Issues with Hospital Networks

1
Issues with Hospital Networks

• HCR220
• Spring 2006

2
Development of the Modern Hospital

• Hospitals founded
• 1527 in Mexico
• 1635 in Canada
• 1751 in the US (PA Hospital, Philadelphia, PA)
• American hospitals
• Based on the model of the British voluntary
• hospitals
• More likely to have paying patients (tended to be
  
• charged extra to subsidize the poor)

3
Development of the Modern Hospital

• Economics have changed dramatically!
• 18th 19th centuries
• Most funding came from donations
• Patient fees played a minor role
• No insurance reimbursement
• Major expenditure category was food
• Today
• Hotel costs (i.e., room and board) account for
  
• of expenditures

4
Revenues The Flow of Funds into the Hospital

• Largest sources of payment -- Medicare !!
• Revenue growth has slowed since 1990 as managed
• care has taken hold
• More revenues are coming from outside the
  hospital in
• form of outpatient services or new business
  ventures (e.g., ambulance nutrition counseling,
  home health care, etc.)
• Over 95 of revenues come from someone other
  than
• the recipient of services, hospital behavior is
  not
• significantly shaped by consumers decisions
  based on
• prices (as in most other markets)

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Sources of Revenue

• Philanthropy and Grants
• Global Budgets
• Charges
• Cost Reimbursement
• Per Case Diagnostically Related Groups (DRGs)
• Capitation
• Managed Care Contracts

6
Organization Who Controls the Hospital

• Hospitals differ from the standard businesses in
  3 ways
• (1) Patients (customers) do not pay, due to
  insurance
• or charity
• (2) Ownership is usually unclear, due to
  nonprofit
• voluntary or governmental organization
• (3) Medical care is largely controlled by doctors
  who
• neither pay nor receive any money from the
  hospital
• and therefore have no direct connection from a
• flow-of-funds perspective

7
Philanthropy and Grants

• Grants
• Funds donated for a specific purpose
• E.g., Carry out cancer research, building a new
  operating pavilion, provide outreach programs for
  prenatal care, etc.
• Donors want to make sure funds are used for the
  intended purpose, but there is little direct
  pressure to compete on price or to control costs
• All non-profit organizations start with a
  charitable grant
• Tax appropriations are a form of grant
  (government is donor)
• Tax breaks (relief from property taxes and user
  fees) are important but controversial

8
Global Budgets

• Grant for all of a hospitals costs
• Typical payment for state mental hospitals,
  military
• hospitals and the VA, other government entities,
  and a
• few specialized private institutions
• Fixed ? few incentives to attract more patients
  or
• reduce costs
• Form of hospital payment in Canada, England, and
  many
• other developed countries outside of the US

9
Per Case Diagnostically Related Groups (DRGs)

• DRGs are administered prices set by the
  government at what they think is a fair rate
• Prospective payment system because DRG rates are
  set in advance
• Buyer (Medicare) has all the rate-setting power

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Costs The Flow of Funds Out of the Hospital

• Labor accounts for bulk of hospital costs
• Today hotel functions are relatively minor in
  comparison
• to the provision of medical care
• Physician care is paid separately largely not
  included in
• the hospital budget
• Expect expensive medical technology would make
• equipment a large category, but the wages of
  the skilled people required to operate each new
  piece of equipment usually runs 2 or 3 times the
  cost of the machinery itself

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Cost Shifting (also called Cream skimming)

• Providing only the services that are overpriced,
  and not the one that is more costly and
  subsidized
• Specialty Hospital treats only selected
  diseases or populations. Example Arizona Heart
  Hospital.
• subsidized.
• Forces the question of who will pay for the poor
  and
• who will pay for research and the poor.
• With cost shifting, there is an opportunity for a
  firm to make extraordinary profits

12
Total Hospital Profits Margins Beginning To Trend
Down
Estimate
Sources 1997-2000 Moodys all rating medians,
2001 AHA national hospital indicators survey
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Hospitals face severe workforce shortages
Vacancy Rates for Selected Hospital Personnel 2001
Source The Healthcare Workforce Shortage and
Its Implications for Americas Hospitals, First
Consulting Group, Fall 2001
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Greatest Risk

• Small volume hospitals
• Cant make the utilization underlying current
  payment approaches
• High uncompensated care hospitals
• Mandate for care not matched by mandate for
  payment
• High debt load hospitals
• Financial inflexibility

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Table 2.1 Number of Hospitals by Type, 1980-2000
Specialty Hospitals
All Hospitals
Psychiatric
General
Fed General
Total Other
Pediatric
Rehabilitation
Fed Psych
Includes specialty hospitals such as TB, Ob-Gyn
eye, ear, nose and throat orthopedic and chronic
disease. Source American Hospital Association,
personal communication.
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Hospital Closures and Mergers
Data on all US registered hospitals Source AHA
Annual Survey, Public Use File documentation
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Hospital Mergers and Financial Performance

• Large increase in number of mergers in the
  mid-1990s
• response to growing market pressures
• desire to develop regional health delivery
  systems
• Research suggests merger cost savings exist but
• small in amount
• result of one-time administrative streamlining
• more common in small hospitals
• promise of savings from clinical consolidation
  went unfulfilled

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Hospital Vertical and Horizontal Integration

