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Excela Health eliminated Pam Kowalczyk's job when the Pennsylvania health system scaled back its behavioral health services. She joined a mental health clinic that was given financial aid to absorb new patients.
Excela Health eliminated Pam Kowalczyk's job when the Pennsylvania health system scaled back its behavioral health services. She joined a mental health clinic that was given financial aid to absorb new patients.
Photo credit: Annie M. O'Neill

Juggling the lineup

Seeking better financial results, providers change services; experts worry about access

By Melanie Evans
Posted: January 14, 2012 - 12:01 am ET

Excela Health entered the Great Recession as the largest mental health provider for the Pennsylvania county that's home to its three hospitals.

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A year and a half later, as the recession drew to a close, Excela began to refer and transfer outpatient mental health patients to primary-care doctors and community clinics to stem losses.

“When you're in good economic times you can oftentimes carry programs you know should be revised,” said Sam Raneri, senior vice president and chief strategy officer for Excela Health, based in Greensburg, Pa. “The recession and the drop in admissions and elective cases put more pressure on us to look at behavioral health in a brand new way.”

Excela and other not-for-profit hospitals across the U.S. have reduced or shed unprofitable services and expanded or opened more lucrative businesses lines as the severe recession and weak recovery stripped health insurance from many households, while others who were still insured did not seek care to avoid the cost.

Those strategies have come as part of hospitals' broader—and quite successful—efforts to cut expenses or find new sources of revenue to protect margins through the economic downturn.

Hospitals have scaled back care for the mentally ill since the recession, and one survey of more than 1,000 hospital executives by the American Hospital Association found one-fifth reported in March 2009 that they reduced services that lost money, including behavioral health, post-acute care and patient education services. Meanwhile, hospitals have invested in services that deliver profits, including neurosurgery and interventional cardiology.

Many hospitals came through the recession with profit margins intact—even improved—despite more uninsured patients, slack demand for profitable elective procedures, and public and private insurers that have squeezed payment rates.

Analysts and executives credit the industry's strong performance to aggressive efforts to slash costs, including stark options such as mass layoffs and service cuts.

But if the strategies have protected hospital margins, they raise thorny questions for health policymakers about access to care for vulnerable patients and growth of unneeded and costly high-margin services.

And the nation's fledgling economic recovery probably won't ease the pressure on hospital revenue. Private insurers are expected to wring hospital payments to curb health spending, and federal and state lawmakers will continue to look to healthcare for budget savings.

As hospital executives continue to search for ways to shelter margins, the recession suggests hospitals will continue to pare unprofitable services and expand lucrative ones.

In Los Angeles, Cedars-Sinai Medical Center announced plans last November to close psychiatry for patients inside and outside the 931-bed hospital, with a few exceptions such as consultations and mental healthcare for transplant and cancer patients. Cedars-Sinai also said it would stop training new psychiatrists.

Executives with the hospital declined to be interviewed. But Thomas Priselac, Cedars-Sinai president and CEO, seemed to suggest in a statement released as the hospital unveiled its plans that psychiatry was a drain on hospital resources.

“At a time when the healthcare delivery system in our country is undergoing a massive transformation, every medical center has a responsibility to examine what it should focus on to ensure that it is strong over the long term to serve the community,” he said.

Cedars-Sinai emerged from the recession with a solid operating margin of 6%, though lower than the 8% operating margin going into the downturn.


“It is not surprising that hospitals respond to financial pressure by changing their service mix by adopting profitable services and discontinuing unprofitable services,” Jill Horwitz, a law and health policy and management professor at the University of Michigan who has studied the relationship between hospital finances and healthcare delivery, said in an e-mail.

Bundled payments under the healthcare reform law that give hospitals a lump sum to cover patients' medical costs, called capitation, could lessen financial incentives that make some services more profitable than others, she said.

But the Patient Protection and Affordable Care Act will more likely prompt more scrutiny of profitable and money-losing services as the law squeezes hospital payments. “This will put more pressure on hospitals,” Horwitz said, “leading to more efforts to find profits. Changes to service mix are one of the more obvious methods for increasing revenues and profits.”

Economic research published last year suggests hospitals respond to less demand, or the threat of less demand, for more profitable services by investing less in unprofitable ones.

The study, published last August by the not-for-profit and nonpartisan National Bureau of Economic Research, found psychiatry and substance abuse services declined at Arizona acute-care hospitals where specialty heart hospitals had entered the market to threaten acute-care hospitals' profitable cardiac margins. Notably, profitable neurology services also increased among acute-care hospitals, the research suggests.

In Savannah, Ga., 543-bed Memorial University Medical Center moved to combat sluggish operations in 2009 and 2010 by expanding cancer and neurosurgery services, two profitable business lines, and expanding into markets where insurers pay more favorable rates, according to a credit report from ratings agency Moody's Investors Service.

In Riverdale, Ga., 317-bed Southern Regional Medical Center reported fewer patients, more Medicaid and uninsured patients, and weak operations during the same period. In a turnaround effort, Southern Regional sought to boost volume for profitable services such as neuroscience, interventional cardiology and surgical oncology, Moody's said.

The trend has implications for healthcare access, quality and spending, Horwitz said. Patients who need unprofitable services, such as mental healthcare, are typically lower income and will find care harder to get, Horwitz said. An expansion of profitable services, which can be expensive as well, could increase health spending and creates incentives for hospitals to treat more patients—including those who may not need it, she said.

Poor, difficult, complicated

“I think that programs that deal with poor, difficult, complicated people and illness are at risk,” said Richard Frank, an economics professor at Harvard Medical School's healthcare policy department who studies mental healthcare. “It's not just behavioral health, but behavioral health inpatient is one that is especially focused on poor people.”

