Summary
The status quo will be maintained during the election year. But, what will happen to the funding for physicians and hospitals after the election? Healthcare and defense are the two largest components of the Federal budget. Congress will likely act to gain budget reductions in both areas. The hospital component is the largest of the federal healthcare budget and makes an easy target. In addition to revenue pressures, hospitals are facing mounting input cost pressures. Hospital margins are projected to decline in the near future.
Analysis
The major player in the hospital industry is the federal government. Public funding of the healthcare industry is at 45%, with private funding being 55% according to a recent study by the Kaiser Foundation. http://www.kff.org/insurance/upload/7692.pdf. Hospitals and nursing homes make up the largest proportion of the public funding of healthcare. As such, they make a big target for congress as congress looks to deal with budget deficits caused by a slowdown in the national economy and continuing needs to pay for the war on terror. Further, Hospitals tend to be the odd person out in the political arena that includes workers paying Medicare tax, Medicare beneficiaries, physicians, insurance companies, and hospitals. Over half the patients at a typical hospital are paid for by Medicare and Medicaid. Hospitals have dealt with public funding sources that have not kept pace with inflation for some time. My expectation is that the public funding shortfalls will get worse in the future due to the budget issues congress is faced with. Hospitals have engaged in cost shifting as a means to manage the shortfalls in reimbursement from public sources. The cost shifting has gone on long enough that it is becoming increasingly more difficult. Cost shifting is as follows. The hospital industry is very labor intense, with salaries and benefits making up over half of the operating costs of a hospital. With the shortages of healthcare staff, wage inflation has increased. Healthcare Financial Management Association (HFMA) in their recent “Healthcare Financial Outlook 2008 – 2013” publication included a table estimating salary inflation of approximately 5% a year and benefit inflation of 6% a year in 2009 and 2010. If half of a hospital’s costs are going up 5 to 6 percent a year, and half of you payers are not paying you for those cost increases, then those costs must be shifted to the other half of your payers. If a hospital is in a market with aggressing private financing contracting, the hospital may only have a small portion of their patient base that will react to increases in prices. These facts result in hospital prices increasing at a rate higher than inflation. If a hospital has input price (cost) inflation of 5%, the hospital may have to raise prices 10% to keep operating margins from decreasing. As the number of uninsured and bad debt and charity allowances continue to grow, the ability of a hospital to cost shift declines. The above mentioned HFMA article contained a prediction that net operating revenues would be growing by 3.4% a year in 2010, while hospital costs would be growing by 5% a year. And this is the near term, the prospects look worse when in 2012 the baby boomers start utilizing healthcare in greater quantity. The outlook for hospital margins is not good.
