Excess capacity: S. Florida characterized by 'supply-side economics'
Utter the phrase “South Florida” in a room full of healthcare executives, and many thoughts will go right to the region's national reputation for fraud and high cost. However, hospital operators who actually work in the market say there's a larger story to tell.
That story is about capacity. And though it's linked to cost trends and legal impropriety (more on that later), it has its roots in the sunny climate, migration patterns of aging East Coasters, and the birth of the Medicare program in the 1960s.
“Excess capacity is what has always characterized this community,” says Linda Quick, president of the South Florida Hospital and Healthcare Association. “Before they had established the (certificate of need) program, this community had already created an excess capacity of beds. … It has always been characterized by supply-side economics.”
In 2010, Miami-Dade and Broward counties had 41 acute-care hospitals with 14,500 beds serving a population of 4.3 million people. That's 3.4 hospital beds per 1,000 people, compared with the national average of 2.6, according to figures from the Florida Hospital Association and the American Hospital Association.
What's more, all those beds are held by a diversity of ownership that observers say is almost unique in the country.
Less than a third of the beds are owned by public entities, another third are held by not-for-profit operators and the remainder are housed in investor-owned hospitals.
“There are not many markets in the country where you find the range of proprietary, governmental and not-for-profit providers coexisting in the same market,” says Bob Langston, who spent 25 years studying healthcare in Florida as an analyst and director for KMPG and Ernst & Young, before retiring and forming his own consultancy, Gryphon Advisory.
Langston and Quick describe a kind of gold rush in Florida healthcare after the creation of Medicare in 1965, which became one of the first truly dependable revenue streams in healthcare. Physicians were compensated based on usual and customary rates, while hospitals were paid based on their costs—giving providers ample reason to flock to Florida.
“It was that sort of economics that attracted people in the marketplace, and then you had a rapidly growing population. Florida in general and South Florida in particular has a very high growth rate. So you had the combination of good economics, a growing population and a good place to live,” Langston says.
“The mystery dissolves pretty quickly when you think of it that way,” he says.
The region supports three public hospital districts, two in Broward County—Broward Health and Memorial Healthcare System, which have direct taxing power—and Miami-Dade's system, Jackson Healthcare, which is supported with tax dollars through the county government.
But under traditional notions of supply and demand, wouldn't having all those hospital beds drive down costs? Miami, in particular, is famous for having the nation's highest cost per Medicare beneficiary—$17,274 in 2007, according to the Dartmouth Atlas of Health Care.
“The whole idea of a market-driven healthcare economy hasn't specifically worked. It's not like a hospital can say, ‘Have your appendectomy here today, 25% off,' ” Quick says. “The fact that we have an ample number of physicians, and specifically specialists, and we only have so many people to go around, means the unit price goes up. In order to support that kind of market, the unit price has to go higher.”
Langston notes that the idea of “customary” prices also encouraged a kind of group inflation in which “aggressive” pricing was accepted, especially since many patients and doctors were from New York City—no stranger to high medical prices.
For fraudsters, the high prices have acted like a magnet over the years. Quick notes that the region is also home to a large immigrant population that seems to embrace fraud with an entrepreneurial spirit.
“I can't paint all people with the same brush, but I want to say there is a subculture within South Florida of people … from a country or environment where raping and pillaging the government is an expected way to earn a living. And they see our government's financing of the healthcare system as an opportunity to do similarly,” she says. “And it is, unfortunately, so easy to do.”