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Reform Update: Hospitals see more paying patients, but there's a hitch


By Beth Kutscher
Posted: August 20, 2014 - 3:15 pm ET
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Insurance expansion under healthcare reform is starting to yield patient volume for hospitals, but the costs of staffing up for more patients are eclipsing the additional revenue.

Earnings reports for not-for-profit systems in the first half of the year show that many providers are seeing rising salary and benefit expenses cut into revenue gains, leading to smaller operating surpluses.

“As the pieces of the Affordable Care Act are coming together, it's changing the demand for care,” said Jeff Jones, managing director at Huron Consulting Group. “It's shifting the way that providers are thinking about their labor pools.”

A report from Standard & Poor's similarly found that in 2013, expenses increased 7%, outpacing revenue growth of 5%. The rating agency attributed the rising costs to preparations that systems were making to prepare for healthcare reform, including staffing needs.

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Compensation costs are increasing as more systems move to a physician employment model to drive referrals and prepare for population health management. In addition, healthcare reform is driving demand for specific skill sets such as experience with electronic health-record systems.

“Management is focused on the recruitment and retention of qualified staff in many clinical areas in order to meet the demands of patient activity, particularly as the Affordable Care Act health insurance mandates that are expected to increase the number of insured Americans seeking healthcare services are implemented in 2014,” the Cleveland Clinic said in its second-quarter earnings report. “These efforts pressure the system's salary cost structure, as well as employee benefit costs.”

Salaries are increasing because demand for highly skilled healthcare workers is outstripping supply, said Jay Sage, vice president of business development at Randstad Healthcare, a staffing firm. “Everywhere we look, those needs are increasing.”

At Shands Teaching Hospital and Clinics, part of University of Florida Health in Gainesville, an 8.2% increase in admissions led to a 3% increase in revenue but also an 8.6% increase in salary and benefit costs, in part due to the higher staffing levels required.

Compensation costs represent anywhere from 40% to 60% of a provider's total expenses, but that number has been decreasing as systems make staffing an area of focus for cost reductions, said Brendan Courtney, president and CEO of Parallon Workforce Management Solutions.

“Health systems are forced to look at how effectively they're managing their labor,” Courtney said. “As we go in and talk to our customers, those that aren't aggressively going after labor as a way to manage their costs are thinking about it and developing a program.”

Not every hospital is seeing the same kind of volume bump from healthcare reform. Their experiences have varied significantly, for example, depending on whether they're in a state that expanded Medicaid coverage or one that did not. All healthcare providers, however, are under pressure to modify their staffing in response to the reform law—such as employing more physicians and care managers—while labor costs rise. As a result, some have turned to layoffs, particularly for nonclinical positions.

In the second half of 2013, Indiana University Health cut more than 900 positions and offered early retirement to others as part of a $1 billion cost-reduction plan. As of June 30, the system had reduced its full-time-equivalent employees by about 2,000, or about 7%. Its surplus nearly tripled in the quarter even as admissions declined 3.9%. (Indiana has not raised Medicaid eligibility, although Gov. Mike Pence's administration has submitted a proposal to HHS for an alternative expansion.)

Other ways that systems are managing labor costs include flexing roles, so that the same employee can take on multiple responsibilities; using data analytics to predict patient demand; and creating staffing pools of part-time or seasonal employees that can be shared across hospitals or even across systems.

“Overall, they're just getting more strategic about how they think about their labor pool,” Huron's Jones said. “The whole issue of staffing strategically is going to be crucial to the bottom line.”

More cost-sharing expected

More than half of employers indicated that the Affordable Care Act is prompting changes to the health plans they'll offer next year, according to a pair of surveys conducted by the Federal Reserve Bank of New York (PDF). As many of 60.5% of manufacturing firms and 54% of service companies said they're making modifications to their health benefits, most commonly on cost-sharing, such as raising deductibles, premiums and copayments. Only 2.3% of manufacturers and 0.8% of service companies said they plan to drop coverage entirely. The findings come as 51.2% of manufacturers said they believe the ACA will raise their costs a lot in 2015; in comparison, only a third of service firms saw a large increase in costs and 39.7% predicted a small cost increase next year.

Reform guidance for rural hospitals

Small rural hospitals have a particular challenge when it comes to meeting the goals of healthcare reform as many lack the size and resources to participate in new payment and delivery models. In response, the National Rural Health Resource Center has developed a guide for these providers to help them make the transition. The online toolkit, “Improving Population Health: A Guide for Critical Access Hospitals,” received funding from the Health Resources and Services Administration's Office of Rural Health Policy.

Follow Beth Kutscher on Twitter: @MHbkutscher


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