The Bottom Line: Hospitals Are Still Struggling It’s Been a Decade of Extreme Fiscal Challenge, and There’s No End in Sightv

Craig Melin has been a hospital administrator through enough economic cycles to know that the commonly held belief that health care is recession-proof isn’t entirely true.

Melin, president and CEO of Cooley Dickinson Hospital, explained that, while the medical sector fares better than some when times get tough (because the need for services doesn’t change with the economic climate), it has always been impacted by downturns in some ways.

And in the case of the Great Recession, which is officially over by most yardsticks but certainly still being felt in Western Mass., health care has been much more vulnerable than at any time in recent memory.

“This recession had a tremendous impact on employment, and it is still being felt — there are still many people without jobs,” said Melin, noting that such individuals, even if they have insurance (which most now do), will put off or cut back on most health care services that require them to take money out of their pocket, thus reducing volume at hospitals and other care providers.

But it is not just the unemployed who have been cutting back, Melin continued, noting that, in these lean times, many employers facing rising expenses and falling revenues have chosen to enroll staff in health care plans that shift additional burden to employees through higher co-pays and deductibles. Faced with these rising costs, many people with solid jobs are nonetheless putting off elective surgery, not scheduling regular doctor appointments, and even making prescriptions last longer by effectively paring the dosage.

“People stopped going to their doctors,” Melin explained, noting that the trend became evident and quite visible early this year. “Doctors suddenly found themselves with lots of open slots. Meanwhile, people were taking a long look at things like diagnostic tests and deciding that they were too expensive.”

But the effects from the recession and the shifting of burden in the cost of health insurance are just a few of the many challenges facing hospitals today. Most state governments are struggling; Massachusetts is no exception, and there has been a resulting drag on Medicaid payment rates. Meanwhile, health care reform is resulting in Medicare payment reductions for all hospitals, and this trend is expected to continue. And on the cost side, the hospital industry remains very capital-intensive, and the operating margins that facilities rely on to fund capital needs are becoming increasingly imperiled.

All this leaves hospitals in very much the same fiscal turmoil they were in when the Healthcare News made its debut in November 2000 — back when administrators were talking about the high cost of Y2K, and perhaps an even worse state.

The cover of the very first edition of HCN featured a picture of Hank Porten, long-time president and CEO of Holyoke Medical Center (known as Holyoke Hospital in 2000). He was smiling, but not at all happy about the conditions confronting his hospital and most all others. Porten used the word ‘nightmare’ to describe conditions then, and said it still applies today.

Lack of support from the state is so acute that Holyoke Medical Center, Berkshire Medical Center, and four other hospitals in the Commonwealth have filed suit against the state and specifically the Executive Office of Health and Human Services (EOHHS). The complaint states, in essence, that the Commonwealth violated its contract with the six providers, known as ‘disproportionate-share hospitals,’ or DISH hospitals, because at least 63{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of their revenue comes from public payers, including Medicare, Medicaid (MassHealth in Massachusetts), and others. Still very much in the discovery phase, the suit claims that the totals for unreimbursed care are more than $71 million over the past three years and nearly $106 million for the past six; Holyoke’s six-year shortfall is an estimated $10.04 million, while Berkshire’s is $7.8 million.

“We need the government to be a good partner,” said Porten, noting that at the moment, it is anything but that, and the odds for improvement in publicly funded programs is slim at best. “Unless the state and federal government come to the table and be good partners and pay for the cost of medical care, it’s going to continue to be very tough for hospitals.”

But while the current picture appears bleak, and many are dubious about the future, some see light at the end of the tunnel and insist that it is not an oncoming train.

Indeed, Tom Robert, chief financial officer for Mercy Medical Center, said that many people are about to become consumers when it comes to deciding where to go for health care, and this emerging trend, if one can call it that, bodes well for providers like Mercy, which provide quality care but at a lower cost than some other area hospitals.

“With all the changes that have taken place in health care, Mercy actually feels that there’s a silver lining for hospitals with high quality and low cost — it’s the value proposition,” he explained. “We’ve always had that, it’s nothing new, it’s just that people and the government are starting to get it; there are cost differentials that exist, and we need to incentivize employers and plans to set up tiered-type products that get the cost of overall care down.”

Looking both back over the past decade and ahead to what will come next, hospital administrators say that what’s ailing their institutions is systemic, and that mere improvement in the economy and a favorable ruling in the lawsuit against the EOHHS are not going to be enough to provide real relief. That can only come with fundamental changes in how health care is paid for.

Dollars and Sense

Melin told the Healthcare News that, lately, he been seeing this picture in his mind that effectively sums up the current situation.

He sees hospitals as buildings standing in the ocean. Their slim operating margins (most aim to have at least 3{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}) have been keeping them above water, but barely. As those bases are eroded, he continued, more and more hospitals, including historically healthy ones like Cooley Dickinson, will soon be underwater, both literally and figuratively.

Hospitals have already been forced into reductions in force and other steps to maintain their 3{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} margins needed to make capital investments, he explained, but if current trends continue, meeting this mark — his definition for making ends meet — will be increasingly difficult for some hospitals and nearly impossible for others.

How did it get this bad?

Mark Tolosky, president and CEO of Baystate Health said there are several factors that have contributed to current conditions. “The budget challenges of hospitals can be attributed to a number of factors, including the slowing of demand for elective procedures,” he told the Healthcare News. “Also, Medicaid payment rates that are well below costs, expense inflation that exceeds the payment-rate increase from most payers, the physician shortage, and the ongoing need to reinvest in facilities, capital equipment, and technology.

