1. Recession. Though conditions have improved in some areas, hospitals are still feeling the lasting effects of the recession.
"This recession seems to be a two-step process that we are only halfway through," says Michael Rowan, COO and executive vice president of Catholic Health Initiatives in Denver. "The markets are improving but there are still a large number of unemployed out there, and that will affect hospitals' bottom lines." The recession has revealed itself in a variety of ways that are mapped out in numbers 2-7 below.
2. More non-paying patients. "Growth in unemployment has translated into growth of the uninsured," says Nancy M. Schlichting, president & CEO of Henry Ford Health System in Detroit. Michigan has had a longer and deeper drop in unemployment than any other state, with the jobless rate at 15 percent for the state and at 30 percent for Detroit alone. Ms. Schlichting says Henry Ford has seen a 20 percent growth in uncompensated care each year for the past two years.
Ms. Schlichting has been trying to find ways to cope with the influx of non-paying patients. Henry Ford is partnering with a federally qualified health center in Detroit to direct patients needing primary care from its EDs to the center. Even as the economy improves, Ms. Schlichting says the challenge of non-paying patients won't go away because unemployment will remain high. Washington has been trying to soften the blow. Dick Clarke, president of the Healthcare Financial Management Association, hopes that Congress' extension of COBRA eligibility for group insurance coverage for laid-off workers could markedly raise the number of paying patients.
3. Cancelling or delaying capital projects. The recession forced 44-bed Community Hospital in McCook, Neb., to initially postpone a $30 million building addition, says CFO Troy Bruntz. "We had to deal with lack of credit," he says. "Now it's starting to loosen up and we were able to actually get the funding we needed and push it through. But it created quite a nightmare the first six months of the year."
Hospital CFOs across the country have been laboring for months to find funds for capital projects, according to Mr. Clarke at HFMA. "As a result of bond insurance companies being downgraded, some hospitals are moving capital funds from a variable to a fixed basis," he says. Markets for fixed rate bonds in the past three months have become favorable hospitals with an A- rating or better, but Mr. Clarke says this change requires a great deal of paperwork.
4. Restructuring investments. Many CFOs have also had to pay close attention to the asset side in the balance sheet, Mr. Clarke adds. With investment portfolios hit hard by the stock market crash, "hospitals have been restructuring investments to make sure they have fully assessed the risks," he says. "CFOs have been asking: What is the allocation? What percentage of assets is in equities, what percentage is in fixed investments, what percentage is in alternatives, what are in the risky things like derivatives, hedge funds and real estate?"
5. End of the nursing shortage (for now). One good thing that has come out of the recession, says Thomas Dolan, president and CEO of the American College of Healthcare Executives, is that healthcare workforce shortages have eased. Nurses who had left the workforce years ago came back into it when spouses lost their jobs and had their pay cut. Although there are pockets of demand for more nurses, "my guess is that right now we have the largest percentage of licensed nurses in the workforce than ever before," Mr. Dolan says.
Mr. Rowan at Catholic Health Initiatives thinks it will take at least a few more years for the nursing shortage to return. Employment in other sectors of the economy will remain weak and "we're not going to go back to the go-go years we've seen," he says.
"Healthcare has become the employer of choice in tough times," observes Ms. Schlichting. Henry Ford hosts a healthcare retraining program for displaced autoworkers at a Detroit-area university. When Henry Ford West Bloomfield Hospital opened in 2009, she says 300,000 people applied for its openings.
6. Stagnant interest in healthcare executive positions. Another effect of the bad economy is healthcare executives' lack of interest in switching jobs, Mr. Dolan says. "Executive search firms say this is the worst year in their history," he says. Rather than follow their ambitions, moving the family to a new city and facing daunting administrative challenges caused by the recession, executives are staying put. "Few want to take on the risks of starting a new position in this economy," he says.
7. Coming up with new ways to save money. Hospitals have instituted budget cuts, laid off employees and canceled or cut back on capital projects. Many of these institutions, often to their surprise, ended this year in the black, with even higher surpluses than the year before.
"The worst of the recession may be over," says Nicholas Wolter, MD, a former MedPAC commissioner who is CEO of the Billings (Mont.) Clinic, which operates a 272-bed hospital. But Dr. Wolter he doesn't think hospitals will dispense with the cost-cutting mentality they have learned as they enter health reform. "Both the economy and health reform are putting pressure on hospitals to look at their cost structures," the former MedPAC commissioner says.
