The hospital’s foggy future

As government and health insurance plans desperately seek to contain costs, hospital care has become a whipping boy.

Charges can run as high as $18,000 a day. In 2008, two million of the most expensive hospital stays cost nearly $200,000 per person. Days spent in the hospital declined in the 1980s and early 1990s and then stabilized after the federal government changed the way it paid hospitals. Hospitals’ portion of health-care costs declined from 43 percent in 1980 to 33 percent in 2009. However, it remains the largest category of health-care spending.

According to the late management guru Peter Drucker, the four hardest jobs in America, in no particular order, are president of the United States, university president, hospital CEO and pastor. Hospitals are under constant pressure to lower costs while improving quality.

The implications of hurried care are reflected in hospital metrics: dismal safety records and high re-admissions, which induce higher costs than if there had been proper initial care. Nonetheless, hospitals are tied with supermarkets as the most trustworthy industry, according to a Harris Interactive poll.

Drucker’s observation certainly rings true, given the current health-care climate. The recession has hit the nation’s hospitals hard. About 3 out of 4 hospitals treated fewer patients and performed fewer elective surgeries. Nearly all have had to treat more patients who cannot pay.

Hospitals, especially the nonprofits, rely on income from investments and community donations. According to an American Hospital Association (AHA) survey, 90 percent of U.S. hospitals say attracting charitable gifts is becoming more difficult. A similar percentage reported extreme difficulty in securing tax-exempt bonds. Two-thirds have had to delay projects because of difficulty accessing capital markets.

Most hospitals have cut administrative costs and reduced staff. About 1 in 4 has cut services. A financially struggling hospital creates economic ripples. It is often one of the largest employers in town. Hospitals employ more than 5 million U.S. workers, the second largest employer category, behind only restaurants. According to the AHA, they support nearly 1 in 10 U.S. jobs based on the goods and services they buy. Average hospital profit operating margins were 4 percent in 2006, with one-third of hospitals losing money on operations.

There are three kinds of hospitals: nonprofit, for-profit and public.

The primary goal of a nonprofit is to serve its community rather than maximize profits. However, nonprofit health-care organizations must be run like for-profit businesses to sustain themselves. The three main sources of capital are reinvestment of earnings from ongoing operations, philanthropic gifts and tax-exempt municipal bonds. They generally must spend a portion of their revenue on charity care and community benefit. Nonprofits are exempt from federal and state income taxes, as well as sales and property taxes.

Public hospitals are also nonprofit organizations, owned and operated by local governments. They have an additional revenue source, because they can levy taxes. That is critical because many of their patients are either uninsured or have government insurance that reimburses the hospital at less than the cost of care.

For-profit hospitals either distribute profits to their owners or reinvest them in the company. Unlike nonprofits, for-profit hospitals can raise capital in risk-based equity markets.

About 58 percent of hospitals are nonprofit, about 20 percent are for-profit and 22 percent are public hospitals.