Will it be misery or happiness for hospitals?

- Kristine Komives

How do hospitals make money? - By spending less than they earn.

But here is the situation that hospitals and health centers will be facing as health care reform legislation is implemented - there will be growing demand to eliminate wasteful spending, including excess care that would otherwise bring in revenue.

In the last few days, Moody’s downgraded the outlook for non-profit hospitals and health centers due to decreases in volume and lower reimbursement. In 2009, many hospitals saw salary freezes, suspension of construction projects or other capital improvement projects, layoffs and other drastic cost saving measures. But Moody’s predicted that “management teams will find it increasingly difficult to cut additional expenses.”

One of the overarching goals of health care reform is to bend the health care cost curve. One approach to do this is for third party payers to simply pay less for the health care provided. The inevitable cuts in Medicare and Medicaid reimbursement that will take place over the next several years will do just that.

Another approach involves patients using less services. There appears to be evidence that consumers are certainly spending less in light of the recession economy: not filling prescriptions, not following up on appointments or opting for plans with lower premiums and lower out of pocket expenses. In a recent article in Health Affairs, looking at Health spending by source show that “spending by households grew at 4.3 percent in 2008, a deceleration from 5.9 percent growth in 2007.” The article concludes “In response to poor economic conditions in 2008, people may have reduced their spending on health care and forgone some medical treatment. . .” Recent estimates on current spending in health care in 2010 corroborate the ongoing slowdowns in overall health care spending across all payment sources. USA Today just published its review of health spending finding that “Spending on doctor’s hospitals, drugs and other medical care climbed at a 2.7 annual rate person in the first half of 2010, the smallest increase since the Bureau of Economic Analysis began tracking medical care in 1959.”

The key to bending the cost curve correctly however is not for patients to stop getting the services they need to be healthy, as currently appears to be the case. Moreover, many health care costs are far beyond the realm of patient control. One thing seems certain however, bending the cost curve is going to mean decreasing revenue for those who provide care, especially hospitals and health systems.

Many of the strategies hospitals used to control their own costs in 2008 and 2009 were short term. In the long term, hospitals will need to invest money and resources to drive down costs they incur for the revenue they achieve. They will need to bend their own internal cost curves compared to the revenue earned. This will take investment in process reengineering and IT resources. They will need to achieve better alignment between clinical and administrative systems. This alignment must be completed not only to foster transaction level improvement but must be built to generate a better feedback loop of information to lead to large scale transformation. And all this will be taking place in a climate of unpredictable and likely declining revenue streams and difficult capital markets with which to raise funds. Otherwise their future will continue to be misery and not happiness.

Kristine Komives

Kristine is a recent graduate of the Executive Masters of Health Services Administration at the University of Michigan School of Public Health. She has 12 years of experience working in information technology, most recently in aligning information systems used throughout the supply chain at the University of Michigan Health System. She is very interested in strategic information management and the promise it holds in helping shape long term changes in the way we deliver patient care.