Once upon a time hospitals set up shop in communities to take care of unhealthy people. They received exemptions from nearly all taxes and even charitable donations from community benefactors to support vital operations such as providing emergency care regardless of ability to pay.
While this image of the good Samaritan still arguably holds sway in the public eye today, it smacks headlong into the business realities that came to pass 25 years ago and remain in effect.
Think hospitals stay open to serve the sick and poor? Consider the case of St. Vincent's Hospital-Manhattan in New York. Last spring the 511-bed hospital closed its doors after 161 years when none of the surrounding health systems would agree to buy the struggling Catholic facility, which had $1 billion in liabilities on its books and an emergency room case mix that included 47% Medicaid recipients.
Despite their image as charitable organizations, hospitals have been closing at a rate of 30 a year since 1983, many in rural and inner-city areas, while those that remain have joined up with larger corporate systems, maximizing their profits.
The AHA data show that modern hospitals have posted an average net profit margin of 4.9% over the past 25 years, placing them below resorts and casinos (7.8%) and above grocery stores (0.9%) in terms of profitability, based on the most recent industrywide figures from 2006.
Administrators don't typically use terms such as “profit” in public since most hospitals are tax-exempt and therefore forbidden by law to pay dividends. But hospitals in California earn more revenue than Hollywood, and the largest private employer in New York City is New York-Presbyterian Hospital.
Experts say the factors that led to the changeover from social service organizations to large businesses can be traced to 1983, the year when economic forces that drove an uninterrupted expansion of bed count in U.S. hospitals since World War II were finally overcome by mandates for efficiency, causing the number of beds to peak at just over 1 million before starting a 25-year descent.
“The sky has been falling for 25 years,” said Glenn Melnick, a healthcare economist at the University of Southern California and a consultant for California-based think tank RAND Corp.
Two developments in 1983 are widely cited for putting hospitals in the fiscally defensive posture that they still occupy today, and both changes were spurred on by the severe “double-dip” recessions of 1981 and 1982.
Amid the extreme economic stress of the recessions, U.S. employers began to take a hard look at one of healthcare's most expensive line items, inpatient hospital care, with an eye toward reducing it by managing the care being authorized by insurers. The number of inpatient admissions actually peaked in the U.S. in 1981, the AHA data show.
The federal government, meanwhile, took steps to stabilize its Medicare costs in the wake of the recession by kicking off the prospective payment revolution, standardizing how hospitals' largest single payer would reimburse them for care. Under the new system, Medicare no longer paid hospitals' “allowable charges” that varied widely among hospitals, but rather switched to standardized payments based on DRGs of patients.
In the decade that preceded DRGs and managed care, hospital revenue grew by 15% a year. In the 25 years afterward, hospitals' total revenue grew by 7% annually on average.
Hospitals closed 1% of their beds each year since 1983, even though the U.S. population grew by 30% in that time.
A second wave of financial stressors hit in the 1990s, with the advent of commercial managed care—HMOs and PPOs—along with federal efforts to reduce Medicare payments in the Balanced Budget Act of 1997.
Hospitals again adapted. A wave of corporate consolidation created larger health systems—and far larger pools of assets and investments to manage—in the process, consolidating hospitals' market presence and building clout in price negotiations with commercial insurers.
Ascension Health, the nation's largest nonfederal not-for-profit health system by patient revenue, last year hired its first chief investment officer, who manages the 77-hospital system's investments, which included $5.4 billion in daily and weekly liquidity and another $2 billion in longer-term investments as of April.
“Healthcare organizations as a rule have been slow to adopt some of the more proven creative financing techniques available today,” Ascension President and CEO Anthony Tersigni said in a news release announcing the investment chief job. “Our intention is to take advantage of all the opportunities available to us in a responsible, thoughtful way in order to help us achieve our mission.”
Melnick, the USC professor, said reliance on investments to subsidize operations can drive up hospital pricing, especially after recessions. “It tends to contribute to price inflation,” he said. “If I spend more this year because I can afford it, and everyone else does the same to compete with me, then next year when I go into negotiations that price basis will factor into negotiations.”
Robert Zirkelbach, spokesman for America's Health Insurance Plans, said some of the commercial insurers that are members of the association have been reporting price increases of as much as 40% or 50% in some parts of the country recently.
A January article in Health Affairs concluded that price increases, not increased utilization, tend to account for most of the growth in healthcare spending after major recessions. “This finding indicates that relatively severe recessions may have more immediate and profound impacts on healthcare spending growth,” the article's authors wrote.
Although the 4.3% growth in health spending by individual households in 2008 was lower than in prior years, the article also noted that wages grew only 2.7% on average that year. “Despite the overall slowdown in national health spending growth, increases continue to outpace growth in the resources available to pay for it,” the authors wrote.