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California hospitals brace for lower margins

Tammy Worth, Contributor

A report released last month by the California HealthCare Foundation found that total and operating margins in the state's hospitals were higher than they have been in the past nine years – 5.1 percent and 3.1 percent respectively. They fell in line with the rest of the country's hospitals, which average about 5 percent, according to the American Hospital Association.

But looking beyond those two basic numbers, hospitals are working on razor-thin margins. And health reform could, at any time, flip providers from black to red.

"If someone was to open up these charts and look at the pictures, they would think hospitals are doing fabulous," said Anne McLeod, senior vice president of health policy for the California Hospital Association. "But these numbers don't tell the whole story."

The first thing to note, McLeod said, is that hospitals' revenue and income were inflated because of a provider tax in 2010. This tax increased the Medicaid matching funds hospitals receive from the federal government. Without the taxes, McLeod said operating margins are closer to 2.5 percent.

Maribeth Shannon, director of the market and policy monitor program at CHCF, said she expects the tax, which has to be reapproved through the Centers for Medicare & Medicaid Services, to continue, "but it is always on a short leash."

Less positive numbers in the report highlighted that charity care and bad debt hit $2.4 billion in 2010, up 50 percent from 2001. The need for services increased as well – visits to the emergency room rose 12 percent while the number of beds declined.

The state's population is also growing, one of the first challenges that McLeod said will hit hospitals in the coming years.

"We are projected to have slightly less growth than the national average," she said. "But we project all that growth will be in the 55 and older group. That comes with the likelihood of more chronic disease."

She said they are cautioning hospitals to look to the needs of this population when planning for future services. Hospitals should also prepare for a possible hit in reimbursement as patients move from private insurance to lower-paying Medicare. 

Another insurance dilemma will come in 2014 with some of the provisions of the Affordable Care Act. Should California expand its Medicaid program when the exchanges are open, it is estimated that 33 million people will be insured (up from approximately 30 million now).

Having more people with insurance coverage will help providers, but the reimbursements under Medicaid will be low, often estimated to be about half of what private insurers pay.

This will occur at the same time hospitals will lose nearly $22 billion in Medicare payments from cuts in the ACA and the recent fiscal cliff negotiations, McLeod said.

But Shannon said hospitals are looking at creative ways to reduce costs, like using telemedicine and cutting back on services that are less profitable or very low volume. They are also negotiating more resolutely with insurers and merging to increase negotiating power.

McLeod said there isn't going to be one magical pathway that every hospital can take to weather the storm. Hospitals, she said, will have to test methods for reducing cost and improving quality. They will need to start talking with health plans to understand what will be offered in their markets. And, finally, they are also going to have to delve into population health management.

McLeod said 2013 and 2014 are going to be "some of the most magnificent years in healthcare across the country."

"It will require so much change and so many shifts and we don't even know what they are all going to be yet," she said. "These are going to be phenomenal years in terms of activity – good and bad."

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