Paying the Price The Recession Takes a Toll on Health Care

When the economy sours, says Hank Porten, financial and physical health go hand in hand. And not in a good way.

“We run about 25 physician offices, and we see it there first with cancellations,” said Porten, president of Holyoke Hospital, describing what happens during a recession when people lose jobs and money gets tight.

“People don’t want to pay their co-pays and deductibles, so they skip visits,” he said. “And then we start to see it in the emergency room — it turns out those people are a little sicker than they thought they were, and they have to see somebody soon, so they come into the emergency room, and we see a backup there.”

This ebb and flow between medical office cancellations and patients clamoring for free care in the ER can cause volatility that can makes it difficult to ensure the correct number of people staffing each department at any given time. But by far, the greatest effect is on the health of the community.

“The outcome of this is, when people delay their care, they end up more ill when they do get here,” said Porten. “We’re seeing acuity increase statistically. It’s very unfortunate that some patients elect to delay their visits because it can impact their health in a big way” — while leading to longer, more expensive hospital stays.

“At the same time,” he added, “I’m very sensitive to what’s going on because they have to make some tough decisions. One person told me, ‘do I get my pills this month, or do I feed my family?’ Those are very difficult decisions, but unfortunately, that’s the kind of thing we’re hearing at an increased rate.”

The fiscal challenges of health care — for patients and providers alike — are well-documented, and nothing new. But overlaid by a stagnant economy, those challenges become magnified, and threaten institutions’ ability to provide care and grow their facilities and services.

To illuminate just how that happens, Dennis Chalke, vice president of Finance at Baystate Medical Center, referred to a report by Moody’s Investors Service highlighting current strains in health care.

Moody’s cites several factors directly related to the struggling economy that are impacting hospitals and other providers of care. They include a softening of volume for paid services (and a corresponding increase in ‘free care’ provided at the emergency room), increased bad debt, challenges with accessing capital, and higher interest rates — these on top of the decades-old complaints about inadequate reimbursement from public and private insurers and the constantly rising costs of technology and research.

“It seems that hospitals across the state, including Baystate, have seen declining cash investments related to the stock market, and that reduces cash on hand,” Chalke said, echoing one of the points. “The reductions in the market also put pressures on hospitals’ pension plans — which is true across all industries.”

Chalke noted, however, that Massachusetts’ mandatory health insurance law has brought enough people under the umbrella — although tens of thousands still remain uncovered — that free care isn’t as much of a burden as it might be in other states.

“But there is some softening in terms of the volume of elective procedures being put off,” he said. “People are afraid to take time away from their jobs.”

In this issue, The Healthcare News examines some of the financial hurdles that the health care industry must face during a severe economic downturn — and why it’s not just wallets and investment portfolios feeling the pain.

Pay Up

Inadequate reimbursement rates have long been a scourge of health care. In Massachusetts, hospitals and other providers have complained for many years of Medicaid payments well under the cost of the actual care.

“Medicaid was paying 70 cents on the dollar not that long ago, and we’re rapidly moving in that direction again,” said Steve Bradley, Baystate’s vice president for Government, Community Relations, and Public Affairs.

“Providing health care is our mission,” he continued, “and the reason for us to be in business is to fulfill our mission. In order to do that, we need government payers to act in a reasonable manner and make sure that hospitals all across the Commonwealth are being paid at least the cost of the health care that’s provided.”

In one sense, Bradley noted, the mandatory-insurance law has actually been a strain on hospitals because treating patients has in many cases become unprofitable, and now many more of them are in the system.

“The government is doing a great job on access,” he said, “but not on covering the cost of care for the additional 40,000 to 50,000 people who now have insurance.”

Bradley also noted that Baystate is the second-largest provider of Medicaid services in the Commonwealth, with 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of its patients having some kind of state insurance or health-insurance subsidy.

“We are, in fact, a public safety-net hospital for all of Western Mass. when it comes to certain specialty care,” he said. “There needs to be statewide equity in the level of support that goes to safety-net hospitals.”

Craig Melin is also well aware of the critical role that hospitals play. As president of Cooley Dickinson Hospital, he saw that institution through some dire financial times not too long ago and said he’s determined to steer it through this recession without sacrificing patient safety or quality of care.

“In the old days, from the ’80s to the mid- to late ’90s, finance was the focus,” said Melin. “When we had only three days in cash on hand, survival was the issue. But we got past that, and the focus became quality. We never again want to fall into the survival mentality.”

Melin said Cooley Dickinson tried to get ahead of the economic storm clouds as early as last spring, when volume was dropping and insurers were changing they way they pay for services.

“We didn’t know whether it was just a blip, but by July we knew it was a trend,” he said. By September, the hospital was forecasting an $11 million revenue gap, and something needed to be done. After that, the hospital administration decided to take the financial issue to the hospital at large.

That’s how cutting a projected $8 million shortfall this year has become an open, facility-wide process. To get to that number, CDH has undergone two rounds of layoffs, which Melin said were largely based on performance, not length of service. More important, he distributed an information sheet to all employees breaking down the causes of the shortfall and soliciting input on ways each department could achieve savings under the budget.

