The Changing Hospital Market
by Elizabeth Kanabe
As states around the U.S. work towards deregulating the hospital industry, many hospitals find themselves unprepared for some of the consequences that have emerged. Although state regulations differ from one to the next, many hospitals seem to follow a generic pattern of operation. They function following the government imposed rules, make money where they can and cover money lost by redistributing their profits and taking what government help they can find. Because so much of the industry is still regulated, much of the hospital 'business' world is that of reaction with some creativity, new technology and increased efficiency mixed in.
In the past, hospitals provided the health care to the community. Physicians depended on the hospital and there weren't many other options for both physicians and patients. Hospitals had the money to invest in the technology and equipment needed, physicians didn't. The 1997 Balancing Budget Act affected both hospitals and physicians reimbursement rates, and since then it has changed how business is done for both parties. With reimbursements reduced, malpractice skyrocketing, and ever-changing regulations, hospitals and physicians were forced to examine how they could best make money in the future. Unintentionally, not all services were made to be reimbursed at the same rate. Some make money while others always are a loss for providers. Both parties looked to shift the focus on the more profitable services and to use that money to cover those procedures that were losing money. Services such as cardiology, orthopedic surgery, ear nose and throat, and oncology services brought in money, while services such as burn units, emergency rooms, and others always lost.
Even with this shift in focus, the hospitals did what was best for them often ignoring physician's interest to share in the profits. Many specialty physicians in the lucrative service departments wanted to share in the money made, but hospitals had little incentive to work with the physicians to share these earnings. So long as physicians depended on hospitals, there was nothing to worry about.
Then in the past few years another major shift occurred. Many states were successful in doing away with their certificate of need (CON) application process. This meant that hospitals no longer had to apply to the state every time they wanted to add new beds, grow a service, or make a change. This is a great success for the hospital industry in such states, as it allows patient demand and the market to determine what hospitals did, instead of a room full of government officials reviewing thousands of pages, and dollars, worth of applications each time.
As with all new opportunities, though, new providers emerged. The removal of CON applications for hospitals alleviated much of the paperwork and regulations inhibiting and slowing down growth, but it also allowed for the emergence of specialty hospitals. Specialty hospitals and free-standing surgery centers focus on profitable niche services and can now open such services without a CON, yet they are not necessarily restricted by some of the regulations that hospitals still are. For example, these specialty hospitals do not have to provide emergency room services. Because this is one of the biggest losses for hospitals, and because they are not forced to cover such losses, they get to keep the money that they make. These centers in southwest Pennsylvania were found on average to make as much as 11.85 cents for every dollar of revenue, compared to only 2 cents for local hospitals.
Physicians were also anxious at the new opportunities to partner up with each other and with new companies in the market that facilitated the opening of specialty hospitals through these partnerships. Physicians are, after all, often the ones with access to the patients. These centers often recruit the best specialists since the doctors can get a piece of the profit and also because they can offer incentives such as no ER coverage, which most physicians at hospitals are required to do. They can also attract many of the higher paying patients because of the new facilities and the ability to deny care to some patients.
Where does this leave some hospitals? Hospitals are worried that as many of their best specialists and top paying patients go to specialty hospitals, they will lose a lot of the money they used to make in these services. Left with the lower-paying patients and without profits to cover services such as burn units, emergency rooms, and community education, these services might close down.
Where does this leave patients? It leaves them with greater choices and consequences to consider in each situation. The specialty centers often have nicer facilities and experienced specialty surgeons, but they don't always have the money to purchase some of the latest equipment that hospitals can. Also, they don't have emergency room back up and other specialty physicians around in case they would require these services during a visit.
What will happen in the future? There are several things that will or already have happened. Many hospitals are partnering up with physicians themselves in these joint ventures to gain back a piece of the pie, even if it's a smaller piece than they originally had. Some hospitals are refusing to allow physicians access to their hospitals for admitting patients if they are associated with one of these niche providers. Many hospitals are forced to shut down their least profitable services when they can't afford them anymore. And still other hospitals look to lobby for further reform in regulations to fix their situation. Some states have thought about reenacting CON regulations, others are trying to pass regulations to prohibit physicians from admitting patients to hospitals where they have a financial interest, and still others are trying to make it mandatory for these hospitals to also provide emergency coverage and more charity care.
Two Sources:
"Heading a nice provider off at the pass", Hospitals & Health Network, August, 2002.
"Outpatient surgery centers show much higher profits", Pittsburgh Post-Gazette, August 20, 2003.
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