Mentally ill patients who require hospital care—those grappling with severe illness such as schizophrenia—also often are low-income and covered by safety net insurance, Frank said. States responded to the recession by squeezing Medicaid hospital payments just as unemployment pushed more people onto Medicaid rolls, he said.

“The problem is that one of the things that we're doing now is we're splitting the haves and have-nots a bit,” Frank said. “By putting extreme pressure on public programs, you sort of give people who run those programs a choice: shrink the size of the program or push down on rates or reorganize. What you see is an attempt to do the last two. I think that, therefore, illnesses that disproportionately rely on public programs are generally going to have more economic pressure and that's part of what's going on with inpatient psychiatry.”

Psychiatric ward closed

Chilton Hospital in northern New Jersey halted behavioral healthcare as the recession ended and the hesitant recovery began. More patients had arrived at 260-bed Chilton uninsured or covered by safety net plans, the hospital told Moody's. Revenue dropped by $2 million as the number of uninsured and Medicaid patients grew. Chilton's operations slid from a narrow profit to a slim loss.

The Pompton Plains-based hospital, located in a competitive market, planned to borrow roughly $40 million in October 2009 to finance investment in oncology and orthopedics, two service lines considered more profitable. Credit analysts warned that if Chilton's finances did not improve, its rating could drop. Psychiatric care did not lose money, but did not earn enough to offset other hospital costs either, the hospital told potential investors.

In August 2009, the hospital closed its psychiatric ward—which saw 438 admissions in 2008 compared with 525 two years before—and applied to convert the beds into ones for medical and surgery patients, according to financial statements.

The hospital also saved money by cutting 78 jobs, a squeeze on supply costs and other moves, the credit analysts said. The next year, Chilton reported a $2.3 million profit. Chilton did not respond to requests for an interview.

At Excela Health in Pennsylvania, inpatient psychiatric services were profitable, Raneri said. Outpatient mental healthcare was not.

The system was the sole significant provider of outpatient mental healthcare in Westmoreland County, but “suffered large and escalating losses” as costs grew but payment remained low, he said. “We were taking the burden of not only inpatient, but shouldering the burden of all the outpatient in the county as well.”

Excela lost $1.6 million in 2008 on outpatient behavioral health.

During the year that ended in June 2009—the month the Great Recession ended—the system struggled with fewer patients than expected, more unpaid medical bills and volatile markets that drained cash from Excela's balance sheet, according to a Moody's credit report. Excela Health lost $2.3 million on operations that year.

By the following June, Excela reported a profit of $7.5 million on operations after significantly curbing its outpatient mental healthcare and closing skilled nursing services at its hospitals.

Raneri said the weak economy and financial losses prompted Excela to make the changes, but only after officials were satisfied that access to services and quality of care would not suffer.

Outpatient treatment

Now Excela offers outpatient mental health treatment for patients with an “acute need” or those who are leaving the hospital. All other patients are referred to mental health or primary-care doctors in the community.

Independent mental health providers entered the market to meet demand, Raneri said. The hospital also opened a crisis intervention center. Meanwhile, Excela Health cut losses on outpatient mental health in half.

Jane Jerzak, a partner with the consulting and accounting firm Wipfli, said hospitals saw demand for profitable services—including elective orthopedic surgery and imaging—decline as the economy worsened.

The trend left hospitals without profits to subsidize unprofitable services, which prompted executives to scrutinize subsidized operations between 2008 and 2010, said Jerzak, an accountant and registered nurse.

Figures released last week highlight households' pullback from medical spending.

Health spending grew slowly again in 2010, increasing 3.9%, as households put off trips to the hospital or doctor's office, CMS estimates show (See story). The slowdown was pronounced among hospitals and medical groups, the agency said.

Jerzak said hospitals winnowed unprofitable services or sought to boost market share for more profitable businesses lines, but few shut programs entirely or launched entirely new services in response to financial pressures. “That is not a short-term strategy,” she said. “That is an intermediate strategy at best.”

An upheaval

When hospitals revamp services, communities must find ways to meet local needs.

In Westmoreland County, where Excela scaled back its outpatient behavioral healthcare, local mental health officials pledged financial aid for a clinic that would agree to open to absorb former Excela patients, at first expected to be 3,700 patients, said Michael Quinn, CEO of Chestnut Ridge Counseling Services, based in Uniontown, Pa. The number later proved to be smaller, he said.

Chestnut Ridge, a not-for-profit, opened its third Pennsylvania clinic after being selected by the county to treat former Excela patients. Since the clinic opened 2� years ago, demand has grown. “The good news is it's getting busier,” Quinn said. “Unfortunately, that speaks to the fact there is a lot of unmet need out there,” he said.

Losses have narrowed and Chestnut Ridge has expanded into school-based services, which break even, and telepsychiatry, which earns a profit. Quinn blamed the shortfall on inadequate payment and burdensome regulations.

Pam Kowalczyk, a clinical social worker, joined Chestnut Ridge from Excela after the hospital cut back its services.

About one-third of Kowalczyk's hospital patients followed her to the clinic. Kowalczyk said she turned down one job offer and held out for an offer from Chestnut Ridge because the clinic was among a few to accept Medicare patients, which would allow her Medicare patients to follow her, if they chose.

Patients found the transition stressful, Kowalczyk said, but new clinic patients receive the same help with transportation and other support that hospital patients received. Some patients struggled with fears as the move approached, and she found herself repeatedly seeking to calm their anxieties.

“In their life, it's like an upheaval,” she said. “It's almost like an earthquake.”

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