Gazing Into the Future of Hospital Financial Management

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By Jan Jennings

An old rule of thumb is that a hospital requires 150 percent of depreciation in the form of free cash year in and year out in order to maintain the physical plant and equipment, replace old technology and acquire new technology.  Less than one in five hospitals met this standard in the most recently recorded fiscal year.  More concerning, it is estimated that less than one percent of American hospitals broke even on the Medicare program last year.

Despite all of the political bickering in Washington, D.C. there is uncanny bi-partisan consensus to reduce federal support for the Medicaid and Medicare Programs for U.S. hospitals.  Why?  Hospitals have minimal political support.  It is breathtaking to take in the political clout of the pharmaceutical industry.  Medicare Part D was rammed through the George W. Bush Administration with no offsets and with extraordinary ease.  American hospitals have not seen anything on this level since the passage of Medicare itself in 1965.  With unlimited political contributions permitted by U.S. corporations to political campaigns and the extraordinary restrictions for political contributions from the hospital sector, we are simply outgunned in the political arena.

For those of you feeling warm and comforted by the Affordable Care Act (Obama Care), it is scheduled to remove $550 billion over the next ten years in federal support for the Medicaid and Medicare Programs..  Of course, it is possible the U. S. Supreme Court will invalidate Obama Care in the June deliberations of the high court.  Alternatively, if a Republican President is elected in November, all standing candidates for the Republican nomination are committed to repeal Obama Care.

There are or have been other attacks on Medicaid and Medicare funding.  Many state houses have already dramatically reduced Medicaid funding and hundreds of hospitals are reeling in an effort to balance their budgets as a consequence.  And then there are the speculative proposals to whack away at the Medicare Program.  When the congressional Super Committee was debating ways and means to reduce the federal budget late in 2011, the Obama Administration offered an additional $320 billion in Medicare cuts, over the next ten years, to move the process along.  When the committee efforts failed, pre-agreed cuts hit many federal departments.  Scheduled for January 1, 2013, under Medicare Sequestration, is a 2 percent across the board cut to all Medicare payments to all Medicare providers.  While the total is unknown, this is a serious blow to those communities with a heavy Medicare patient care load.

To illustrate that these cuts are by no means partisan, the point person for Republican federal fiscal policy if Wisconsin Representative Ryan (R) has proposed $6.2 trillion in federal cuts from all areas over the next ten years.  The Ryan Plan provides some definition to the so-called “Medicare Voucher Option.”  This is by no means clear with respect to how these cuts will impact Medicare providers and Medicare subscribers, but there is no question that the impact would be unimaginable.

With all of the political volatility in Washington, D.C., it is most likely that none of these cuts, as defined, will ever see the signature of a U.S. President on a piece of federal legislation.  The people I trust are the leadership of the Healthcare Financial Management Association and they predict an eight to twelve percent cut in Federal support to the Medicaid and Medicare programs over the next five years.  This will close hundreds of marginal U.S. hospitals and cripple essential community providers all over the United States.

I reviewed this material with a focus group from the Institute for Healthcare Executives and Suppliers recently.  The most thoughtful take away for me from one of the hospital CEO’s in attendance was, “You have to start now to prepare for an unknown future, otherwise you will be left in the dust.”  I would strongly urge you to read the case study of Dr. Gary Kaplan, Chairman and CEO of Virginia Mason Medical Center in Seattle, Washington.  Therein lies the future to hospitals that deserve to be open and providing the highest quality and affordable care.  Should you avoid this opportunity, you are either near retirement or willing to proceed at your own peril.

Jan Jennings is president and CEO of American Healthcare Solutions. For more information, visit www.americanhs.com.