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Navigating the Downturn

May 29, 2008
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Economic tough times often translate into more bad debt and charity care for hospitals.

Susie Krentz

Susie Krentz


Though some may debate the label to be placed on the current economic downturn, no one questions the fact that the country is certainly in the midst of one. And while the crisis was born of defaulting subprime mortgages in the financial markets, it has rippled into the rest of the American economy. Unfortunately, healthcare has not been spared the ill effects. To help hospital executives navigate these choppy waters, HRCM Editor-in-Chief Anthony Guerra recently talked with Susie Krentz, senior principal, strategy and planning national practice director, with the Noblis Center for Health Innovation in Falls Church, Va.

AG: It seems like your group, the Noblis Center, has decided to dig into this area to help hospitals through it. Tell me a little bit about your perspective as to what's going on with the economy.

SK: I think, for many years and in general, people often say that healthcare is a recession-proof industry. In some ways, healthcare is recession-proof in so far as people getting sick during a recession. No matter what the economy is like, people still have healthcare needs, and that was the basis for that little phrase. The reality is recessions do impact the health and the financial health of healthcare organizations, regardless of what kind of queue is outside the emergency room, or needing to come into the hospital for care. I think, as you look at hospitals across the country, there are some very direct places, where there is an impact because of the recession, on the viability of healthcare organizations, or their ability to stay as (much) on as firm footing as they would like.

AG: You just mentioned the fact that the patient volume doesn't really decrease, so what is the real impact of the economy on hospitals and health systems?

SK: When you look at where you see pressures, it's on their revenue side or the expense side; it's pretty simple math. When you get into a recession, what happens on the revenue side is as people lose jobs (and) become unemployed, they often lose their health insurance. One kind of direct impact on the revenue side is people who need care but no longer have the health insurance to cover the cost, so they present to the healthcare organizations that are now faced with increased charity care loads.

Even when someone is employed — take the average middle class person who is employed and may have health insurance — a lot of the health insurance has co-pays or deductibles. “Fred” goes to the hospital, he's employed, has insurance, but they have to pay $100 of the co-pay of some sort. When gas prices go up, when the mortgage bill comes due, with all the pressures on families, even with insurance, the healthcare organization is not always at the top of people's list of bills they're going to pay. Because the hospitals are there, they have a mission; they know they have a mission to provide care, which is true, so that means bad debt goes up. So, on the revenue side, even when there's demand, the revenue doesn't always follow.

Then if you take it another step, employers in a recession are trying to improve their bottom lines. They put more pressure on their health insurers. They don't want to pay as much for health insurance, or they want the rates to not go up as much, which leads to changes in the policies, which often increases the co-pays or deductibles, or employers require higher payment on the part of employees to cover dependents. Then you have a situation where the employee might be covered but they no longer pay for the rest of their family to be covered. Again, it's like the domino. The employers and the businesses are being hit by the recession, they want to improve their bottom line, they put pressure on the insurers, it changes the structure for the employee, down the road. It's not a direct hit, but the revenue side feels the effects.

Then, on the expense side, you can see just with a lot of the uncertainty in the markets what happened with the interest rates and the willingness to lend money. That has implications as hospitals finance with any kind of debt finance, the interest rates go up which, again, unrelated to demand, is just the cost to access capital increases. That means it costs more to do the same capital initiative compared to what it would have done some years ago. If you want to do some form of debt financing, it's a little more difficult to structure.

AG: Have we really seen interest rates go up yet?

SK: With some of the bond insurers having difficulty, and a number of the different auction markets, there have been financing vehicles that hospitals have used as part of their overall financing strategy that have become more expensive. A lot of that is the spin off from the whole mortgage crisis, which affects a lot of lending. There's just a lot of wariness as people get a little more risk averse about lending money. Certain of these markets have had some problems, as insurers have been negatively impacted from the mortgage crisis.

Again, it's not the standard interest rate you and I think about, such as T-bills or something, but certain other types of money that hospitals use in their portfolio for their management purposes. They're very sophisticated in how they manage the leverage side of accessing capital. There are some instances where it has caused significant interest rate pressures.

AG: Is there a way that CEOs and CFOs can market the increase in charity care and bad debt to build up some good will in the community?

SK: I think you can always take a situation and look for how to turn it. There is a lot of pressure, as you probably know, on our hospitals in terms of living up to their obligations as a tax exempt provider. Certainly it's going to be a lot easier to tell that story in a way that people can understand when the charity load starts increasing, and that will be reflected in the community benefit reports that hospitals put out every year. In that dimension, it can work well, and I think there are also things that hospitals can do to be sensitive to the financial straits that patients are in. So they may not qualify for charity under the charity policies, but it's important to consider how you handle the financing, if you will, of payment: as opposed to saying, “You owe this money,” and sending a debt collector, working with people to do it in a compassionate way. I think hospitals are trying to figure out what's a fair and appropriate way to handle things when someone has the wherewithal to pay, but is feeling cash strained. How do we set up a mechanism to make that work? And I think that does send a good message to people in the community of the hospitals that they're trying to make sure that services are accessible.

AG: Do you find that the CEOs and CFOs at hospitals have a difficult time walking that line between functioning as a care-based organization versus functioning as a business?

SK: I think that in our levels of work, at non-profit hospitals, I think there is a very conscious and deliberate effort to find the appropriate balance between those two; because if you don't pay attention to the business side, you won't be able to provide the care. I mean, you have to be healthy to do that.

On the other hand, hospitals, most of them, are there to provide care in a compassionate way. So I think keeping it balanced so you don't go too much one way or the other, to make sure the organization is healthy and still meeting that community care mission, has always been a challenge. It's more challenging when times are economically difficult. So with the recession impact, if that puts more a pressure on the business's health, then how do you weigh it to make sure you're doing the appropriate things that the community needs. I think CEOs and CFOs are more conscious than ever about finding a healthy balance between those two.

AG: Would you say that the most CEOs and CFOs find that balance? Are most in good balance or do most tilt to one side or the other?

SK: Overall, I think many are in good balance. Sometimes there are periods of imbalance. Often it has to do with geography. If you think of the inner city hospitals, to maintain the balance it is a lot more challenging than to maintain the balance if you have a healthier, more evenly distributed mix of patients.

I think that the ones that are challenged are the ones that have a disproportionate number of patients that need charity care or are economically under duress. There's an amazing amount of innovation that CEOs and CFOs are trying to do to find a way to balance continuing that care commitment and figuring out a way to stay viable. They are trying to be innovative both in what is offered, how it's offered, and the partnerships they put in place.

I think, on the other hand, those organizations that, because of just happenstance and location, are replaced with a different mix may need to do more on the community service side: to say, “Should we put a clinic in place? Should we do some things that intentionally reach out to the communities where they feel like maybe we can do more?”

AG: The Wall Street Journal recently wrote an article indicating there are haves and have nots in healthcare; some hospitals are awash with cash and some are struggling. A colleague of mine on staff agrees. What are your thoughts?

Continued Online at http://www.healthcare-informatics.com/HRCM_krentz.


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