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Performing surgery on hospital budgets

By Mark Green

Kentucky hospitals are in a cost-cutting mode.

Long anticipated transformative change in the healthcare marketplace is arriving, for major providers especially, creating financial crunches for some but not all. Layoffs and large budget cuts in Kentucky and elsewhere have gotten news coverage, but they are only part of the picture.

The volume-business ways that built revenue for decades are crumbling away as individuals consumers and insurers shift to cheaper outpatient treatments and wellness programs. Increasingly, revenue, profits and cash flow come to those who provide service best and at the least cost.

Consumers are bearing more direct costs, paying more attention to prices and opting away from traditional profit-generating methods of providing care. At the same time, taxpayer-funded government compensation models are making better medical outcomes and financial efficiency important bottom-line issues.

Changes in the healthcare marketplace are arriving, creating financial crunches for some health care providers, but not all.

Making healthcare more affordable, a namesake goal of the federal Patient Protection and Affordable Care Act passed in 2010 and being enacted now, “naturally puts pressure on healthcare providers to keep costs in check,” said Carl Herde, system chief financial officer for Baptist Health. “However, many of the issues facing healthcare were in place before the ACA came into effect.”

“We are moving from a system in which rewards are based on volume to one that rewards value,” said Dr. Michael Karpf, the University of Kentucky executive vice president for health affairs and administrator of UK HealthCare. Since 2003 he’s been responsible for UK’s hospitals, College of Medicine, practice plans and the clinical activities of the other colleges of the academic medical center. And for years Karpf has been saying publicly that the healthcare industry is on an unsustainable financial course.

“There is a real need to decrease utilization to get healthcare costs under control. It just puts pressure on institutions,” Karpf said. “We won’t be doing business the same old-fashioned way we’ve been doing it.”

Even those care providers whose revenues are growing healthily – such as UK HealthCare, whose $920 million hospital budget is producing 7 to 8 percent cash flow – are cutting costs and hunting efficiencies. For others, it’s more drastic.

KentuckyOne Health, which had 15,000 employees at 200 facilities, including 10 hospitals, after coming into existence through mergers and partnership deals two years ago, said early this year it expects a $218 million deficit in its $2.5 billion budget. Last month it laid off 500 workers and said it won’t fill another 200 openings, plus the emergency room at Medical Center Jewish Northeast in Louisville will close April 1 “due to low demand for emergency services at that location.”

Without suggesting which one, the company has said it might close an entire hospital.

KentuckyOne Health is not an isolated case. New York City’s 11 public hospitals face a reported $400 million deficit for fiscal 2015. According to USA Today, Indiana University Health laid off 900 toward a five-year goal of cutting its budget $1 billion. Vanderbilt University Medical Center eliminated nearly 1,000 jobs last year to cut costs. Internationally famous Cleveland Clinic is offering buyouts to 3,000 employees toward shaving its annual operating costs by $330 million.

Baptist Health, a Louisville-based system that owns seven Kentucky hospitals plus a long-term, acute-care facility in Corbin and manages hospitals in Elizabethtown and Russell County, had a $22 million operating loss in fiscal 2013. But Baptist also had $78 million in investment income to erase that deficit, Herde said.

“There is increasing pressure for hospitals to do more with less without sacrificing quality,” he said, “so we are exploring creative ways to contain costs, but we are financially sound now – and we are confident that we will remain so in the future.”

Achieving the common goal of containing expenses while maintaining excellence will require collective cooperation among the state’s care-seeking public as well as members of the industry providing health service, Herde said.

KentuckyOne CEO Ruth Brinkley noted the management challenges occurring nationally in describing the causes for major healthcare entities’ current financial problems.

“The recession has come to healthcare, and that is causing the industry to transform,” said Brinkley. “There are many causes for the changes, among them: the economy, reduced payments from government and commercial payers, increasing consumerism, and shifts in how care is organized and delivered.

“We have seen large and respected healthcare organizations announcing restructuring, budget cuts and layoffs. Among them are Vanderbilt University Medical Center and Cleveland Clinic. This situation is even more acute in Kentucky, with steep declines in inpatient volumes,” she said.

The trend toward more outpatient treatment, which is less expensive, takes a bite out of the juiciest portion of many hospitals’ operations.

