THE WALL STREET JOURNAL / CALIFORNIA
California's hospitals are facing a critical pinch, an industry study
shows, stuck between steep Medicare cuts and the country's most
pennywise insurance companies.
Over the past few years, Californians have led the nation in joining
managed-care health plans, which leverage large pools of consumers to
win volume discounts from hospitals and other health-care providers. As
a result, hospitals in California and other Pacific states have slashed
operating costs more than those in other parts of the U.S., according to
the study; expenses were an average of 11% below the national average
over the past three years, after accounting for cost-of-living and other
variances. (In addition to California, the Pacific region included
figures from Alaska, Hawaii, Oregon and Washington; although the study
didn't break out costs for California, experts say that, if anything,
those numbers are even lower here.) But the report, by HCIA Inc., a health-care consulting company in
Baltimore, says that what seem to be efficiencies in California
hospitals are really liabilities. That's because the hospitals' lower
operating costs allowed for the kind of cheap deals large insurance
companies wanted, and those deals, in turn, mean that it is harder than
ever for hospitals to practice so-called cross-subsidization, raising
sticker prices to make up for losses on indigent or
government-subsidized patients.
"Before, it used to be like a balloon -- if you push in one place,
you can expand in another," says Stephen Shortell, a professor of health
policy and management at the University of California-Berkeley's School
of Public Health. But now, "that's being eliminated."
Managed-care companies never pay sticker price, for one, and their
large pools of consumers also give them such bargaining clout that,
according to hospitals, they often can simply dictate prices themselves.
So California hospitals will have few ways to temper the Medicare
payment cuts from the Balanced Budget Act of 1997. The study predicts
that hospitals' median profit margins will fall to historic lows by
2002: to just 0.01% from the current 4.79%, compared with the projected
national average of 3.43%.
For consumers, that could mean fewer hospitals to choose from and,
after hospitals return to the bargaining table with private insurers,
higher premiums.
"People like you and me will end up paying more because our employers
will end up paying more," says the study's author, John Morrow, senior
vice president of HCIA. "There is going to be a reduced level of
services for seniors, less investment in local communities and some cost
shifting back to commercial insurers and private industries, because a
hospital is going to have to continue to figure out how to survive."
But hospitals say that needn't happen in the present economic boom,
when the federal government is running surpluses of $5 billion to $15
billion. They also point out that while the Balanced Budget Act was
intended to save Medicare $103 billion over five years starting in 1998,
the Congressional Budget Office has raised that estimate to $191.5
billion. So the industry is asking that Congress put some $25 billion to
$30 billion back into Medicare over the next five years, allowing
increased payments to hospitals. The money would come from a $100
billion reserve fund established for Medicare in the spring.
But there are other ideas on how to spend the money, including
President Clinton's prescription-drug program for Medicare
beneficiaries. And if Medicare funds aren't increased, the industry
paints a gloomy picture: hospitals closing, prices rising, research
atrophying and public-health campaigns collapsing. "It's a little like
the Titanic," says Carmela Coyle, senior vice president for policy at
the American Hospital Association in Washington, D.C. "We shouldn't have
to wait until we are on top of the iceberg to change course. . . . In
the past, hospitals could shift unfunded costs to the private sector,
but now the escape valve has been cut off."
And the hospital industry in California says the situation is even
more dire here. In addition to federal cuts in Medicare -- which
provides health insurance for the elderly -- hospitals say they are
chafing under restrictions in Medi-Cal, the state-federal program that
provides health care for the poor. And now, the state Senate is
considering a bill that would set expensive, mandatory nurse-to-patient
ratios in hospitals, says Mary Wallace, a spokeswoman for the California
Healthcare Association in Sacramento.
Hospitals here already have "cut costs to the bone," Ms. Wallace
says. Unless the Legislature puts more money into Medi-Cal, hospitals
will have to raise prices for other patients. "It's a trickle-down
effect," she says. "Out-of-pocket costs will rise, costs to private
insurers will rise, costs to {hospital} contractors will rise."
To be sure, the Golden State still offers some bright spots for the
health-care industry. The study projects, for instance, that while
hospital profit margins in the region will drop to 0.01% in 2002 from
3.94% in 1997, they'll fall further in some parts of the country.
Not all parts of the state will be affected equally by the Medicare
payment cuts, according to the HCIA analysis. For instance, the study
gave an "in danger" rating to Oakland, where costs have been slashed to
a whopping 38% below the national average, adjusting for severity of
illness and cost of living, and where profit margins are projected to
fall to minus 1.05% by 2002. But less than seven miles away in San
Francisco, the hospitals are "safe," the study says, and expected to
realize a profit margin of 1.57%.
Mr. Morrow is reluctant to venture a guess as to why that is, as is
Prof. Shortell, although both say that a heavier dependence on Medicare
and Medi-Cal could be at the root of it.
---
Carol Gentry contributed to this article.
---
Pay Cut
Economic Focus
State Hospitals' Efficiency
May Also Be a Drawback
By Ryan Tate
Staff Reporter of The Wall Street Journal
07/28/1999
The Wall Street Journal
CA2
(Copyright (c) 1999, Dow Jones & Company, Inc.)
Hospital profit margins for selected areas
Profit Margin
City 1997 2002*
Los Angeles-
Long Beach 3.19% -0.74%
Oakland 2.88 -1.05
Orange County 5.49 1.56
Riverside-
San Bernardino 5.59 1.66
Sacramento 2.73 -1.20
San Diego 1.53 -2.40
San Francisco 5.50 1.57
San Jose 2.64 -1.29
*Projected
Source: HCIA
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