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Articles by Donald E. L. Johnson

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Hospitals must raise rates, make profits

By Donald E. L. Johnson

Health Care Strategic Management, June 2002, Vol. 20, No. 6

Copyright 2002 by The Business Word Inc.

States are slashing planned increases in their Medicaid budgets, and Congress is refusing to pay its fair share for Medicare, but private health insurance premiums are soaring 20% to 80%, and many hospitals are being paid more by managed care organizations (MCOs).

These conflicting trends are forcing hospital executives to make some important decisions about how they will react to the combination of governmental budget cuts and higher revenues from the privately insured.

Cry wolf or reassure employees? Do you cry “Medicare and Medicaid cuts continue” and impose new budget restraints on your institution? Or do you tell employees and the medical staff that things will work out because you’ll be generating more revenue from private payers?

A lot depends, of course, on whether a hospital can shift enough Medicaid and Medicare costs to private insurers to maintain a decent bottom line or at least break even. After several years of stunning premium increases, privately insured employers are in no mood to accept even more cost shifting, but MCOs’ profits are surging, and they can and will be forced to share more of their bounty with hospitals and other providers.

Back in 1998, this newsletter published articles and columns advocating an end to the price wars among hospitals and integrated delivery networks (IDNs). In most markets, such price wars have ended and providers have learned that they can wring higher rates out of private insurers, which pass those increases plus more on to the companies and workers that they insure.

Politicians force cost shifts Although the Federal Trade Commission is trying to use antitrust laws to keep physicians from conspiring to raise rates and is investigating some IDNs, it is unlikely to have a case against IDNs that have consolidated hospitals in their markets legally. It appears that most have.

Therefore, the burden will fall on hospitals to do the job that Congress and the states refuse to do. That is,  ‚Äútax‚Äù businesses and consumers by cost shifting to them. Someone must pay for the benefits that hospitals deliver to Medicaid and Medicare beneficiaries if Congress won‚Äôt pay. Such cost shifting is unfair. And it is unethical and dishonest for politicians to force providers to do it, but it must be done to preserve the integrity of the health care delivery system in this country.

Historically, cost shifting has been treated as a dirty, unspeakable topic in hospitals. Hospital executives have talked and worried openly about insufficient payments for their services to Medicare and Medicaid beneficiaries. But they said little about shifting Medicare and Medicaid costs to the privately insured and self-insured. And for good reason—they didn’t want to anger private payers, and they could use shortfalls in Medicare and Medicaid payments as excuses internally to cut costs and limit compensation increases.

The question at this time is, how long can a hospital hold that club over its employees? Certainly, the Medicare/Medicaid and HMO club has been used in hospitals to contain costs for a good 25 to 30 years, and there may be little choice but to continue using it. Employees may be so used to the “limited resources” chant that they just discount it and keep working.

But hospital and medical workers are some of the best educated and knowledgeable folks around, and they know the rest of the story. They know that private payers are screaming about soaring rates and that HMOs are reporting record profits.

Moreover, they understand the cost shifting game, and in at least two-thirds of the nation’s hospitals they see black bottom lines.

So why wouldn’t a hospital put a positive spin on the economic outlook?

Deliver quality care services and charge for them The morale-boosting message to employees and medical staffs might be: “Because Medicare and Medicaid are not paying their shares, we will have to charge private payers and the self-insured substantially more to ensure that we will continue to deliver the increased quality of care that our community demands. In the face of shortages of experienced nurses and other allied and administrative professionals, we must pay more to recruit the best people to our staff, and we intend to do just that. Our plan is to continue to be one of the best staffed, informed and equipped hospitals in the country and to charge our customers what it takes to deliver the best possible health care services at a reasonable profit or surplus. We need to maintain our profitability so that we can continue to finance the acquisitions of new technology and to replace worn out equipment and facilities. We also will continue to manage our resources as conservatively and responsibly as we always have, and, of course, we will ask our community to continue its generous philanthropic support of this wonderful medical center.”

Would such a declaration put a CEO’s job on the line? Would it stir a revolt among local employers and insurers? Anger politicians? Become news in the local papers and on local TV stations?

CEOs’ jobs always are at risk. And the easiest way to lose your job is to put a hospital into the red or deeper into the red. Declaring that you intend to maintain the financial health of an institution should not get you fired. It should get you a five-year extension of your employment contract. Just to be sure, it’s important to anticipate the public and political reaction to your institution’s reaffirmation of its long-term mission to serve its community.

Explain why you’re shifting costs In declaring its plan to shift costs and employ good people at reasonable wages and salaries, a hospital needs to provide employees, customers and the media with economic and demographic data that justifies its plans.

While most people working in hospitals probably understand health care economics and politics, most of the public does not. The public and politicians—especially politicians— need to be reminded over and over again that delivering health care services is a highly labor-intensive business. There are no short cuts. People need to be reminded as often as possible that the public’s demand for the latest drugs and technology and for increased patient access, safety and comfort costs money.

Tell employees, customers, politicians and the media that when there are labor shortages as there are in nursing, wages rise not only to solve short-term recruiting needs but also to draw more people into nursing careers.

Tell employees they’re worth every penny and more And be sure to tell your employees that you think they are worth every penny you can pay them, and you wish you could pay them more.

Report in as much detail as possible recent and anticipated cost increases. Explain why prices are higher for pharmaceuticals, malpractice insurance, equipment maintenance, new equipment and supplies.

Customers and politicians won’t like hearing that health care costs and expenditures will continue to escalate while their revenues are stalled and tax receipts are falling short of expectations. But there is not much they can do about it. If there are only one or two IDNs in town, and they both are in the same financial pinch, there isn’t much that insurers or the self-insured can do if hospitals raise their rates to cover their cost increases and to shift Medicare and Medicaid costs to the insured.

Meanwhile, employees will cheer a board of directors that has the determination and courage to fight for its employees and for quality care. When employees and medical staffs believe that management is fighting for them and for quality care, it will be easier for them to accept that some things just will not be affordable.

But they must believe that they will be well paid, that they will receive the continuing education and information that they need to do their jobs well and that patients will receive the best quality care possible.

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