Is the next shoe to drop on the economy healthcare?

With all the changes occurring in health and health care it may be wise to study these changes with more of an economic perspective rather than emotional rationalization. Reimbursement from government insured programs have been substantially reduced 15 to 25% per year over the last three years. Many marginally successful medical practices have been forced to close or merge with other groups or institutions. How will these reductions effect your hospital and the way you receive care?

Please find the following excerpt taken from The Economics of Health and Health Care Seventh Edition Copyright 2013,2010,2007,2004,2001 Pearson Education, Inc. Authors: Sherman Folland, Allen Goodman, Miron Stano Pgs 291 Paragraph 2.

"Determining the burden of lower public reimbursement is complex. The burden ultimately can be borne by many groups through reductions in the number of hospitals, lower compensation to hospital employees as the demand for their services diminishes, reduced access to care for those with public insurance or those receiving uncompensated care, and higher fees to the private paying groups.

A review of the evidence on cost shifting by Morrisey (1995) indicates that cost shifting through higher prices has taken place but that it is far from complete. One study included in his review shows that California hospitals reduced the amount of uncompensated care by 53 cents for every $1 decrease in their discounts to third parties. This would have been unnecessary if the hospitals could have shifted the cost to others.

More recently, following reductions in Medicare payments to hospitals, Wu (2010) found relatively little cost shifting overall but large variations across hospitals. Those where Medicare reimbursement was small relative to private insurance were able to shift nearly 40 percent of the Medicare cuts. Hospitals that relied more heavily on Medicare patients were much more limited in shifting costs.

Closures, Mergers, and Restructuring

We have already referred to some of the dramatic changes affecting hospitals. The growth of managed care and the introduction of reimbursement methods that discourage inpatient care and long lengths of stay have contributed to declining inpatient utilization. In response, capacity has been reduced through the sharp drop since 1980 in the number of hospitals and beds (Table14-1). Even so, with occupancy running at just 68 percent in 2008, excess capacity remains one of the most visible and significant characteristics of the hospital industry.

Although hospital closures can be painful to a community, the restructuring of the hospital industry should be viewed as a market response to cost-containment efforts. Nevertheless, it remains important to determine just how well the market works for this sector, and, in particular, whether inefficient hospitals are more likely to close.

Cleverly (1993) examined 160 community hospitals that closed between 1989 and 1991. Most were small, located in rural areas, and had sustained progressively larger losses for several years before closing. High costs and high prices, low utilization, and little investment in new technology were common features. From the characteristics of failed hospitals, Cleverly describes the road to failure. High prices and lack of investment in technology drives patients away. With lower utilization, costs per patient increase and cash flows become negative. The deteriorating liquidity ultimately leads to closure.

The relatively large number of small, rural hospital closings has challenged policymakers to maintain access for rural populations. To prepare for unexpected influxes of patients, small hospitals have higher rates of excess capacity and, hence, lower occupancy rates than larger hospitals. Various federal programs provide subsidies to these hospitals. Nevertheless, rural hospitals can increase their chances of survival by practicing good management and responding to competitive pressures. Succi and colleagues (1997) found that rural hospitals gain an advantage and reduce the threat of competition by differentiating their services. Those that offer more basic services with high-tech services compared to the market average are less likely to close."

The Economics of Health and Health Care Seventh Edition Copyright 2013,2010,2007,2004,2001 Pearson Education, Inc. Authors: Sherman Folland, Allen Goodman, Miron Stano Pgs 291 Paragraph 2-8.

The story has yet to play out. Hospitals are finding it increasingly difficult to fund operations when their client base is dependent on government subsidies. My recommendation for the immediate future is if you are going to be ill, do not wait until Obamacare has been implemented, do it now while you can still benefit from our "free market" health care before it is lost to a single payer system.

submitted by: David Enicks Sales Associate Medical Office Specialist CBC Benchmark (904) 421-8533. Specializing in Medical Office Sales and Leasing since 2006.