8. Health reform. Even though at the end of the year Congress still hadn't passed a bill and many of its provisions require several years to take effect, preparations for reform cast a giant shadow over 2009. "Health reform is really the lead story of the year," Dr. Wolter maintains. "What seems to be unfolding is really momentous." Hospitals were affected in the following ways (numbers 9-10) as a prelude to reform.
9. Deep involvement in grassroots lobbying. Despite the hospital industry's deep involvement in health reform planning, Mr. Clarke at HFMA says the process involved many anxious moments. When the House passed a public option tied to low-paying government rates, it looked like hospitals would take a big hit, though it is now unlikely that the public option will be in the final bill. The same happened when the Senate briefly flirted with adding people ages 55-64 to Medicare.
"I have been uneasy about the bills," says Mr. Bruntz of Community Hospital. Sitting at the keyboard in his small Nebraska hospital, he has been fully immersed in the Washington debate, reading about 10 e-mails a day on it, sending out letters and placing phone calls. Officials at his hospital have been in close touch with Sen. Ben Nelson (D-Neb.), who grew up in the same town. After Senate leaders agreed to fully underwrite Nebraska's share of increased Medicaid payments under the bill, Sen. Nelson cast the deciding vote in favor of reform. But Mr. Bruntz is not particularly pleased with the outcome, predicting that reform will raise premiums for the middle class.
10. Taking steps to get ready for reform. Reform would usher in big changes for hospitals. Expanded coverage will deliver hospitals more paying patients, but disproportionate share hospital (DSH) payments that covered uncompensated care will be phased out and many of the new patients will be covered with low-paying state Medicaid rates. Moreover, hospitals may be penalized for readmissions and be pressured to unite with doctors and other providers in integrated systems that orchestrate the entire episode of care.
HFMA's Mr. Clarke has been urging hospitals to prepare for these radical changes. "The start of a new year is the perfect time to infuse our organizations with a sense of optimism about the possibilities engendered by the imminence of reform legislation," he wrote in a recent message to hospital CEOs.
Many hospitals have already started. Ms. Schlichting personally chairs a policy group at Henry Ford looking at readmissions. The group has established a 24-hour call line to support discharged patients so that they won't be readmitted. She says the Henry Ford system is already well on its way to becoming an integrated system through Henry Ford Medical Group, made up of a salaried physicians in multiple specialties.
11. Push for healthcare information technology. In any other year, says Chip Kahn, president of the Federation of American Hospitals, the new HITECH bill would have been the most important piece of legislation, but this year it was trumped by health reform. The HITECH bill, part of the American Recovery and Reinvestment Act, the huge the economic stimulus package, will pay $30-$40 billion to hospitals, physicians and other providers that adopt electronic medical records and interoperability.
Lured by the federal incentive payments, "we have been adding technology more rapidly than we would initially have done," says Mr. Bruntz of his Nebraska hospital. But Mr. Rowan at Catholic Health Initiatives calculates that HITECH payments will only cover about one-quarter of hospitals' and physicians' costs for the new technology.
12. Reauthorization of the Children's Health Insurance Program (CHIP). Mr. Kahn says another huge piece of legislation overshadowed by health reform this year was Congress' reauthorization of CHIP. Passed in February, it is pouring $33 billion in federal funding into state coverage of children's healthcare over the next four and a half years, providing coverage to 4.1 million children who would otherwise have been uninsured.
13. Greater focus on fraud and billing errors. CMS' Recovery Audit Contractor program, which got up and running this year, unleashes private auditors to root out billions in Medicare overpayments in government-authorized audits. "We spent a lot of time preparing for RAC and now we are waiting for them to start asking for records," Mr. Bruntz says. In preparation for RACs, Mr. Rowan says Catholic Health Initiatives has started centralizing its billing and collections so that it can assure compliance with payment rules. The HHS Office of the Inspector General was also active in fraud and abuse investigations this year and will boost its budget by 50 percent in 2010.
14. Growth of hospital mergers. A lot of merger activity was starting even before the recession got under way. For example, Ms. Schlichting says Henry Ford has acquired two additional hospitals in the past three years. With the recession still eating away at hospitals' bottom lines, "there will probably continue to be consolidation with smaller hospitals that are still independent," she predicts. At Henry Ford, "we want to be very strategic about acquisitions, given the nature of our integrated health system."
Contact Leigh Page at leigh@beckersasc.com.