Meanwhile, financial pressures mean smaller budgets for hospital laboratories
When it comes to multi-hospital health systems, the biggest are getting bigger. But many health systems are not covering their costs. These were the findings from a recent annual survey of health systems by Modern Healthcare magazine. It confirms what pathologists and clinical laboratory directors see in many regional markets.
As we wrote in Dark Daily on June 29, three factors are driving this growth trend: federal healthcare reform, mandated spending on health information technology (HIT), and the economic contraction from 2007 to 2009 that pushed smaller hospitals to merge with larger health systems. This is the analysis reported by Modern Healthcare. (See Dark Daily, Modern Healthcare’sTop 10 Largest Health System Rankings also Reveal Nation’s Largest Hospital-Based Laboratories, June 29, 2011.)
The report also shows that what motivates health systems to become larger and increase market share is the need to fully cover their costs. By acquiring other hospitals and other facilities, health systems seek increased efficiencies so they can cut costs and increase profit margins.
It goes without saying that health systems cannot grow bigger unless there are hospitals that are willing to be sold. So the other aspect of this trend is that there is an ample supply of such hospitals.
“There is increased receptivity on the part of potential hospitals to be acquired,” James LeBuhn, a Senior Director and head of the U.S. Public Finance Healthcare Group at Fitch Ratings, in New York, told Modern Healthcare. “As individual hospitals look at the greater challenges from health reform coming down there is a greater willingness to join larger systems and receive those economies of scale.” Fitch Ratings is a global rating agency that provides independent and prospective credit opinions, research, and data.
Health policy expert, Stuart Altman, Ph.D., also commented on the growth strategies of health systems earlier this year in an article titled: “Hospitals and Health Plans Keep Getting Bigger—but Not Better.” Altman believes that federal health reform legislation will force both insurers and providers to consolidate so that they can offer better care at lower cost.
Altman observed that one consequence of the increasing size of major hospitals and health systems will be a similar trend among health insurers. Altman, who is the Sol C. Chaikin Professor of National Health Policy in the Heller School for Social Policy and Management at Brandeis University, expects that insurers will want to grow as a way to counter the market clouts of the largest providers.
Modern Healthcare’s survey confirmed that, as an industry, health systems do not generate enough review from patient care to cover their expenses. After compiling rankings using survey responses from 210 hospitals nationwide, the magazine staff analyzed the financial responses to the survey from 199 of these hospitals because they provided the necessary financial information for this analysis.
Among the 199 health systems that were analyzed, Modern Healthcare determined that 92% of net revenue comes from patient care. These facilities averaged $1.98 billion in net patient revenue and $2.2 billion in total net revenue. They also averaged $122 million in net income. The survey authors stated that these results mean that the 199 health systems spent an average of $2.08 billion in 2010, or about $92 million more than they earned from patient care.
This shortfall in patient revenue is part of a long-running trend, even though the shortfall in 2010 was less than it was in 2009, when health systems spent an average of $140 million more than they collected.
When health systems adopt a strategy to increase revenue, they buy hospitals and other health systems. In an article published on the Kaiser Health News website last year in collaboration with the Washington Post, it was reported that health reform and other factors were driving this consolidation in the hospital industry.
“Hospital leaders from Baltimore to Seattle say the health law approved by Congress in March  gives them even more reason to merge with or buy rivals because of its emphasis on integrated systems where hospitals and doctors better coordinate care,” wrote the reporter for the Washington Post. “Larger systems have an easier time getting capital for new services or equipment, such as electronic medical records. The e-records, they say, should save money over time through more efficient care and fewer medical errors.”
Clinical laboratory managers and pathologists who work in hospital laboratories are seeing these trends play out. Many hospitals are dealing with steady erosion in the level of reimbursement generated from patient care. This often translates into reduced budgets for the clinical laboratory division. Meanwhile, the strategy of buying other hospitals to get bigger may not succeed for many health systems if reimbursement levels continue to be squeezed down by government and private payers.