Medical Device Daily Washington Editor

WASHINGTON — The financing of hospital operations has been a topic of especially intense interest since the advent of the prospective payment systems at the Centers for Medicare & Medicaid Services, a fact not lost on the organizers of this year’s meeting of the American Public Health Association (APHA; Washington). In a session yesterday morning on how various healthcare facilities have adapted to the modern reimbursement rubric, one academician described data suggesting that the profit motive seems to have sharpened the administrative skills of some rehab hospitals.

However, the analysis did not look at patient outcomes, leaving the analytical glass only half full.

Discussing trends in financial and operating performance of in-patient rehabilitation facilities (IRFs) under the prospective payment system (PPS), Jon Thompson, PhD, an associate professor of health sciences at James Madison University (Harrisonburg, Virginia), said “the history of rehab hospitals is such that they have been unregulated,” for the most part. All that changed in 2002, when CMS put IRFs under a prospective payment system (PPS), although the agency provided diagnostic variables “to try to reflect the relative resource intensity.”

Thompson said that in 2006, IRFs generated expenditures of about $6 billion to Medicare, and the numbers of IRFs has risen substantially to more than 217. “Part of this has been due to being an unregulated industry” in the early going, Thompson said. About two thirds of IRFs “are not-for-profit facilities, but we have seen quite an increase in for-profit” operations, he said.

Thompson said that there are two streams of literature on the subject of IRF financial health. One of these addresses the impact of prospective payment on functional levels and patient satisfaction. The other stream has been a review of the financial impacts of PPSs, and early comparisons suggested that “those that converted early [to the PPS] reduced their costs and had higher profitability.”

Thompson presented data from a study he and several colleagues recently completed that examined the financial and operating performance of IRFs in the two years following their conversions to PPS. They drew data came from a CMS healthcare cost reporting information system (HCRIS) database for 171 freestanding IRFs, 51 of which operated on a non-profit basis.

According to Thompson’s data, the mean length of stay in 2003 was higher in for-profit IRFs, by 15.85 to 14.05 days, and occupancy rates were also higher on average, 74.3% to 69.15%. Net patient revenue was lower in the for-profits, about $12,000 to $17,000, and per-patient expenses were also lower, about $10,000 to $17,000. Salaries were also lower in the for-profit unit on average.

“In the first year, for-profits had significantly higher lengths of stay,” Thompson said, but they also had more complex cases. Thompson said that in the second year of the survey, 2004, for-profits “again, showed significantly higher length of stay” and patient complexity, as well as a higher ratio of Medicare patients.

Thompson asked rhetorically, “[i]t looks like the for-profits are doing their jobs, right?” He said there are significant differences between the populations served by the for-profits and the not-for-profits, with the former consistently more profitable, which hinted at different adaptations to the PPS system. “For-profits serving more complex patients may suggest a conscious effort” in terms of patient selection, he said.

“They obviously have done a great job in keeping their expenses under control,” Thompson added, noting that non-profits may have contracted with managed care organizations in order to broaden their patient mix, which may explain the lower ratio of Medicare patients.

Hyun Kim, PhD, an assistant professor of health administration at Governors State University (University Park, Illinois), gave an overview of the factors affecting the financial risk of not-for-profit hospitals. He said that substantial financial pressures already existed during the late 1990s and early 2000s due to the imposition of the prospective payment systems as a result of the Balanced Budget Act of 1997.

“What are the driving factors associated with the financial risk of non-for-profits?” Kim asked. Some of the answers seemed obvious.

“Several studies show that inefficiency and lower occupancy were associated with hospital closure,” he said, but “even efficient hospitals could close if they were poorly reimbursed.”

The reimbursement question was complicated by another CMS program according to Kim. “Medicaid dependency was associated” with financial pressures that could eclipse the benefit of a well-run hospital. He also noted that several studies did find a significant relationship between doing business with managed care organizations (MCOs) and financial performance.

“Competition appears to have had a bigger negative impact on revenue growth than on expenses growth,” Kim noted, adding that competition, as might be expected, has been associated with greater consolidation.

“Financial risk may be affected by operational and organizational characteristics” as well as exogenous factors, such as location, Kim said. He said that the data from a study he and several others conducted suggested that financial strength is a composite of profitability, liquidity, market leverage, and proximity to physician facilities. Hence a hospital that is profitable but liquid may be at risk.

On the other hand, a real estate agent could explain part of a hospital’s financial risk index. The study, which sampled data from 1,800 hospitals culled from CMS Medicare cost reports between 1998 and 2001, showed that “about 10% of urban hospitals and 6% of rural hospitals are identified as financially risky.” This, he said, is suggestive of the possibility that hospitals in urban areas were more sensitive to occupancy than those in rural areas. “Market competition appeared to increase the financial risk of urban hospitals, but this effect was not seen in rural hospitals,” Kim said. On the other hand, heavy loads of managed care and Medicaid patients both “had a positive association with financial risk” regardless of location.

Kim said that he had no comparator data from other developed nations to address the possibility that some markets in the U.S. may be saturated with excess capacity, but said “there might be” some such markets.