Issue Brief available at: www.chanet.org February 2004 Hospital Finance 101 Issue Brief available at: www.chanet.org

How are hospital services paid for? Private payers Employer-based health insurance Directly-purchased health insurance Government payers Medicare Medicaid Self pay Uninsured individuals who have the ability to pay for some or all of their hospital costs out-of-pocket Typically includes a large portion of working poor Nearly 70 percent of the U.S. population is covered by private insurance provided either through an employer or purchased directed by an individual. Employer-based coverage covers more than 61 percent of the U.S. population. Direct-purchase insurance covers more than 9 percent of the U.S. population. (U.S. Census Bureau. “Health Insurance Coverage in the United States: 2002.” Current Population Reports. September 2003.) Hospitals are reimbursed for Medicare inpatient and outpatient services based on a prospective payment system (“predetermined fixed amounts based on a patient’s diagnosis and treatment”). Hospitals are reimbursed for Medicaid inpatient services using a prospective payment system. Medicaid outpatient services are primarily reimbursed based on a percentage of charge.

What are the sources of hospital revenues? Four primary sources Patient care services, both inpatient and outpatient i.e. ‘room and board’ for admitted patients, X-rays, physical therapy Non-patient care services i.e. parking garages, cafeterias, gift shops Investment income Grants and donations 93 percent of U.S. hospitals’ revenues come from delivering patient care (American Hospital Association. Hospital Statistics: 2004 Edition. Health Forum LLC, 2004.) Hospitals often lose money on patient care services Typically difficult for hospitals to predict what amount of their revenues will come from grants and donations (Additional source: Lane, S.G., Longstreth, E., and Nixon, V. “A Community Leader’s Guide to Hospital Finance: Evaluating How a Hospital Gets and Spends its Money.” The Access Project, 2002.)

What are the sources of hospital expenses? Wages and benefits (57 percent) Other products (13 percent) Capital expenses (8 percent) Prescription drugs (5 percent) Professional fees (5 percent) Utilities (1 percent) Other services (11 percent) (Source: PricewaterhouseCoopers. “The Cost of Caring: Key Drivers of Growth in Spending on Hospital Care.” February 19, 2003.)

What factors drive hospital costs? Workforce shortages Medical liability Capital costs IT advances Medical technology advances Facilities construction Workforce shortages are not just limited to the field of nursing. Other fields experiencing shortages include pharmacists, laboratory technicians and billers/coders. Filing vacancies comes at a cost, i.e. sign-on bonuses, etc. (First Consulting Group. “The Healthcare Workforce Shortage and Its Implications for America’s Hospitals.” Fall 2001.) Spikes in lawsuit settlements and jury awards are arguably the most influential factor affecting high medical liability insurance rates. The American Medical Association ranks Ohio among the states experiencing a medical liability insurance crisis. Capital costs are incurred from hospitals borrowing money to pay for big-ticket items, like IT advances, medical technology and facilities construction. These expenditures help improve patient access and quality of care. (Additional source: PricewaterhouseCoopers. “The Cost of Caring: Key Drivers of Growth in Spending on Hospital Care.” February 19, 2003.)

What about uncompensated care? Uncompensated care generally refers to services for which hospitals aren’t reimbursed, including charity care, government shortfalls and bad debt. Increasingly, hospitals are becoming more selective in their quantification of uncompensated care.

What are payer mix and service mix? proportion of hospital reimbursement received from different payers Northeast Ohio Hospitals’ Payer Mix: 47% private, 38% Medicare, 9% Medicaid, 5% self pay, 1% other Service mix some services tend to be reimbursed more favorably than others i.e. surgical care more profitable than medical care Hospitals tend to lose money on emergency departments, trauma units, burn units and intensive care units A hospital’s ability to remain viable is heavily dependent on its payer mix and service mix Payer mix tends to be linked to the demographics of the surrounding community, thus payer mix varies across hospitals. For example, a community with a large elderly population would result in a payer mix that leans more toward Medicare. (Source: The Center for Health Affairs. 2002 Uncompensated Care Survey. Note: Based on gross revenue before adjustments.)

Conclusion “When you boil all the statistics and data down, the two essential elements that determine a hospital’s ability to remain viable are payer mix and service mix.” Bill Ryan President & CEO The Center for Health Affairs