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Battling the Downturn

Mike Alkire, for HealthLeaders Media, December 15, 2008

If there's one thing that healthcare professionals have learned in these trying economic times, it's that the healthcare industry certainly isn't recession-proof. The continuing crisis in the credit markets and the negative turn on Wall Street has slowed the flow of nonprofit hospital capital dramatically. Many hospitals were already working with razor-thin operating margins; without investment income, the pressure increases exponentially.

To make matters worse, with reduced tax revenues, state and federal deficits have and will continue to balloon, and we are already seeing significant efforts to cut hospital payments in New York and California to make up for the shortfall. And to top it off, according to a study out of Pennsylvania, Medicare eligibility and reimbursement rates have led to fewer patients being treated at rehabilitation hospitals and long-term acute care hospitals. This bad news coincides with an American Hospital Association report suggesting fewer Americans are seeking hospital care while more need help paying for care.

As a recent Wall Street Journal health blog put it so aptly, "hospitals traffic in debt. They borrow money for big construction projects, and they effectively lend money to patients when they treat people without requiring payment upfront."

In an all-too-common occurrence these days, many hospitals, which typically depend on the tax-exempt bond market and auction-rate securities to finance their expansions, are suspending non-emergency capital equipment purchases and/or construction plans. Siemens just completed a survey of its customers that revealed that 35% were currently operating under a capital spending freeze. Other facilities are looking at deferment on a case-by-case basis with up to two years of slowed capital purchasing.

Band together

As with other crises, such as 9/11 or Hurricane Katrina, the healthcare community—manufacturers, healthcare providers, and group purchasing organizations alike—need to work together to help minimize the financial strains that our hospitals are facing for the sake of the health of our communities.

In October, I sent a letter to the more than 800 manufacturers with which we work, requesting their assistance in helping our hospitals. In recent days, other GPOs have followed suit. Specifically, we asked them to work collaboratively to hold our contracted prices firm. In cases where an increase was unavoidable, we requested that, when market forces correct, such price increases will be subsequently reduced. Additionally, we have asked manufacturers to provide flexible alternative financing options and pay term flexibility, and requested they support our advocacy efforts in Washington, D.C., to address funding shortfalls for hospitals.

We realize that these financial pressures don't fall solely on hospitals. Healthcare manufacturers and suppliers are also struggling. But whereas manufacturers may ask for a price increase to offset their losses, hospitals will not be able to receive additional funding to cover such an increase; they cannot afford any additional strain on their already difficult financial situations. Manufacturers need to take into account that such increases could literally put some facilities out of business, drastically reducing their income while putting patients at risk.

What hospitals can do

Because sacrificing the quality of patient care is not an option, certain capital expenditures are a necessity. Many hospitals are moving forward with planned capital equipment purchases or construction.

Kettering Health Network in southwestern Ohio recently purchased a 35-acre parcel of land to proceed with the construction of a new facility, and they are in the process of finalizing the construction of an 80,000-square-foot facility that includes physician offices, medical imaging, and a large physical therapy area.

Catholic Healthcare West just purchased 30 acres of land in Sacramento for a medical campus that will include a hospital and additional medical buildings with imaging and laboratory services. Plans call for a new four-story, 148,000-square-foot building, and an expanded emergency room and birth center.

Orlando-based Florida Hospital will open in December a new building that holds space for 440 patient rooms and an emergency department that could span a football field. The tower's purpose is to replace the hospital's existing overcrowded ER and expand its cardiac services. The ability to proceed with capital expenditures during a down economy can be achieved through:

  • Prioritization and planning: There's always a strategic give-and-take at play, and prioritization and planning are absolutely critical in this environment. Hospitals need to review their planned capital purchases, focusing on return on investment from both a monetary and patient safety standpoint.
  • Comparisons: It is integral that hospitals do apples-to-apples comparisons of varying offerings and opportunities to ensure they are able to make an informed decision based on cost, quality, capability, service and need. For instance, why buy a 64-slice CT scanner when a 16-slice meets all of your needs?
  • Deferment of payments: Hospitals should look into the opportunity to defer the start of payments by taking advantage of tax benefits, and then begin payments once the purchase is generating return on investment.
  • Group buys: By taking part in group buys, major drivers of savings specifically in areas of capital expenditures, hospitals can achieve savings of up to 15% beyond regular contract pricing. Group buys may also include special rates for financing, trade-ins, training, service and extended warranties.

From Wall Street to Main Street, the troubled economy has created extremely challenging times for business industries across America; healthcare is no exception. To minimize the impact of economic struggles, hospitals, manufacturers, and GPOs need to focus on priorities as much in the short-term as in the long-term. As healthcare professionals, we need to guide and assist care providers to ensure they get the best value for the most important investment they have to make—the investment in the health of our communities.


Mike Alkire is president of Premier Purchasing Partners, a division of the Premier healthcare alliance. He may be reached at Mike_Alkire@PremierInc.com .
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