‘Rich Hospital, Poor Hospital’ by Nancy Turnbull

If you need any convincing about the urgent need for reform of provider payment, check out the latest report on hospital financial performance from the Massachusetts Division of Health Care Finance and Policy.

The report gives a very stark picture of the growing gulf between the “haves and have-nots” among hospitals in the Commonwealth.

I think the operating results are the most troubling and relevant, since they show financial performance without the effect of non-operating factors like investment gains or losses.

Among the findings in the report:

• 40% of Massachusetts hospitals had a loss from operations in Fiscal Year 2008.
• The top quarter of hospitals made a healthy 2.9% operating margin; the lowest quartile lost money, with an average negative margin of 1.1%.
• The gap between the financial performance of teaching and community hospitals is getting wider and wider: the median operating margin among teaching hospitals was 4.1%–by far the highest level in the seven-year-period shown in the report– while community hospitals barely broke even from operations, with an anemic 0.4% operating margin.

Not all community hospitals did poorly on operations. As usual, Sturdy Memorial Hospital, a community hospital in Attleboro was among the most profitable hospitals in the state, with an 8.5% operating margin. And a few teaching hospitals had losses, including Cambridge Health Alliance, Dana Farber and Tufts Medical Center.

But the financial results for Massachusetts hospitals look more and more like the overall income distribution in the United States: the wealthy, the poor and a rapidly vanishing middle class.

In case you’re wondering, this is not about health reform. The gap between well-off and struggling hospitals has been growing for the past 20 years. This is about public and private payment systems that don’t work. It’s about systems that reward providing more and more care, whether we need it or not and whether it improves our health or not. It’s about disengagement by government and a misguided romance with the market as a way to set payment rates for health care. It’s about the market power of some hospitals to extract excessive rates of payment—unrelated to quality or efficiency–while other hospitals are paid inadequately. It’s about politics.

Reform of provider payment is an essential step to get to greater equity among hospitals and affordability of health care for the Commonwealth and all of us. While we must listen respectfully to those who caution that we can’t just change payment methods or rates overnight, we can’t let the fact that change is hard and disruptive be an excuse for not taking aggressive and bold action now. Otherwise the gap will continue to widen between the well-off and struggling hospitals in the Commonwealth. And this growing gulf will be harmful to the health of all of us.

Nancy Turnbull
Harvard School of Public Health

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  • Nancy T.

    Hi Paul

    Sorry for slow reply—I’ve been on vacation.

    With all due respect, I think you may have missed the point.

    To me, it’s hard to refute that the financial performance of hospitals is related to the illogic of current payment methods. First, different types of services have different levels of profitability. Hospitals that don’t provide lots of the highly compensated services generally don’t do as well as hospitals that do. For example, if a hospital provides lots of primary care and behavioral health, and not as many high-end specialty and inventionist procedures (e.g., cardiac surgery, orthopedics), it generally doesn’t do as well. Just ask Cambridge Health Alliance if you don’t believe this… Second, hospitals that have more market power—through geographic location and/or “brand monopoly”– do better financially. This is hard to dispute.

    Although I’m not involved in the payment reform commission, my understanding is that it is very much focused on moving the state to more rational payment methodologies, ones that will reduce unwarranted payment inequities both among services and across providers. I hope global payment will be among its strong recommendations. My following of the commission is that it’s been quite clear that insurance risk belongs with insurance companies, and I agree. But I think there’s good evidence—from the US and other countries—that global payment systems hold enormous potential for moderating costs and improving quality, if designed carefully.

    I hope we will also think about innovative benefit design and coverage policies as ways to contain costs and improve value. Limited networks might have some promise in this regard, although in many parts of the state there may not be enough providers to make limited network products very feasible. But I hope we won’t limit our thinking to networks alone. We need to get much more creative about finding every way possible to eliminate services of little or marginal value. If we do that, we might well have the resources to increase rates of payment for public programs. And, even more important, we’d free up public dollars to invest in education, housing, income support, public health, and, near and dear to your heart, I know, public infrastructure. All these investments would, of course, improve the health of all of us much more than more medical care.

    Nancy

  • http://www.runningahospital.blogspot.com Paul Levy

    Nancy,

    I fail to see what this has to do with reform of provider payment, at least based on what I have seen as the principles coming out of the reform commission. Those mainly seem to be based on movement from fee for service to capitated or bundled payments. How would that affect the relative financial performance of hospitals?

    I didn’t see the commission saying anything about reducing the effect of market power, but maybe I missed that.

    I also see the commission totally avoiding two key issues — the transfer of actuarial risk to providers and the design of insurance products based on more limited networks. The former could actually enhance the market power of those providers with larger balance sheets, in that they could absorb more risk than smaller places. Likewise, the latter could reward the hospitals systems that have bigger networks.

    It seems to me that you are misdiagnosing the problem in the conclusion you draw. Perhaps we could start improving financial performance by having the Comonwealth pay for Medicaid at compensatory rates. And yes, it would be really great if the state used its existing authority to openly publish real-time patient quality and safety figures, and payment rates to the various hospitals.