This is likely to be the year when the rubber hits the road in healthcare administration. More than at any time since the early 1980s, it's essential that executives prepare for the tough choices that lie ahead. As we say in our 1996 outlook beginning on page 39, it's time to put up or shut up.
During the past few years, there's been a high level of moaning and groaning about the payment pressures caused by skimpier government reimbursements and the shift to more managed care. But the fact is, past payment restraints have largely amounted to reduction in the rate of increase in healthcare spending. Now executives must face real cuts.
In Washington, policymakers are talking about slicing $200 billion out of Medicare over the next seven years. That's actually the good news. Recent research shows that HMOs are starting to pay less than Medicare-as low as 70% of Medicare rates in some instances. As a result, the common practice of cost shifting is running out of steam.
Savvy administrators have figured out what they must do. For example, hospitals in 1994 were able to post profit margins of 3.4% under Medicare's prospective payment system. That happened because average hospital costs per discharge actually decreased 0.5%, according to ProPAC. It was the first time in PPS' 11-year history that costs decreased.
The urge to merge and consolidate continues unabated. Our staff estimates that roughly one in five hospitals has changed owners in the past two years. But the hard steps to fully synthesize and overhaul merged organizations have yet to be taken. Merged hospitals and newly formed systems have only dipped their toes into the waters to reduce duplication of services, cut costs and create truly integrated systems.
These are the resolutions executives should make for '96:
Develop an organization that is community-focused and committed to disease prevention.
Look at outsourcing as a way to cut costs.
Align incentives for physicians, hospitals, vendors and others in the organization.
Learn to understand the tools that exist to provide data that can offer insight into the workings of the organization.
Make a real commitment to reducing duplicative personnel and clinical programs.
Avoid jumping on the latest fad.
If administrators achieve half these goals, they'll be substantially stronger when 1997 rolls around.