Friday, February 18, 2011

Scale and efficiency

At the CNYHSA meeting last month, there was one comment by a physician. Dr. Douglas Tucker works for MVP health plan so he was actually speaking as an insurer, rather than as a physician.

Dr. Tucker said that the acquisition of Community by Upstate would be “a catastrophe” because patient services at Upstate cost more than at Community. As a result, he asserted, the combined hospital would be more expensive for the community-at-large.

He wasn't speaking about hospital costs. He was talking about what insurers pay hospitals for care given to their beneficiaries. (Hospitals aren't able to disclose what we are paid by insurance companies. To do so would violate antitrust laws.)

Is Dr. Tucker's concern a valid one? Will the combination of Community and Upstate help or hurt the cost of care over the next five or ten or 15 years?

First, let's be clear about Community's prospects as an independent community hospital. They are not great, as has been widely reported, unless we become part of a larger hospital system.

So why are Community's prospects "not great" as a stand-alone, community hospital? There are several reasons. A loss of cases in profit-making services. A limited ability to cost-shift to private insurers when there is underpayment from government payers. The ever rising costs of the hospital business. And fewer physicians who replace themselves when they leave practice.

Community has lost profitable cases to free-standing ambulatory surgery centers. This profit-making volume helps a hospital like ours subsidize the money-losing services, such as medicine, psychiatry, and 24/7 emergency services.

Over the years some ambulatory surgery cases have migrated away from the hospital in favor of free-standing ambulatory surgery centers, which are typically owned by physicians. Why do physicians need the additional revenue? Because their incomes have been frozen or otherwise restricted for a number of years.

What about insurers, such as Dr. Tucker represents? Arguably, insurers have been paying more than their fair share to hospitals, given the increasing statutory and regulatory controls on Medicare and Medicaid. Like other hospitals, Community relies on private insurers to make up the difference. But private payers do not make up all the difference, and there is a limit to this cost-shift. Dave Oliker, MVP’s President, recently called the cost-shift a hidden tax.

With this pressure on hospital revenues, we have also seen hospital fixed costs going up. Hospitals shoulder the added cost of services no longer provided by private doctors (such as 24/7 hospitalist service). We've seen higher costs due to federally-mandated electronic medical records (EMRs). And there are greater capital costs as hospitals construct private rooms (the emerging standard) and update medical technology.

Add to that the problems of doctor practices. Many older physicians do not replace themselves when they leave practice. A shrinking supply of doctors means hospitals scramble to buy medical practices as a way of replenishing physicians (and not incidentally, as a way to avoid competing with doctors for ambulatory surgery cases).

Community has been clear about what it wants from its affiliation with a larger hospital system: we seek to spread the fixed costs over a bigger base of operations, we seek to avoid duplicate and costly capital investment, we seek an integrated delivery system, and we seek better access to capital. Upstate provides these things.

The question about hospital system efficiency cannot be answered by looking at the hospital payment rates negotiated last year by the health insurers. Those rates represent the embedded costs of the old system. We are talking about future costs of a reconfigured system. Scale and efficiency are everything in the future system – only the larger, more efficient, and well integrated health care organizations will weather the storm.

Community General Hospital cannot build such a system. So we will join one.

We believe that Upstate’s investment in Community is a cost-effective way to best use the expensive assets in which this community has already invested.

We believe the combination with Upstate will foster a more efficient hospital system in the coming years -- and for decades.

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