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The Truth About Cross-Subsidization

Philip Betbeze, for HealthLeaders Media, June 2, 2008

Cross subsidization isn't difficult to understand. As hospital leaders, you know that you have a multitude of money-losing services that you must provide for patients that are either required by law (emergency services, for example) or can't easily be eliminated for a variety of reasons (your commitment to improving your community's health). But it only works if you're making enough margin on the profitable services so that you can continue as a going concern. That model is rapidly becoming a dinosaur, however.

For years, cross-subsidization worked nicely. But it can't continue. At best, it's a declining strategy that will cause you to lose more and more each year. Somewhere there's a tipping point at which the system breaks down. Many would have thought we would already be there, with 47 million uninsured and a declining base of patients with employer-sponsored health insurance coverage. So if not now, when does cross subsidization reach a tipping point? I don't know the answer to that question. You don't either. But you know that employer-based health insurance, which has carried the freight for so long for our healthcare "system," is declining rapidly. Government payers, which already don't cover your costs of providing care, don't seem to be able to keep up either. So what are you left with? Still emphasizing those money-making services, and trying to get as much revenue in the door from them as you can.

It's a vicious cycle, and seems to be getting even more vicious as time goes on. The number of uninsured grows every year. The percentage of people who are covered by employer health insurance declines every year. Employers are having a difficult time competing with overseas competitors. Something has to give, doesn't it?

Yes, and no. Yes, the current course of cross-subsidization in healthcare appears unsustainable. No, government isn't picking up its fair share of the tab. Yes, competitors are nibbling at your profitable margins every year, but experience shows that these negative trends can continue for many years without an acceptable solution. So what can you do?

You can compete harder and smarter. Many of you have already gotten this message, and are expanding into markets you never thought your hospital would enter. Some of you haven't, and your balance sheet is suffering.

Many of you already have a sizable advantage over your competitors thanks to your nonprofit status. Forward-thinking hospital leaders have already moved into better paying and more consumer-oriented markets through outpatient facilities and new, smaller hospitals in more affluent areas of town. This kind of arms race is brutal, it's not efficient, and it's not fair, but it's reality. You could ignore these trends and waste away as a full-service, all-things-to-all-people traditional hospital, or you could branch out into imaging, walk-in clinics, wellness centers or other profitable services that demand cash on the barrelhead.

I'm not saying you should ignore your mission to provide for the less fortunate in society. But to be able to do that, you have to work within the system we have. So unless you're hoping against hope that a grand solution is coming from the new president or the new Congress to save you from this malaise (don't bet on it), competing is your only choice.


Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.
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