• Integration undertaken for multiple purposes
  through various forms of arrangements
• Horizontal integrationseparate hospital systems
  from a new network. Provides more purchase power
  and less duplication of services. Questions have
  been raisedIs this a violation of anti-trust
  law?
• Vertical integration one hospital network
  offering all services. Hope to foster consumer
  loyalty. markets

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Health Plan
Affiliated Physician Networks
Flagship Hospital
Affiliated Hospital
Owned Physician Practices
Affiliated Hospital
HORIZONTAL INTEGRATION
Ambulatory Care Centers
Post Acute Facilities/Services
VERTICAL INTEGRATION
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Provider Horizontal Integration

• Examples
• Banner Health (formerly Good Samaritan Mesa
  Lutheran)
• Goals
• Operational efficiency
• Minimize redundancy and duplication
• Reduce number of competitors
• Expand geographic coverage
• Improve negotiating leverage with payers

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Vertical Integration

• Examples
• Sun Health, Lincoln Healthcare
• Aims
• Control patient flow/lock-in market share
• Solidify affiliations, particularly with
  physicians
• Position to receive and distribute capitation
• Pursue seamlessness across continuum of care

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Profit versus Non profit Hospitals

• Non Profit Hospitals--Approximately 60 of
  Hospitals
• Totally tax-exempt, Must provide charity care
• No shareholders/Cannot sell stock
• Can issue tax-exempt bonds and solicit donations
  from supporters.
• Must provide charity
• Profit must be used to benefit the hospital, such
  as buying new equipment or expanding cash
  reserves.

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Profit versus Non profit Hospitals

• For Profit Hospitals--Approximately 15 of
  Hospitals
• Pay corporate taxes
• Not obligated to charity care
• Have shareholders who want to see a profit
• Distribution of any profits determined by
  corporation.
• Some offer stock sharing plans to employees.
  Issue often how much support to local community.
• Numbers are increasing Two Major Stakeholders
  are Vanguard and Tenet Health

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Most Studies Find

• Non Profits are less costly for purchasers
• Non Profits to be more charitable
• But presence of For Profit changes the behavior
  of Non Profit
• Presence of for-profits has a cumulative
  effectMarkets with more for-profit hospitals
  have higher costs
• Less charity care in market with greater
  for-profit presence
• Regarding quality of care, most studies show no
  significance difference.

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Comparative Performance Not Sole Issue

• Presence of FPs changes the behavior of NPs
• Less charity care in market with greater
  for-profit presence
• Presence of for-profits has a cumulative
  effectMarkets with more for-profit hospitals
  have higher costs

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Uncompensated care

• Care provided by hospitals or other providers
  that is not paid for directly by patients or
  insurers
• Includes
• charity care (furnished without expectation of
  payment) and bad debts (provider has
  unsuccessfully attempted to collect)
• Unpaid copayments and deductibles
• Does not Includes
• Cost differences with capitation plans
• Lack of Medicaid payment for days beyond a length
  of stay limit
• Courtesy discounts for employees, etc

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Trend in uncompensated care costs and losses
Proportion of uncompensated care


covered by
Uncompensated care as a percent of total costs
government subsidies
Losses
Costs
Year
23.3 22.4
18.9
4.6 4.8 4.9
6.0 6.2 6.0
1984 1988 1992
17.3 12.1
5.1 5.3
6.1 6.1
1996 2000
Source AHA Annual Survey.
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How does uncompensated care vary by type of
hospital?
Uncompensated care as a percent of total
costs Type of hospital Costs
Losses Urban 6.4 5.3 Rural 5.3 4.7
Major teaching 10.0 7.4 Other
teaching 4.9 4.5 Non-teaching 4.9 4.4 Vol
untary 4.7 4.4 Proprietary 4.7 4.0 Urban
government 15.7 10.6 Rural government
6.4 4.9
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How concentrated is the provision of
uncompensated care? (continued)
Measure 1992 2000 Share of all
uncompensated 45 46 care costs furnished by
the top 250 providers
Of the amount furnished by 61
53 the top 250 providers, share provided
by government hospitals
Source AHA Annual Survey.
30
Revenue sources hospitals use to cover their
uncompensated care costs?

• Payments from private insurers (cost
  shifting)(private insurers now monitor closely)
• Government subsidies
• Operating subsidies (Hill Burton)
• Dedicated taxes(Medicare/Medicaid)
• Medicaid disproportionate share payments (if
  patient population primarily Medicaid) (Maricopa
  Med Center)
• Indirect medical education payments (U of A Med
  Center)
• Revenue from non-patient sources (Endowments,
  business enterprises, etc)

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Financial Pressures and Hospital Operations

• When confronted with financial pressures,
  hospitals
• reduce staffing levels
• reduce intensity of service (especially for
  patients whose payers reduce reimbursement)
• provide less charity care limit public
  health/specialty services
• seek new revenue sources
• face higher costs of capital
• ultimately go bankrupt

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Strategies for Hospitals

• Retain hands-on care as a core purpose
• Continue 24x7x365 care
• Reflect distinctive local characteristics
• View institution as programs, not facilities
• Focus on consumers
• Develop information service strategy
• Create own workforce
• Partner for capital
• Encourage innovative leadership

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Changing Hospital Roles

• Backstopping the system 24x7
• Increasing intensive care
• Increasing emergency care
• Terrorism preparedness
• Rural hospitals providing the continuum of care

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Todays Major Issues

• Financial stability
• Workforce
• Regulatory mandates
• Safety and error reduction
• Professional liability