“Hospitals have traditionally made their margins on inpatient services,” Brinkley said. “Now, inpatient care will be paid (for by public and private insurers) at lower rates as the industry and Kentucky-One shift to keeping people healthy rather than treating them solely when they are ill and need inpatient hospitalization. We have seen declines in inpatient care volumes at KentuckyOne Health with a transition to higher volumes in outpatient care.”

Less inpatient treatment means fewer employees are necessary at Kentucky hospitals, which have been one of the nation’s best job-creation engines during the past decade.

The Louisville region’s biggest provider, non-profit Norton Healthcare, which has five Louisville area hospitals and affiliation with facilities in Carrollton, Hardinsburg, Horse Cave, Lebanon and Leitchfield, Ky., plus Corydon, Ind., is operating at a break-even level financially, said Michael W. Gough, the system’s senior vice president and chief financial officer.

The healthcare industry is, indeed, in a financial squeeze in Gough’s view “caused by cuts in reimbursements from Medicare and Medicaid and the increasing number of uninsured and under-insured patients. The ACA is supposed to provide more coverage for individuals, but it’s too early to tell if that will actually happen.”

UK HealthCare maintains relatively good financial health with a 7-8 percent cash flow by focusing on its niche as a regional provider for patients needing high-end treatment such as organ transplants, severe-case cancer care and complex neuroscience.
UK HealthCare maintains relatively good financial health with a 7-8 percent cash flow by focusing on its niche as a regional provider for patients needing high-end treatment such as organ transplants, severe-case cancer care and complex neuroscience.

Public healthcare plan changes are creating higher administrative costs for hospitals, said John Hackbarth, chief financial officer for Owensboro Health, which in 2013 opened a new $385 million medical center.

“Three years ago we had one payor for Kentucky Medicaid patients and now, after movement to a managed care model, we have five insurance plans, plus some patients remaining on Kentucky Medicaid indemnity,” Hackbarth said. “This has increased costs in many areas such as contracting, compliance, billing, IT and case management because we are dealing with five times the amount of rules and hoops to jump through for a slower payment and ultimately less reimbursement.”

Gov. Steve Beshear accepted the federal government’s offer to pay for the first several years of added costs to expand Medicaid eligibility in Kentucky to an additional 308,000 state residents – those with incomes up to 138 percent of the official federal poverty level. The state eventually must assume the cost, but before than happens the Medicaid program will pay an additional $15 billion for care to Kentucky providers, Beshear and Cabinet for Health and Family Services Secretary Audrey Haynes point out at every opportunity. That will create an estimated 17,000 new jobs, they say.

But not yet.

The most common response from five major hospital operators answering questions The Lane Report submitted about the their financial status was that Medicaid expansion eventually should lower their annual charity care and bad debt burden, which is hundreds of millions of dollars. For now, however, they are focused on adding access capacity to meet an increased demand for care by the formerly uninsured.

“We believe the expansion of Medicaid is certainly good news for uninsured citizens who now have the opportunity to proactively manage their health,” Brinkley said. “As health providers, however, we must have a system of care in place for them. We need to proactively work to reduce the use of emergency departments for non-emergency concerns and help individuals to seek care before they are significantly ill.”

Baptist Health reported the most proactive response to expansion. It increased employee training on coverage options, put financial counselors through Kentucky’s program for Certified Application Counselors status to helping patients enroll in Medicaid via Kynect, and sent letters to former patients who are now eligible.

“We have seen an increase of approximately 15 percent in Medicaid volume attributable to Medicaid expansion,” said Donna Ghobadi, Baptist’s assistant vice president of managed care and revenue cycle.

Norton’s Gough said there is an expectation that the state will have to cut Medicaid reimbursements to providers or the number of enrollees when the federal subsidy ends.

The Affordable Care Act’s overall impact to date, Gough said, is “decreases in Medicare reimbursements.”

Revenue trends vary at Kentucky’s major hospital operators. KentuckyOne Health has experienced “a significant decline in revenue.” Baptist Health’s “revenue trend has been up, just not at the same pace it use to be” – and less than the rate of increase in its expenses.

UK HealthCare’s “revenues are the strongest they’ve ever been,” Karpf said. “Our expenses are up, but compared to our volumes they are under control. We focused on cost efficiency long before the Affordable Care Act. We’ve been working on efficiency for 10 years now. We knew this was coming. We could have our strongest bottom line ever this year.”

