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How Post-acute Care Can Improve Hospital Financial Performance

Daniel Walter and Francine Machisko, for HealthLeaders Media, January 30, 2009

Although the current economic environment is negatively impacting the entire healthcare industry, many health systems are realizing that post-acute programs, which often take a backseat in many hospitals, can generate some much needed financial returns for the organization. Today's financial pressures, including tightened access to capital and higher interest rates, increased charity care and bad debt expenses, reduced admissions and elective procedures, and negative returns on investments have hammered many hospitals' bottom lines. For example, hospitals' total margin for the third quarter of 2008 was a -1.6%, down significantly from the 6.1% margin reported just one year earlier, according to an American Hospital Association survey released in November 2008.

These pressures have led health leaders to ask what can be done to improve margins during an economic downturn. Many health systems are justifiably evaluating stop-gap measures, such as postponing capital expenditures and implementing lay-offs, but you must remember that no business ever shrunk its way to success. Clearly, these stop-gap measures are worthy of consideration and may be necessary, but ultimately most organizations will achieve and maintain both short- and long-term success by including in their portfolio a sufficient number of profitable service lines that have both strong community demand and favorable reimbursement.

One profitable area that is often overlooked, but should be assessed by hospital administrators during these challenging economic times, is post-acute care. The March 2008 MedPAC report to Congress projected an overall FY 2008 Medicare acute-care hospital margin of -4.4%, but this same report projected positive operating margins for most post-acute programs. In fact, acute-care providers who have not recently evaluated post-acute care opportunities might be giving away some of their most potentially profitable service lines. For instance, the projected FY 2008 Medicare margin for inpatient rehabilitation was 8.4%, home health was 11.4%, and skilled nursing units were 3.8%, and long-term care hospitals were a -0.9%.

The MedPAC figures are important because for most post-acute programs, Medicare represents at least 65% of all current admissions. And with the exception of Medicaid and self-pay patients who generally make up no more than 10% of admissions, there tend to be positive operating margins for other payers as well.

Nationally, the 65 and over population is projected to increase from less than 13% of the population in 2007 to 14.5% in 2015 and 18.2% of the population by 2025. This aging will continue to increase the demand for post-acute programs, as well as other programs and services meeting the needs of chronic and elderly patients.

The post-acute revenue and operating margin that is at risk is not chump change, either. Each occupied rehabilitation bed represents approximately $300,000 in contribution margin annually, according to the most recent industry information. Increasing the rehabilitation census by just five patients would improve the hospital's bottom line by $1.5 million! In general, the same financial effect holds true for the other post-acute programs. (Although MedPac projected a negative Medicare operating margin for LTCHs, the incremental margin for each additional Medicare admission is estimated to be approximately $19,000. As such, each additional occupied LTCH bed represents almost $250,000 in incremental operating margin annually.)

Unless an acute-care hospital is certain that it's not allowing any post-acute opportunities to slip away, a closer look at this specialty area is warranted. For acute-care providers and health systems that currently offer post-acute services, this means asking the question, "How do we ensure that we are keeping as many patients as appropriate in-house?" For hospitals that do not offer some or all of the post-acute programs possible, the question to ask is "Why is the hospital letting this business and these margins drift to other providers?"

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