HFMA VIEWS

David A. Williams CPA, FHFMA
Partner, HORNE LLP, Jackson, Miss.

The status of today’s American healthcare system can best be described as dysfunctional. The healthcare payment and pricing systems are based on illogical systems that are grossly unfair, creating problems for all Americans. The budgetary constraints of federal and state governments have caused hospitals and primary healthcare delivery systems to experience payment shortfalls.  An emerging payment shortfall is being created by the growing number of uninsured Americans who do not have the ability to pay for health care (charity patients) or who are unwilling to pay for health care (bad debt patients). Although health systems continue to institute cost-control measures, they cannot make up the payment shortfalls. As such, the costs of shortfalls are generally passed through to commercial payers and consumers. In some instances more than one-third of the costs are shifted to commercial payers and consumers who pay for their services at healthcare providers. In an election year and with a new president in 2009, it will be difficult to determine whether or not this issue will be addressed, but let’s take a look at four drivers that will impact our healthcare system over the next three to five years: patient volumes, costs of care, pricing and payments, and cost of capital.

Patient volumes: Additional services will be needed by the aging baby-boom generation. This growing demand will overheat the current delivery system and require that some new and innovative approaches be developed. Consumers will see non-traditional settings for health care such as a clinic located at a local super center. Consolidation will occur as many small rural hospitals will become triage and treatment type centers supporting the larger regional centers. The safety net hospitals will experience additional financial stress with increased patient loads coming through the emergency rooms.

Costs of care: The most significant components of healthcare costs are labor and supplies. Five issues that will impact future costs include:

1. Accelerating regulatory requirements – the costs of meeting accreditation and quality measures
2. Labor costs – driven by nursing and other professional care worker shortages in addition to escalation of retirement and other benefits
3. Increased cost of supplies – physician preference items, new treatment items and impact of Medicare drug program
4. Ineffective tools impacting productivity
5. Slow development and resistance to pay for performance initiatives

Pricing and payments: It is important to recognize the difference between pricing and payments. Many consumers focus on the prices or charges that health care organizations bill for their services, but fail to recognize that on average 50 to 60 percent of the charge is written off as an adjustment. The result is that in many instances the payment rate is less than half of what was expected or billed. Stagnant Medicare payment rates, with payment increases barely covering healthcare inflation, will cause further financial stress in just about every health care organization. In addition, the Mississippi state health care program (MS Medicaid) is 100 percent at risk at the current time due to a looming deficit of approximately $150 million. This is due in part to the erosion of federal matching funds, where the Centers for Medicare and Medicaid Services mandated changes to restrict the funding mechanisms such as the Upper Payment Limit and Disproportionate Share Hospital programs. Finally, as health care consumers become savvier with their spending there is an indication of a movement towards package pricing. The result of the package pricing may be good for the consumer in the short run, but look for other areas to see corresponding increases as a result.

Costs of capital: Continued aging of facilities, rapid development of new technology, increased consumerism, and a national focus on patient safety are the primary drivers of the capital spending boom today. The following factors will influence health systems access to capital over the next three to five years:

• Cost of capital - operating margin slippage and quality indicators for debt issues will drive up the cost of borrowing
• The increasing threat to health care providers' tax-exempt status resulting from scrutiny over charity care and community benefit
• Increased private equity investments in health care will force up the costs of capital overall as investors seek to participate in profitable service lines
• Surplus in bed capacity in some markets will require conversion of excess bed space to areas of other patient care activities. This renovation cost will be in addition to the routine capital improvements health care organizations are required to make to keep pace with rapid technological and medical practice changes.

The future of the American healthcare system can be impacted most by the consumers. Today, we often take for granted the associated cost of the services we receive. In many organizations, the costs are borne by the employer, and those unable to afford health insurance either qualifies for government or charity programs while a segment of users simply won’t pay for care. We must ask ourselves is health care a right or privilege? Secondly, if it is a right, how much are you willing to pay for the care of others? Once we as consumers resolve those questions, we might be able to positively influence the future of health care.

Reprinted with permission from Mississippi Medical News.