Hospitals remain unsure of future business model

December 1, 2009
Michael T. McCue

If more patients are covered by Medicaid, hospitals stand to become unstable under reimbursement of 88 cents on the dollar

"Our biggest concern is about healthcare coverage and extending it to the maximum number of people, but that can lead to the chronic problem of potential government underpayments," says Richard Umbdenstock, president and CEO of the Chicago-based American Hospital Assn. "Medicare pays hospitals, on average, about 91 cents on the dollar, and Medicaid about 88 cents. If more of our patients are covered by those government programs, or some sort of public option tied to those payment rates, the result is going to be much greater financial instability for the entire system."

It's a perfect storm brewing across the healthcare landscape, and the economy is only one part of it, says Gary Blackford, president of Universal Hospital Services, a medical equipment outsourcing company based in Edina, Minn.

On the bright side, some experts believe that this difficult period has helped prepare hospitals for a brighter future by forcing them to become leaner and more efficient.

"It's not like hospitals simply closed their eyes and continued to plow forward during this down period; they made improvements in their ability to control expenses, particularly on the labor side," according to Gary Pickens, leader of the research and development group for the Center for Healthcare Improvement at Thomson Reuters.

MEETING THE CHALLENGE

Without many other viable options, so far, hospital executives have largely focused on cost cutting: freezing their capital budgets and cutting into their operating budgets. For the most part, experts say they've done a good job at that; in fact, some for-profit hospitals have posted record-setting quarter-over-quarter gains. They've made a solid recovery, but there is no indication hospitals have returned to business as usual yet. However, it does appear that they've at least weathered the storm, Pickens says.

Still, hospitals can only cut costs and put off expenses for so long, because they must continue to purchase supplies, while the clinical equipment accumulates wear and tear. They can't keep using the same X-ray machines and hospital beds for the next 20 years. Maintenance and new investments are a must.

"The good news is that the bond market has turned around, so hospitals are now able to get long-term financing at attractive rates," Blackford says. "In addition, while philanthropy and charitable donations did drop-as expected in a tough economy-they didn't drop as far as hospital executives feared they might. The public has understood the need to support the healthcare system, especially at the community level."

Hospitals also have done a good job of managing their labor expenses. When it comes to labor costs, the two easiest (though still painful) ways are to cut wages or decrease total headcount.