The Big Picture: A Look at Hospitals in a Volatile Healthcare Environment

1. The Big Picture: A Look at Hospitals in a Volatile Healthcare Environment Gloria J. Bazzoli, Ph.D. Professor of Health Administration Virginia Commonwealth University

2. Hospital Closures and Mergers Data on all US registered hospitals Source: AHA Annual Survey, Public Use File documentation

3. Industry Financial Performance & Closure/Merger Trends Source: AHA Annual Survey, Public Use File documentation & MedPAC reports to Congress, 1999 & 2002.

4. Organizational Change: Distressed and Non-Distressed Community Hospitals Source: Bazzoli and Andes, H&HSA, 1995; analysis replicated for 1994-98 period

5. 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

6. Changes in Hospital Credit Ratings: Last Decade

7. 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

8. Hospital Mergers and Financial Performance • Research suggests mergers increase hospital prices/profits: • especially for high market share services • especially in markets with low managed care penetration & limited hospital competition • Research suggests hospitals gaining leverage vis-à-vis health plans: • managed care backlash has reduced payer power • increased evidence of provider-insurer “show-downs”

9. Special Pressures on Hospital Safety Net • Safety net hospitals faced same pressures as other hospitals in 1990s and 2000s plus: • large and growing number of uninsured • confusion about Medicaid eligibility under Welfare Reform • reductions or limited growth in indigent care subsidies • Medicaid managed care • Total margins of DSH hospitals have declined

10. Trends in Total Margins of DSH and Non-DSH Hospitals Source: MedPAC Report to Congress, March 2002

11. The Balance Sheet: UC Costs and Subsidies (billions of $) 1997 UC costs of public/private hospitals: . . . . . . . . . . . . . . . . . . . . . . . . $18.5 1997 UC subsidies to public/private hospitals: Medicare DSH . . . . . . . . . . . . . . . . . . $ 4.2 Medicare IME . . . . . . . . . . . . . . . . . . . $ 4.4 Medicaid DSH: gross: . . . . . . . . . .$15.9 net: . . . . . . . . . . ~$ 8.3 net to hospitals: . . ~60% . . . . . .$ 5.0 TOTAL UC subsidies: . . . . . . . . . . . . . . . . . . . . . . $13.6 DIFFERENCE . . . . . . . . . . . $ 4.9 Sources: Melnick et al., 2000 and Coughlin et al., 1999

12. Evidence of Declining Voluntary Charity Care • Financial pressures of urban hospitals leading to reduction in their charity care provision • Physician involvement in charity care also appears to be on the decline • Increasingly, indigent care is concentrated in a small group of hospitals and physicians • Whether these trends will accelerate or diminish in the future is unclear

13. Needed Research:Financial Pressures and Hospital Operations • We need to know: • effects of financial performance on hospital investments in technology and infrastructure • effects of financial performance on quality of patient care and health outcomes • hospital turnaround strategies and their effectiveness • how communities managed and coped with hospital closures

14. Needed Research:Hospital Safety Net and Financial Pressures • How havecore safety net providers been affected in terms of: • their indigent patient volumes? • their ability to maintain physical plant, high cost technology, services and staffing? • ultimately, the care received by the indigent? • How will State budget crises affect: • State Medicaid/SCHIP benefits and eligibility? • provider payments and ultimately, provider willingness to participate in State programs?

15. Data to Assess Hospital Trends: National Sources • AHA Annual Survey • CMS Medicare cost reports • AHRQ National Inpatient Sample (NIS) • Financial data and reports of investment banking firms • National Hospital Indicator Survey (commissioned by CMS and MedPAC, conducted by AHA)

16. Data to Assess Hospital Trends: State Sources • AHRQ HCUP initiative: • State Inpatient Discharge (SID) databases • State Ambulatory Surgery Database (SASD) • Hospital financial reports filed due to disclosure requirements • Hospital community benefit reports filed due to disclosure requirements