; it breaks even on Medicare patients, and loses money, to varying degrees, on patients with Medicaid coverage, self-paying uninsured and those who qualify as charity cases’.
The latest bad news comes from Massachusetts, via FierceHealthcare and the Globe.
Here’s how the Globe put it:
“59 percent of hospitals statewide reported a drop in elective surgeries in 2008 and into the beginning of fiscal 2009…as more people forgo treatment, hospitals are suffering financially, industry specialists say. Their profits depend heavily on lucrative surgical procedures paid for by private insurers.” And that’s in a state that has fewer folks without health insurance than just about any other state in the country.
On the west coast, the problem is even worse. according to a CalPERS study, “One-third of private payers’ costs went to hospital profits and to subsidize a revenue gap”. Health plans paid hospitals $18 billion in 2005 for care that cost the hospitals $13 billion.
A hidden, but nonetheless significant contributor to hospitals’ woes has been the growth of high-deductible health plans. Patients with these plans seeking elective surgery often don’t have enough money in their deductible accounts to cover the deductible; hospitals are turning these patients away, unwilling to accept the risk of non-payment.
Impact on health plans
Health plans have been dealing with increasing hospital cost inflation for several years; what’s new is the worsening economy has significantly exacerbated the problem. Price has been the primary driver of hospital cost inflation; back in 2003-2004 prices jumped eight percent annually.
Healthplan giant Wellpoint saw hospital trend rates last year above ten percent; in their Q1 2009 earnings call they reported “Inpatient hospital trend is in the low double-digit range and is almost all related to increases in cost per admission. Unit costs are rising due to an elevated average case acuity and higher negotiated rate increases with hospitals.”
Aetna is also seeing significant cost inflation, driven by more services per admission, while HealthNet is enjoying cost inflation just under ten percent
The same trend hammered Coventry Health last year, leading to a big increase in their medical loss ratio, and eventually a management shakeup and re-ordering of priorities.
Impact on workers comp
Unlike group and individual health plans, workers comp patients don’t have to worry about deductibles and copays. Comp is ‘first dollar, every dollar’. And hospitals just love workers comp. Recall that workers comp generates one-fiftieth of a hospital’s revenues – and one-sixth of hospital profits It’s no wonder workers comp medical costs are starting to jump again – driven by cost shifting from hospitals desperate to make up for lost private pay patients
In recent audits (including a large self-insured employer and a workers’ comp municipal trust) the greatest year over year increase in their medical expenses was due to facility cost inflation (primarily hospitals and ambulatory surgical centers). Other clients are experiencing hospital cost trends above 10% year over year, and some are in the 12% range.
Post script – for a detailed review of the hospital perspective on the issues, click here.
May
6
The uncompensated care really is the driver of this problem. Everyone’s sense of entitlement Medical care with out payment is critical here in California where people will spend ridiculous money to pimp there ride but are outraged when presented with a bill for medical treatment. Some how we need to change the perception of what is valuable and worthy of investment.
Joe,
Near the end of this column you state, “Recall that WC generates 1/50 of a hospital’s revenues – and 1/6 of hospital profits.” I’m curious if you have a source for this statement. Thanks a million.