Just when providers had begun feeling good about the cost reductions they've achieved, Medicare handed them smaller-sized pants. Once again providers will have to suck it in.
The industry has done a good job in recent years of slimming down and socking away a lot of cash. According to the latest analysis by the Center for Healthcare Industry Performance Studies in Columbus, Ohio, total profit margins for all hospitals reached a median 5.4% in 1997, up one percentage point from the previous year. Cash on hand swelled to 110.2 days.
But now isn't the time to stand still. The brunt of Medicare's budget-balancing maneuvers will begin hitting home a year from now. Those reductions will come as many hospitals struggle to turn a profit on operations.
With continued discounting and increasing managed-care penetration, providers' slice of the reimbursement pie grows ever smaller. They talk about dropping their contracts with lowballing HMOs, but so far it's mostly talk. Only the strong-of-stomach have been willing to walk away from the negotiating table.
While providers have reduced lengths of stay and tightened staffing, they've largely failed to consolidate services. The industry is laden with mammoth healthcare organizations -- often the result of mergers -- that really haven't streamlined services or fused their operations.
Competitive pressures are mounting, and signs of industry volatility abound. Small urban hospitals are most in danger of closing, but even big players are feeling the heat. Henry Ford Health System in Detroit and San Francisco-based Catholic Healthcare West are among the systems whose credit ratings took a drubbing last year.
Anticipating a multiyear shakeout, turnaround firms are girding for more hospital work. Forensic accountants, meanwhile, are finding more work helping creditors protect money tied up in troubled hospitals.
Hospitals and health systems also plan to refocus on what they do best. After sustaining years of losses on failed HMOs and unsuccessful physician investments, weary providers are bailing out.
Fiscal pressures also are likely to result in even bigger mergers as systems look to allocate costs over a larger base.