Code Red: Hospital Costs

Hospitals today suffer tremendous strain on their bottom lines. Reimbursement levels are dropping, revenues are declining, yet costs are climbing.
Increased spending on hospital care, home health services, drugs and public health programs will help push total health care spending from its current 16.2 percent of the economy to a fifth of the economy within the next 10 years, according to the Centers for Medicare and Medicaid Services.
“During the last couple of years, Medicare reimbursements have been stable, but with federal deficits, the states are seeing a decline of Medicare reimbursements,” said Richard Gundling, vice president of Healthcare Financial Management Association. HFMA is made up of more than 34,000 health care financial management executives and leaders.
Medicare is distributed between employers and employees while Medicaid is distributed to federal, state and local governments.
Medicare accounted for 27 percent of health spending in 2003, according to the report by the Centers for Medicare and Medicaid Services.
Tulsa hospitals undergo similar results, according to a pair of hospital executives.
Hillcrest Hospital, which provides 61 percent of the Medicaid or indigent care in the Tulsa market, also offers up to 40 percent of the uncompensated care in the area, said Robert Langland, Hillcrest Health System CFO.
“We support three teaching programs — and continue to support them with funding going down,” he said.
Labor is the most significant cost.
“After that, it’s technology. Technology changes so quickly. Years ago an MRI was a million-dollar investment and you’d think it would last you 10 or 15 years,” Langland said. But the technology is changing so fast that you’re looking at three-to-five years on an MRI and it’s a $1million-$2 million investment.”
Hillcrest also has the highest-valued property on the Tulsa county tax roles.
Labor costs and supply costs account for about 70 percent of the total expenses at St. John Medical Center, said Lex Anderson, St. John CFO.
“Labor is about 50 percent all by itself,” he said.
A third area that doesn’t show as an expense because of the way it’s reported is uncompensated care, Anderson said.
“That has to do with the shortfall that Medicaid pays us when we see Medicaid patients and the amount of charity that we give away in terms of free service and bad debt,” he said. “Charity is provided to patients with whom we’ve done the assessment and decided that they can’t pay the bill. Bad debt happens when the patient seems to have the financial resources, but for whatever reason, don’t pay their bill.”
In terms of dollars, uncompensated care is equal to about 10 percent of St. John’s total revenue stream, Anderson said.
In the long term, an increasing amount of economic resources are going to a part of the economy, Gundling said.
Spending by the federal government for health care reached $344 billion in 2003, or 21 percent of HSS. Federal health care spending growth decelerated sharply in 2003, at roughly one-half the 2001 and 2002 rates, according to the report.
Growth for all federal health programs, except the Department of Veterans Affairs and Indian Health Service, slowed between 2002 and 2003.
Medicaid spending, which was 47 percent of health care costs in 2003, also dropped sharply, slowing from 12.6 percent growth in 2002 to 6.9 percent in 2003, according to the report. While nearly all states implemented cost containment efforts in 2003, many states specifically controlled growth in Medicaid spending and enrollment by tightening eligibility and restricting benefits, according to a report from the National Governors Association and National Association of State Budget Officers.
Executives’ natural reaction is to cut costs.
Hospitals have developed extensive experience at implementing cost cutting campaigns to maintain profitability. While these efforts have made a difference, profit margins continue to shrink from year to year, he said.
Nursing shortages, labor and salary costs are rising as well.
“There are a lot of efforts to chip away at costs,” Grundling said. “Supply chains help control damage to the bottom line.
Moody’s reports that the percent of medical supplies compared to total costs continues to rise.
The amount grew 1 percent in 2004 compared to 2003 and nearly doubled —1.9 percent — from 2004 to 2005.
Costs for general supplies in hospitals nationwide are nearly flat, staying at or below 22 percent since 2002.
Salaries, the greatest expense for hospitals, have continued to climb.
Hospitals have instituted several cost-control strategies.
“I think they are using information technology more and more,” Gundling said. “They are increasingly using automation, inventory management to track and deliver supplies for procurement and cut distribution costs.”
Other area hospitals are cutting costs with physicians’ preference items. Instead of five orthopedic surgeons ordering five different prosthesis, hospitals are encouraging them to agree on one type of device to take advantage of volume discounts.
Hospitals routinely treat uninsured patients, who are required during their hospital stay to fill out a financial disclosure form.
In some cases, hospitals enroll patients in the state Medicaid program.
The number of uninsured patients in the U.S. is growing — the percentage of uninsured rose 0.3 percent from 15.6 percent 15.9 in 2005. “Also, a lot of employers are switching to consumer-directed health plans where they can expect high deductible, and higher co-pays.”
“What happens is that these bills are more burdensome to collect,” Gundling said. “People know they have a financial obligation and are willing to make an effort to pay their bill,” hes aid.
Hospitals nationwide have created a sliding scale based on patients’ income, hoping to increase collections, create a fairer payment system and lessen the financial stress on uninsured families who might already have staggering medical bills. ?

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