1. The Big Picture: A Look at Hospitals in a Volatile Healthcare Environment Gloria J. Bazzoli, Ph.D. Professor of Health Administration Virginia Commonwealth University

2. Gloria Bazzoli Hospital Closures and Mergers Time Period Closed # % Merged # % 1986 – 882533.6%1532.2% 1989 – 912243.3%1382.0% 1992 – 942473.7%1792.7% 1995 – 971923.0%3685.8% 1998 – 001973.2%1352.2% Data on all US registered hospitals Source: AHA Annual Survey, Public Use File documentation

3. Gloria Bazzoli Industry Financial Performance & Closure/Merger Trends Source: AHA Annual Survey, Public Use File documentation & MedPAC reports to Congress, 1999 & 2002.

4. Gloria Bazzoli Organizational Change: Distressed and Non-Distressed Community Hospitals 1985-90 Distressed Not Distressed 1994-98 Distressed Not Distressed Closed 6.0% 5.6% 3.8% 1.2% Acquired through Merger 1.7% 3.2% 6.0% 6.7% Survived92.3%91.2%90.2%92.1% Source: Bazzoli and Andes, H&HSA, 1995; analysis replicated for 1994-98 period

5. Gloria Bazzoli Financial Pressures and Hospital Operations When confronted with financial pressures, hospitals: –reduce staffing levels –reduce intensity of service (especially for patients whose payers reduce reimbursement) –provide less charity care & limit public health/specialty services –seek new revenue sources –face higher costs of capital

6. Gloria Bazzoli Changes in Hospital Credit Ratings: Last Decade

7. Gloria Bazzoli Hospital Mergers and Financial Performance Large increase in number of mergers in the mid- 1990s –response to growing market pressures –desire to develop regional health delivery systems Research suggests merger cost savings exist but: –small in $ amount –result of one-time administrative streamlining –more common in small hospitals –promise of savings from clinical consolidation went unfulfilled

8. Gloria Bazzoli Hospital Mergers and Financial Performance Research suggests mergers increase hospital prices/profits: –especially for high market share services –especially in markets with low managed care penetration & limited hospital competition Research suggests hospitals gaining leverage vis-à-vis health plans: –managed care backlash has reduced payer power –increased evidence of provider-insurer “show-downs”

9. Gloria Bazzoli Special Pressures on Hospital Safety Net Safety net hospitals faced same pressures as other hospitals in 1990s and 2000s plus: –large and growing number of uninsured –confusion about Medicaid eligibility under Welfare Reform –reductions or limited growth in indigent care subsidies –Medicaid managed care Total margins of DSH hospitals have declined

10. Gloria Bazzoli Trends in Total Margins of DSH and Non-DSH Hospitals Source: MedPAC Report to Congress, March 2002

11. Gloria Bazzoli The Balance Sheet: UC Costs and Subsidies (billions of $) 1997 UC costs of public/private hospitals:........................ $18.5 1997 UC subsidies to public/private hospitals: Medicare DSH.................. $ 4.2 Medicare IME................... $ 4.4 Medicaid DSH: gross:..........$15.9 net:.......... ~$ 8.3 net to hospitals:.. ~60%......$ 5.0 TOTAL UC subsidies:...................... $13.6 DIFFERENCE........... $ 4.9 Sources: Melnick et al., 2000 and Coughlin et al., 1999

12. Gloria Bazzoli Evidence of Declining Voluntary Charity Care Financial pressures of urban hospitals leading to reduction in their charity care provision Physician involvement in charity care also appears to be on the decline Increasingly, indigent care is concentrated in a small group of hospitals and physicians Whether these trends will accelerate or diminish in the future is unclear

13. Gloria Bazzoli Needed Research: Financial Pressures and Hospital Operations We need to know: –effects of financial performance on hospital investments in technology and infrastructure –effects of financial performance on quality of patient care and health outcomes –hospital turnaround strategies and their effectiveness –how communities managed and coped with hospital closures

14. Gloria Bazzoli Needed Research: Hospital Safety Net and Financial Pressures How have core safety net providers been affected in terms of: –their indigent patient volumes? –their ability to maintain physical plant, high cost technology, services and staffing? –ultimately, the care received by the indigent? How will State budget crises affect: –State Medicaid/SCHIP benefits and eligibility? –provider payments and ultimately, provider willingness to participate in State programs?

15. Gloria Bazzoli Data to Assess Hospital Trends: National Sources AHA Annual Survey CMS Medicare cost reports AHRQ National Inpatient Sample (NIS) Financial data and reports of investment banking firms National Hospital Indicator Survey (commissioned by CMS and MedPAC, conducted by AHA)

16. Gloria Bazzoli Data to Assess Hospital Trends: State Sources AHRQ HCUP initiative: –State Inpatient Discharge (SID) databases –State Ambulatory Surgery Database (SASD) Hospital financial reports filed due to disclosure requirements Hospital community benefit reports filed due to disclosure requirements