Shrinking margins Featured

9:36am EDT July 22, 2002

Regardless of industry or market, cost increases are almost always passed on to the consumer, and health care is no different.

Hospital operating margins have dropped 47 percent in the last three years, from 6.1 percent in 1997 to 3.2 percent in 1999, according to HBS International, a provider of outcomes-management systems to the health care industry.

These dropping margins are attributed to a squeeze the federal government is putting on Medicare payments. In a nutshell, hospitals are required to treat Medicare patients, but the government sets the price for what it will pay for treatment. Payment amounts are increasing at a much lower rate than what it actually costs hospitals to perform the treatments.

"Over the next five years, there is a continuing reduction in payments to hospitals by the federal government," says John Robinson, director of action operations for HBSI and a former hospital administrator. "Hospitals are trying to reduce their costs or increase the amount of payments they receive from other areas."

As the government keeps paying less, the end result will likely be that health insurance will cost more.

"Hospitals will have to seek higher charges and more reimbursements from insurance companies and private payers," says Robinson. "That's the push back that comes when the federal government reduces payments. It comes back to private businesses and individuals to pay more."

Many facilities are running out of places to cut costs. Companies like HBSI can assess how much hospitals are spending in various areas and compare it to similar facilities nationwide to identify areas of potential savings, but managed care has already forced many of the obvious cuts.

"Many of these hospitals have a commitment to the community," says Robinson. "Some are the sole providers of emergency services. They may provide certain services that are not up for reduction or elimination. They have to retain their major trauma centers. They have to maintain their obstetrics services and other high risk areas or they will really endanger their populations."

Larger hospitals may appear to have more flexibility, but they saw their margins drop (from 6.02 percent in 1997 to 2.69 percent in 1999) more than smaller hospitals. They are also caught up in the consolidation going on in the industry, which had already eliminated many redundancies. The federal government also eliminated much of the funding for teaching facilities, which were more evident at larger facilities.

The hospitals really get caught on both sides," says Robinson. "As employers themselves, the more pressure they put on the insurance companies to increase payouts, the more impact they feel in their own health insurance costs." How to reach: www.hbsi.com

Todd Shryock (tshryock@sbnnet.com) is SBN's special reports editor.