While hospitals are complaining about the financial impact of the Balanced Budget Act of 1997, their financial outcomes may depend more on the level of managed care in their market than reimbursement cuts, a new study indicates.
The study, a research update, shows that through 2002, when the last of the Medicare reductions are implemented, hospitals in markets with low HMO penetration won't suffer nearly as much as their counterparts in heavy managed-care areas (See chart).
That finding bolsters the claims of hospital critics who say the cuts have hit hospitals so hard only because the facilities were relying on Medicare to offset steep discounts they gave to HMOs.
"What's really going on is that hospitals have agreed to give low rates to HMOs, and now they're suffering (because of the budget law)," said John Rother, legislative director of the American Association of Retired Persons.
However, the authors of the study, accounting and consulting firm Ernst & Young and Baltimore-based healthcare information company HCIA, were more interested in making conclusions about the devastating effects of the Medicare reductions than in talking about the impact of managed care.
The study said that nationwide, hospitals' total profit margins will drop from a median of 4% to -0.4% by 2002.
"The data and feedback from the industry have been very telling," said John Morrow, an HCIA senior vice president. "We now see that there is no question that the reimbursement cuts will have a more significant impact than earlier estimated."
Carmela Coyle, senior vice president of policy at the American Hospital Association, agreed with the authors' assessment of the impact.
"Clearly, all total profit margins are declining," Coyle said. "What's different is that some hospitals start in a better financial place, so they're going to end up in a better financial place after the cuts take effect."
Ernst & Young and HCIA teamed up earlier this year for two similar reports describing the impact of the payment reductions on hospitals. The Federation of American Health Systems funded the first of those reports (March 15, p. 2).
Unlike that original study, the most recent update analyzes regions and metropolitan statistical areas to identify areas experiencing the most financial strain.
Some regions, including urban areas in California and New England, are "in danger," according to the study. Both areas have high managed-care penetration.
But many other areas are not in danger. Most of the greater metropolitan areas in the Midwest will survive the Medicare cuts unscathed, the study reported. In these "safe" areas-which include Chicago, Cincinnati, Cleveland, Detroit and Milwaukee-providers will continue to make a profit after 2002.
HMO penetration in most safe markets is low to moderate, ranging from 21.7% in Chicago to 30.5% in Cincinnati, according to the National Institute for Health Care Management's 1999 edition of Datasource.
Chicago seems to be coping particularly well.
For example, Advocate Health Care in suburban Chicago is building two state-of-the-art wellness/fitness centers at two of its eight hospitals. Together, the projects will cost $35 million.
Lloyd Dean, executive vice president of operations at Oak Brook, Ill.-based Advocate, told MODERN HEALTHCARE in August that while the budget law cuts would affect all hospitals, his system had taken those reductions into account and was proceeding with its strategic plans (Aug. 9, p. 60).
Also in Chicago, Northwestern Memorial Hospital, which moved into a 492-bed replacement acute-care facility earlier this year, plans to build a new women's hospital with a price tag of $100 million to $150 million (July 12, p. 25).
Coyle said the study didn't address other factors in hospitals' financial health, including the stock market and the impact of private insurers, although she said the latter would not be a factor everywhere.
"We have hospitals all across America where there is no managed care, and they're suffering from the Balanced Budget Act, so we know (HMO penetration) is not a factor everywhere," Coyle said.
Even the study's authors said that the Medicare reductions are not solely responsible for hospitals' financial woes.
"In my many years of working with healthcare providers, this is the first time I can recall a confluence of factors impacting the industry that puts virtually every provider at risk," said Michael Hamilton, a partner and national director of Ernst & Young's healthcare advisory business services.