“People have been remarkable,” he said. “And my bet is, by the end of the fiscal year, unless the economy takes another scary, downward turn, we’ll hit the $5 million surplus which is necessary to maintain the bond financing we’ve got.”

This strategy fits well with an initiative at CDH called ‘microsystems,’ by which frontline staff are empowered to evaluate processes and make suggestions for improvement, with the goal of raising the quality of care and cutting down on medical errors — which, in turn, will reduce costs for the entire organization.

“Aggressive improvement in medical errors, reducing infections, falls, pressure ulcers — those are the best ways to reduce costs,” Melin said. Meanwhile, ambitious coordination with other community providers is helping to reduce readmissions for the same event, which hospitals typically do not get paid for. And besides that, he said, “it’s the right thing to do.”

Including budget-cutting as a sort of microsystems process does more than save money, Melin said; it also makes employees stakeholders in the process and makes the numbers personal.

“We trusted them with all the information and asked for their help, and they can literally see the impact of what they do,” he said, adding that employees had access to a series of ‘town meetings’ and a suggestion box to further their ideas. “Our people are creative, and this gives patients more control over their jobs than they would otherwise have.”

Not every financial factor in health care is easily controllable by the rank and file, however. The Mass. Medical Society recently released its annual report of the physician workforce practice environment, and not only did the cost of maintaining a practice rise by 3.5{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} last year, but professional liability costs increased by 5.3{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} — this at a time when liability fees are falling nationwide.

In fact, according to the MMS, the gap between liability fees in Massachusetts and the country as a whole now stands at 9{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} — the widest disparity by far of any variable in comparing state and U.S. indices in the area of health care finances.

Porten, like others who spoke to The Healthcare News, cited pension woes as a major problem for businesses right now, and hospitals are no exception. “Even Fortune 500 companies are struggling with this issue,” he said. “With all the stimulus money coming out of the federal government, they’d better start looking at pensions.

“We’ve frozen our defined-benefit programs, so we’re not quite as vulnerable as some companies may be,” he added. “But health care is not recession-proof. This economy has had a significant effect on us. It’s hit us hard in our operations, our capital needs, as well as our funding for endowments and for pensions.”

Can We Build It?

Capital projects — during an era that has seen hospital and medical-office expansion flourish in Western Mass. — are also feeling the pinch, partly due to banks’ lending woes and a generally poor environment for credit.

“We’ve put our emergency room renovation project on hold,” Porten said. “We want a competitive rate on it, and right now, the banks aren’t lending like they used to — and that has affected us from a capital perspective.”

Baystate Medical Center’s ‘Hospital of the Future’ expansion project, originally tagged at a cost of $259 million, is being re-examined for cost savings as well.

“We’ve made it slightly smaller and reduced some of the shelf space, and are putting more equity into the project to reduce the amount we borrow,” Chalke said. “We’re still seeking other dollars, but we plan to move forward with that project in the near future.

“There were several months in the late fall and winter when hospitals had no access to the bond market,” he explained. “There were no buyers, and hospitals that wanted to issue bonds couldn’t for awhile. As the market began to loosen up a little bit, rates remained quite high. So it’s more costly to borrow than it used to be.”

Meanwhile, administrators there believe the recently approved federal stimulus package could bring some benefits locally.

“We’ve gone to the governor and his administration and asked for their assistance with the stimulus money flowing in from the government, and we’ve had some very positive discussions with Greg Bialecki, the secretary of Housing and Economic Development,” Bradley said. “The president is asking folks to create jobs immediately, and we have a shovel-ready project that can employ, when it’s going full-steam, 300 local construction trades workers.”

The hospital is awaiting an answer on what part those state and federal funds can play in the project, but Bradley maintains that Baystate should be a priority, since those 300 construction jobs will last three years, and the expansion itself will create 550 permanent, good-paying jobs at the hospital, resulting in a $20 million annual payroll increase for the region.

“We can put shovels in the ground in June and hire these construction workers immediately – many of whom don’t have jobs right now,” he said. “This should be a top priority for the community and the region as a whole.”

Clearly, the choppy economic waters are straining the ability of the state’s medical institutions to achieve their mission and continue to grow. Layoffs have been a fact of life at most area hospitals. “We have the same pressures on labor that other industries have,” Porten said.

“I’ve never seen anything like this in my life,” he added, noting that he has navigated the hospital through multiple recessions. “I’ve read about the Great Depression, and the major difference here is that banks are still lending to banks. But this is profoundly deeper and more complicated than I have ever seen in my career. It’s not a good place to be.”

If there is a bright side, he said, it’s that fixing the root causes of the recession — poor lending practices, allowing stocks and banks to mix portfolios, systemic fraud — the country might learn from its mistakes, and the economy could come out stronger in the long run.

“But, boy,” he said, “do we have a fight on our hands in the meantime.”