Unprofitable hospital services suffer when money is tight

Coming out of a recession (and perhaps entering another), here's a timely new paper that suggests hospitals that face financial threats will scale back unprofitable services.

The study, a working paper for the National Bureau of Economic Research, did not directly consider how an economic downturn would affect access to psychiatry, substance abuse or trauma care.

But the research did suggest that hospitals (sub. req.) cross-subsidize unprofitable services and when confronted with the threat of lost revenue or an actual drop in business, they divert resources from money-losing operations.

Using data from Arizona, where new specialty heart hospitals threatened to grab market share from established acute-care hospitals, researchers looked for changes to the volume of unprofitable behavioral health and trauma care and the more lucrative neurology.

Economists Guy David and Lawton Burns of the University of Pennsylvania; Richard Lindrooth, an economist at the University of Colorado; and Lorens Helmchen, an economist at George Mason University, conducted the study.

Hospitals most vulnerable to lost market share from start-up specialty hospitals (often for-profit and physician-owned ventures) saw the biggest decline in services considered unprofitable, the economists wrote.

The study analyzed hospital and cardiac specialty hospital discharges in Phoenix and Tucson between 1997-98 and 2005-07. For comparison, researchers also looked at discharges during the same period for Colorado hospitals in Boulder, Colorado Springs and Denver.

There is ample evidence that many hospitals moved to protect operating margins through the recession and weak recovery. They have done so, even as revenue growth slowed or stalled, with budget cuts that squeezed hospital spending on supplies, labor and services, according to financial records and published reports.

But how significantly those cuts affected services is unclear. And should the nation enter a second recession, hospitals may turn to further services cuts. Meanwhile, plans for Congress to extract $1.4 trillion from the nation's deficit could include cut payments from one of hospitals' largest customers.

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