But UK also faces $150 million in capital investment needs to complete the upper floors of its medical center. Its cash flow “gets plowed back into resources for the commonwealth,” he said.

Norton’s revenue has “increased slightly, but is not keeping pace with expenditures,” Gough said. Owensboro Health reports steady revenue.

There has been a 5 to 10 percent decrease in inpatient admissions nationally, said Owensboro’s Hackbarth, with outpatient business not increasing as fast as inpatient is falling.

“This would indicate that the public demand is being filtered by economic barriers for high co-pays and deductibles,” Hackbarth said. This “self-rationing of care” by consumers, he said, is more responsible for lower demand than the ACA. A worry, he added, is that patients’ cost-cutting care avoidance today could cause worse and more expensive care needs in the future.

Karpf, who administered the UCLA Medical Center in Los Angeles before coming to UK, also sees the Affordable Care Act being less influential for hospitals’ fortunes than broad financial trends that have been at work for years.

“Every provider will have to understand that they have to focus on value. That they have to provide the highest outcomes in the most cost-efficient way, and that volume isn’t going to be the answer to their financial performance,” Karpf said in response a question about the ACA’s impact on Kentucky healthcare. “For some providers, as their volume goes down they’re going to have to change. As their inpatient volume goes down they are going to have to become smaller inpatient operations and better providers of an outpatient system.

“Volume has to go down in Kentucky,” he said. “Kentucky is a high-utilization state and that’s unsustainable.”

UK HealthCare is benefitting from understanding and focusing on its role as the regional provider of the most complex types of care. Its Chandler Hospital does not compete with other commonwealth facilities for gall bladder surgeries; rather, it aims to provide organ transplants, high-dose chemotherapy with bone-marrow transplants for serious cancer patients and “razzle dazzle neuroscience stuff” that Kentuckians often left the state for in the past.

“We’ve said, ‘What is different about us? How do we survive? What do we provide for the commonwealth?’ ” Karpf said. “By doing that we keep people in the commonwealth rather than them having to leave the commonwealth. So we’re …. for the commonwealth.”

UK HealthCare is working to build its competitiveness against other major university medical centers in Nashville, Pittsburg, St. Louis and Columbus, Ohio. In addition to the commonwealth, it wants to draw patients from east Tennessee, West Virginia and southern Ohio.

“Although we don’t have competitors for that high-end stuff locally, we still focus on our cost structure, making sure that we’re as efficient as possible because there ultimately will be regional competition for our patients,” Karpf said. “People will decide where they’re going to get their liver transplants by how well the place does it and what the cost is. They’re going to decide whether they’re going to get their leukemia taken care of by outcomes and what the cost is. So we have to stay price sensitive even as we push for the highest quality.”

He foresees true multistate regional competition within five years.

Baptist Health’s administration is “working on ways to navigate this new business model and ensure a balance that benefits everyone,” Herde said. The inpatient-to-outpatient trend was underway prior to the ACA, he said, a result of improving technology that allows treatment without hospital stays as well as shifts in insurance plans that are producing consumers’ cost awareness.

“We plan to continue delivering the same level of high-quality care to our patients that we always have, while at the same time expanding initiatives that help steer people away from the hospital in the first place,” Herde said. “After all, our goal is to keep people healthy and, if they do get sick, make people well.

“The challenge is to find the right balance so that revenue is sufficient. By summer 2014 we should have a blueprint that will identify partners, infrastructure and timeframes to implement our strategy.”

One step Baptist and Norton have taken jointly is a purchasing agreement to buy and distribute medical and surgical supplies they estimate will save $15 million during the five-year life of their contract.

Norton also expects its electronic medical records system “will be a tremendous help in accomplishing efficiencies in the delivery of care,” Gough said.

Brinkley said KentuckyOne is now examining how best to organize its programs and service; what configuration of facilities will provide optimal access to care; what level of staffing is needed; and maintaining and improving the safety and quality of services.

UK HealthCare foresees no major additional changes. Its strategy is to “stick to the basics,” Karpf said. “We figure if we stick to the basics, whatever happens in healthcare we’ll be OK.”

Mark Green is editorial director of The Lane Report. He can be reached at [email protected].