Taking a Scalpel to Costs

Hospital operators brace themselves for health-care reform.

Earlier this month America’s hospital bosses gathered in Washington, DC, with vice-president Joseph Biden. To the amazement of many, they vowed to accept a cut of $155 billion in their expected revenues over the next decade as part of a grand bargain on health-care reform. How can they justify giving away such a vast sum? There are several explanations, not all of them altruistic. Taken together, they show that the industry’s leaders are bracing themselves for a period of upheaval.

For hospitals, the positive thing about health-care reform is that it is going to be good for business. It will be welcome news to an industry that is hardly in rude health. Despite two decades of consolidation, hospitals’ finances remain anaemic; over a quarter of them regularly post negative operating margins. The recession is making things worse. Moody’s, a credit-rating agency, notes that many patients are putting off non-essential treatments.

So any reforms that promise a flood of new demand for health services should be welcome. Rich Umbdenstock, the head of the American Hospital Association (AHA) and one of the bosses who shared the stage with Mr. Biden, acknowledges that extending health insurance to most of America’s nearly 50m uninsured will benefit his industry in the long term. Those unfortunates still turn up at emergency rooms and often do not pay their bills.

The government gives hospitals some money to compensate them for this, but the AHA says it does not cover the full cost, which it put at $34 billion in 2007 (around 5% of hospitals’ annual revenues), up from $3.9 billion in 1980. Paul Mango of McKinsey, a consultancy, estimates that the hospitals recover only 10-12% of this cost. But he says the problem would be greatly reduced under a system of universal health-insurance which included subsidies for the indigent, as the proposed health reforms envisage. Herbert Pardes, chief executive of New York-Presbyterian, a research hospital, says the large numbers of underinsured patients, who frequently fail to pay their bills in full, cost hospitals still more.

The huge sums the hospitals stand to gain from reducing such losses make even $155 billion over ten years look like a reasonable amount of money to sacrifice to secure such a bonanza. But there are less virtuous reasons why the hospitals offered such a generous-sounding deal. As Mr. Umbdenstock notes, it was less painful than the $225 billion or more in cuts that Barack Obama had been pressing for earlier in the year. This is a tacit acknowledgment that hospital chiefs were seeking to avert the one thing that strikes fear into their hearts: the spread of price controls.

Because of the creeping expansion of Medicare and Medicaid, the publicly funded health-care schemes for the elderly and the poor, the government already pays over half the bills at the average American hospital. But the political left is clamouring for a government-run insurance plan, to compete with private ones, as part of any reform effort. The problem, argues Toby Cosgrove, chief executive of the Cleveland Clinic, a hospital group, is that the existing public schemes routinely underpay hospitals for care. Some economists question that claim. Even so, it is probably right to suggest, as Dr. Cosgrove does, that any public insurance plan based on Medicare’s pricing would squeeze hospitals hard and, as a result, require private insurers to cross-subsidize the bill.


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