Community program to limit hospital budgets
restrained overall hospital costs, but at a price to individual
hospitals
A community program to limit annual revenues of hospitals in
Rochester, NY, was successful in constraining overall costs for
hospital care in the area. However, individual hospitals may have
paid the price. Their total revenue margins appeared to be
neither consistently high nor stable during the program,
according to a study of the program's impact by Bernard Friedman,
Ph.D., and Herbert S. Wong, Ph.D., of the Center for Delivery
Systems Research, Agency for Health Care Policy and Research.
Rochester area hospitals, which voluntarily participated in the
Hospital Experimental Payment (HEP) Program, were waived from the
payment rules in Federal and State programs such as Medicare and
Medicaid. Instead, the HEP program, which operated from 1980 to
1987, assured all payers the same rate of increase in payments
per case, assured hospitals compensation for care of the
uninsured, and provided a forum in which the allocation of
capital spending for particular projects could be debated.
Real hospital expense per case grew annually by about 3 percent
less for Rochester area hospitals than for other hospitals
between 1980 and 1984. Although wages and benefits were higher in
Rochester hospitals prior to 1980, these differences narrowed
and, in the case of benefits, reversed by the end of the budget
agreement. Capital-intensive and expensive services, such as
intensive care units, were restrained in Rochester, compared with
elsewhere. Although hospitals were able to charge all payers the
same rate, which reduced administrative costs and competition
with other hospitals, cash flow in relation to total liabilities
was reduced to levels that were quite low by the end of the
period. The community might then have been forced to deal with
more difficult questions of reducing services or quality,
according to the researchers. They conclude the program probably
ended when hospitals felt that other payment schemes, such as
Medicare and Medicaid, offered them better financial
opportunities than the fixed budget of the HEP program.
For more information, see "Impacts of hospital budget limits in
Rochester, New York," by Drs. Friedman and Wong, in the Summer
1995 issue of Health Care Financing Review 16(4), pp.
201-219.
Hospital mergers in the 1980s often resulted
in conversion of
acute services to other functions
New technologies and pressure to shorten hospital stays reduced
the need for hospital acute care beds during the 1980s. In this
environment, hospital mergers occurring between 1983 and 1988
frequently converted acute, inpatient wards to other functions,
with less than half of acquired hospitals continuing acute
services after merger. A study analyzing hospitals that were
involved in mergers at this time suggests that mergers reflected
two hospital strategies: elimination of direct acute care
competitors or expansion of acute care networks. Both strategies
were designed to strengthen the financial position of the
acquiring hospital.
The study, supported by the Agency for Health Care Policy and
Research (HS06250), examined the premerger characteristics of
acquiring and acquired hospitals and the uses to which acquired
hospitals were put after merger. Researchers found that acquired
hospitals were closed in 17 percent of the mergers. After 42
percent of the mergers, acquired hospitals continued to be used
for acute services. When both hospitals retained acute services,
the acquirer and the acquired had greater similarity in service
mix, full-time equivalents per bed, and occupancy rates and had
complimentary locations. These factors allowed the development of
a horizontal network of acute care services and expansion of the
resulting entity's market share.
In 41 percent of the mergers, the acquiring hospital converted
general acute wards of the acquired hospital to nonacute
inpatient uses (for example, psychiatric and substance abuse
services, rehabilitation, and long-term care), which are
reimbursed by Medicare on a more favorable basis than acute
services. These mergers served to reduce direct competition,
consolidate services, and strengthen the financial position of
the resulting entities relative to the premerger hospitals.
The authors point out the need for additional studies to look at
institutions and communities after merger on a case-by-case basis
to find out how the community perceives the change and the
resulting institution, under what circumstances a community
embraces or turns away from the postmerger entity, when a merger
is counter to the public good, and finally, what criteria define
a merger that leads to lower costs to the community, improved
access, and/or better quality.
For more details, see "Hospital reorganization after merger," by
Richard J. Bogue, Ph.D., Stephen M. Shortell, Ph.D., Min-Woong
Sohn, M.A., and others, in Medical Care 33(7), pp.
676-686, 1995.
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