“Baystate has been notably challenged by low rates for Medicaid reimbursement,” he continued, “which represents a significant share of our revenue, and by the impact of the physician shortage on our ability to fill some physician jobs to accommodate our patients’ demand for services in some areas.”

But while inadequate reimbursements and physician shortages have been constants throughout the past decade, the Great Recession and its lingering effects, as well as the fallout from higher deductibles and co-pays being paid by employees, are more recent phenomena, and they have the potential for far-reaching trauma.

Melin, speaking with more than 20 years of perspective as CDH’s president and CEO, said that, while the health care sector certainly isn’t recession-proof, historically, the services it provides have not fallen into the category of ‘discretionary spending.’

Until now.

As he and others mentioned, people are putting off elective procedures, imaging tests, and even annual physicals with their primary care physicians, thus lowering overall volume for providers. Meanwhile, for those now unemployed, while they have insurance, it is from suppliers paying at or below what Medicaid is paying.

CDH is accustomed to growing at 6{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} a year in terms of admissions, said Melin, but in this environment, volume has been flat, and the recession and its heavy toll on the job market has a lot to do with this and the resulting reductions in force at CDH, Mercy, and elsewhere as hospitals reduced staff to reflect falling volume.

But starting in January of this year, the other shoe dropped in the form of higher co-pays and deductibles.

“Many employers were forced to move in this direction, and the worst culprit was the Commonwealth of Massachusetts,” said Melin, noting that CDH, which serves thousands of people employed at UMass Amherst, felt the impact first-hand — outpatient radiology was down 20{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, for example — so much so that another reduction in force was put into effect.

At Mercy Medical Center, the effects from the recession and higher co-pays and deductibles have prompted a 5{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} decline in overall volume, said Robert, who spoke with the Healthcare News after a budget meeting at which those sitting at the table projected similar numbers for the year ahead.

What’s Next?

Looking down the road, those we spoke with said it is quite likely that things will get worse for hospitals’ bottom lines before they get any better.

State and federal governments are struggling, and are expected to continue to do so for the foreseeable future. Meanwhile, the jobs picture continues to look bleak — although the recession is over according to most analysts and other areas of the state are faring better — meaning that volume will continue to drop at area hospitals or, at best, remain flat.

“I don’t personally think the recession is going to be over in the next few years,” said Porten. “This is a very funny economy — it goes up, things improve somewhat, but the jobs picture doesn’t get any better. We have an unemployment rate in Holyoke of 13.4{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}; I don’t ever recall it being higher, even in the middle of the recession.

“We need to get jobs, we need to get people working,” he continued, “and they need to get covered to some degree where they’re confident that they’ll be receiving a paycheck and getting insurance and getting themselves taken care of in a proper, orderly way.”

And eventually, the bill for putting off needed health care services will come due, said those administrators we spoke with.

Melin said that oncologists at CDH are already worried that many cancers will not be detected early enough to yield probable favorable outcomes because people either ignored signs of potential trouble or put off screenings.

“If people have cancer and they know it, they’ll go for the most aggressive treatment available,” he explained. “But if they don’t know … if the patient doesn’t come in when there’s some symptoms of pain or doesn’t get screened, there are going to be delays. And doctors are scared that because of those delays, that care they provide will be palliative, not curative.”

Like others, Tolosky said fundamental changes to the ways in which hospitals are reimbursed for care are needed to rectify current problems and bring long-term relief.

“Looking around the region, I can say that every hospital in Western Mass. plays an extremely important role in its community, and every hospital is doing its absolute best to provide high-quality care amid fiscal challenges that, it’s fair to say, are unprecedented,” said Tolosky. “For all hospitals, government payments — particularly Medicaid — need to correlate more closely to costs. That would help to neutralize the impact of patient-mix differences among hospitals, and would also help reduce the payments required from the private sector.”

Robert said such change is already coming with the increased importance placed on value that he’s noticed, with more such emphasis to come in the future because of the additional burdens placed on both employers and employees and the differentials that will increasingly become part of the landscape.

“Patients are about to become consumers of health care, which they never have been before,” he said. “It’s never reached the point where patients have had to make decisions, because their deductable was always the same no matter where they went; they’re part of the system, and they go with the flow. All that is going to change, and people are just starting to get it.”

Melin, like Robert, said the payment system must change nationwide, from a fee-for-service model to one that incentivizes hospitals and physicians to do more to keep people healthy than treat them when they’re sick.

CDH has been moving in this direction for several years now, and is well ahead of the curve, he said, but most hospitals are still well behind it, meaning that a large-scale adjustment is needed.

“If we do it the old way and just change things a little, that won’t work,” he explained. “There needs to be a profound change in how we do things.”

Sinking Feeling

Returning to that image in his head of hospitals standing in the ocean, Melin said the water is rising, and dramatic steps are needed to keep hospitals from going under.

“What’s needed is a massive overhaul of the health care system, not just an improvement in the economy,” he explained.

The past decade did not produce that kind of overhaul, which is why the Healthcare News can use the same headline as it did in November 2000 to sum up the plight of hospitals, and why Porten can still make use of the term ‘nightmare.’

Perhaps the next 10 years will produce an end to that nightmare.