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.

Debating price transparency

Ever wonder how prices are set for healthcare services? If you've ever received a medical bill and wondered why it can't be simpler to understand, then you're asking the right question.

While there are many reasons why healthcare costs are spiraling, one of them is that nobody really knows what anything costs. Providers get paid through a multiplicity of insurance-company contracts and billing schedules that change from patient to patient, depending on the type of health plan. Recently a New York Times article covered the issue of 'balance billing'. A situation where doctors and other health care providers receiving discounted payments from the insurance company — an amount less than the fee they want to be paid — bill the patient for the 'balance'.

How are consumers expected to make well informed decisions if they have no idea what to expect with treatment costs? More importantly, what kind of treatment decisions should consumers be making themselves? The overall consensus however is that with consumers being asked to pay larger proportions of their medical costs, they should know what they are paying for.

That is precisely what the Congress is debating over: How much transparency in prices do we want in healthcare? The Health Subcommittee of the House Energy and Commerce Committee held hearings last week on three different bills—all designed to make prices in healthcare markets more transparent. A Wall Street Journal blog does a great job of summarizing the hearings highlighting leading points in the long-running debate over price transparency. Another article by Julian Pecquet of The Hill adds useful details on the democratic vs. the republican bills.

There are strong arguments for and against price transparency. An article in the American clearly summarizes the polarized arguments. On the one hand we have economists who believe that in the healthcare market, price transparency could result in higher, not lower prices, with providers charging as much as their competitors, thus defeating the purpose of transparency. On the other hand, we have proponents of consumerism, who believe that once American's, currently insulated by insurance, are made aware of the healthcare tag price – they will consume less.

In conclusion, while the price transparency legislation is off to a slow start, there are several unanswered questions. How will price transparency affect costs? Does transparency really affect consumer-consciousness in the healthcare market?

 

Cost containment and unfinished business

While the contentious healthcare reform bill enables access to health insurance for 32 million Americans, what about costs and efficient healthcare delivery?

The often-heard criticism of the 10-year, 1 trillion healthcare reform plan is that it simply does not do enough to rein in the cost of treatments. According to a government report released in February this year, healthcare spending grew to a record of 17.3 % of the GDP in 2009, $ 134 billion more than 2008, marking the largest one-year jump in its share of the economy since the government started keeping such records half a century ago.

The question then is, how does ObamaCare plan to deal with the American view of more care is better care? Given that the new healthcare overhaul requires the government to now pick up more of the healthcare tab, can we cope with that? Moreover, how do we convince patients and providers that new procedures, tests, drugs or devices that might save or improve lives really are not always necessary or worth the exorbitant prices?

A stark example of the inefficiency in the system was brought to bear in a recent study published in JAMA about the rise in unnecessary back surgeries. Despite the growing evidence that it does not really work well for patients and increases the likelihood of life threatening conditions like heart attacks, strokes and pneumonia, complex back surgeries have increased 15-fold between 2002 and 2007. In essence, more complex procedures mean higher payments for surgeons. The misaligned financial incentives, the paucity of patient education about less invasive treatment options and the trying-and-everything mentality in medical practice even if we’re not sure it works are all part of the problem.

And it’s not just more back surgeries. More CT scans pose a problem too. A recent study demonstrated the significant overuse of such scans, projecting that 15,000 people die in a given year due to the radiation received from CT scans. Caesarean births have become more common, with little benefit to babies and significant burden to mothers. Men who would never have died from prostate cancer have been treated for it and left incontinent or impotent. Cardiac stenting and bypasses, with all their side effects, have become popular partly because people think they reduce heart attacks.

Overall, the consensus is that culture change is needed to move away from wasteful spending to more efficient healthcare. They include new making doctors more sensitive to costs of care, establishing new payment methods for doctors, more comparative- effectiveness research and penalizing hospitals for inefficiency. The hope is that the Patient-Oriented Outcomes Research institute established by the healthcare Bill, charged with setting the national agenda for the comparative- effectiveness studies, as well as providing more money and disseminating results, will bring some order into the chaos of practicing medicine.