Is the Healthcare Bank About to Break?

Rising costs and shrinking margins – it’s a tough time if you’re involved in the financial side of healthcare management.

CEO of the Healthcare Financial Management Association (HFMA) Dr Dick Clarke says many hospital managers he has spoken to are worried about their ability to generate fee increases as costs meanwhile continue to increase, especially construction costs. He cites the prices of steel and cement, both of which have sky-rocketed as a likely result of a rise in demand from China, as an example.

Another pressure facing financial managers is the increasing drive towards automating electronic patient records (EPRs). "Everything in the US is fragmented, but the objectives are the same as in the UK," says Clarke. "[However,] each entity is responsible for what they are going to do and how to pay for it."

COMPETITION AND PAYMENT PROBLEMS

Because each facility is solving the issue of EPRs in its own way, the result is that many facilities are using different methods, meaning they cannot leverage any benefits from having the same operating systems. Although working towards the same goal, the fact that the businesses are in competition with each other means they are understandably reluctant to share data to maintain competitive advantage. This, says Clarke, can be a disadvantage. In contrast, a centralised EPR system is being developed in the UK which will allow facilities to share information for the advantage of everyone.

"On top of that is one of the terrible policy shortfalls in the US, which is an attempt to develop a comprehensive policy for everyone," he adds. "As the population continues to grow, it’s not that [patients] don’t get care, but that they get care from wherever they can be squeezed in and often go to non-profit-making hospitals. The expectation is that hospitals will provide the service without being paid. Within a range that can work, but if it continues to grow at a time when your ability to raise prices for those who can pay is under constraint, that causes a problem. All of these things are causing hospital managers to worry about the future.

"And it’s getting worse. If you look at the financial data for hospitals in 2005, you find they actually had one of the best years ever, financially. But saying they are doing well is to say they have a 3 or 4% margin, which is not enough. What people are finding is that this year they are having more trouble negotiating contracts. Looking to the future, there appear to be further problems ahead."

Clarke says it’s not just hospitals that are facing these challenges. Physician practices are facing similar problems – especially with the payments from the Medicare scheme. Starting in 2007, Medicare will being equalising rates for services provided by hospital outpatient departments and ambulatory surgery centres, significantly changing the competitive landscape for outpatient services. Hospitals will need to vigorously research and assess their outpatient business lines to ensure they can compete. Competition between hospitals and physicians will continue to intensify as physicians seek to compensate for ongoing pressure on Medicare payments.

Conversely, approval from the Office of the Inspector General (OIG) of eight gainsharing arrangements will lead more hospitals to explore carefully crafted gainsharing arrangements that align hospital and physician incentives to improve care and reduce costs while complying with anti-kickback rules. The system has a fundamental flaw in the way facilities are reimbursed, but because the programme is so politicised and highly charged, no one is willing to do anything to change it.

Equally, there is little pressure from voters. "Healthcare is the third or fourth issue on [American] voters’ agenda at the moment," says Clarke. "Iraq, energy and the economy are foremost in people’s minds. So Congress does not have healthcare at the top of its agenda."

TECHNOLOGICAL IMPACT

But it’s not all bad news. "We think there is an opportunity for technology to make a big difference in safety and efficacy of care," says Clarke. "One of the problems is, we are so fragmented that there are no standards by which different hospitals’ systems will be able to communicate with each other. A healthcare system may invest lots of dollars in technology and will want that as a competitive advantage, so they are not willing to cooperate with others."

Another positive for US healthcare facilities is the robust and growing population and the economy. The population growth is stimulating demand.

"The main areas that seem to be growing are at two ends of the scale," explains Clarke. "One is elective procedures such as cosmetic surgery, laser eye surgery and so on, and the other is outpatient procedures – we’re getting older and fatter.

"At the high end there are opportunities related to specialist services. We’re seeing more and more specialist hospitals that carry out focused activities such as cardiac and orthopaedic procedures."

So there is a mixed bag of news with regards to financial issues in the US hospital management sector. 2007 looks set to be a challenging year, but one that offers plenty of opportunities for success.