Hospitals' real margin pressure comes from HR costs

Jim Novak, for HealthLeaders News, November 12, 2007

Editor's Note: Reader Jim Novak wrote the following response to a column I wrote in the August 27 issue of HealthLeaders Media Finance in which I reported on issues that the major rating agencies feel are putting pressure on hospital operating margins.

Forget anemic volumes and supply chain.

While your brief analysis mentions employee benefits, it also inquires about anemic patient volumes. While challenges in these areas may be a localized phenomena, they are not a systemic problem nationally. In fact, the reverse is true. Volumes are growing and expected to continue to do so. Hospitals are spending enormous capital dollars to build more capacity.

While supply chain and other cost pressures are not insignificant, they pale by comparison to the HR cost arena, the largest operating family of costs in healthcare. HR cost inflation is a factor of a fundamentally flawed business model that is driven by ill-conceived reimbursement mechanisms supporting excessive acute-care services, often for preventable emergent and acute episodes of illness. Reimbursement patterns have developed a healthcare delivery model that is a collage of illness response vendors. That model appears to be on an unsustainable course, one in which projected labor supply and service demand are headed toward serious imbalance.

The Dallas Morning News on July 10 reported:

"By 2020, America will be short 24,000 doctors and nearly 1 million nurses, the federal government predicts; now a major tax and consulting firm says the problem will be even worse."

Labor costs for healthcare professionals continue to rise, a factor of expanding employment levels, increasing cash compensation, and out-of-control health insurance and other benefit costs. As baby boomers retire, increasing their own age-related healthcare consumption while living much, much longer to sustain and grow that consumption, and as volume-driven labor shortages grow more pronounced, a perfect storm of cost hemorrhaging is projected and may be already under way.

• The number of workers needed to sustain the current healthcare model increases significantly, incurring what essentially are avoidable manpower costs.
  
• The number of healthcare professionals needed to sustain the current healthcare model exceeds the supply.
  
• Wages continue to artificially escalate as hospitals try to fill excessive vacancies.
  
• Unsafe staffing conditions, where they occur, contribute to errors and omissions, patient abuse and neglect, increased staff injuries, stress, and illness, growing incidences of disability, turnover and forced retirement.
  
• Resources otherwise available for productivity and care-quality enhancement tools like information technology have to be diverted.

Absent reimbursement realignment, proactively managing demand to levels that can be safely and affordably staffed would, of course, negatively affect provider revenues in today's marketplace. However, if hospitals and health systems were to stop playing the victim in this story, instead exploring and quantifying the full potential of prevention and chronic illness management with their own employee health plans, it could set the stage for their community self-insured plan sponsors (employers) to modify their plans' reimbursement via their TPA/ASO providers to create a financial win-win (as well as a community health win). Major cost drivers in those plans could be identified and addressed first to:

• allow efforts to be focused within reasonable boundaries and joined by progressive clinical leaders
  
• develop a transferable economic model. (In redefining revenue services and reimbursement levels, an initial goal could be to end spiraling cost inflation, maintaining today's level of acute-care activity and expenditure for an aging, more chronically ill population. That would provide for a sustainable, responsible system without undue harm to participating providers.)
  
• support learning and readiness-to-change
  
• support purchaser choice among plan administrators based on their support for a productive care model, vs. provider discount schemes that no longer provide value

Addressing this issue also has the potential to end the employee benefit cost explosion for hospitals.

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Jim Novak is a senior consultant with Benefit Performance Associates, an employee benefits consulting firm in Geneva, IL. He may be reached at jnovak@advocacymodel.com.