Tough decisions ahead, health system CFOs say

With shrinking reimbursements from Medicare and Medicaid programs, health care providers will not be able to afford the services demanded of them by an aging baby boom population. As a result, local health system administrators warn that society is going to have to make some tough decisions about how it will spend its limited resources.

The impact of reduced reimbursements. The ongoing reduction in Medicare and Medicaid reimbursements, triggered by the Balanced Budget Act of 1997, is having an unprecedented effect on local health systems.

"I've been in health care for 20 years and I've never seen anything like this. Health systems are losing money; hospitals are losing money," said Larry Pennel, senior vice president and chief financial officer for Cox Health Systems.

"We, along with most hospitals and health care organizations in the country, are finding it very difficult to have revenues and expenses in balance," said Paul Reinert, CFO for St. John's Health System.

The Balanced Budget Act "was supposed to impact hospitals by $105 billion over a five-year period," Pennel said. Cox's share of that impact was estimated at $50 million.

Now, however, the nationwide impact has been adjusted to $185 billion to reflect what is being called "unintended consequences," he said. The exact cost to Cox has not been figured, but it will be significantly more than $50 million, he added.

But while government reimbursements are shrinking, the costs of doing business are not.

"As a business, we must pay market rates to retain quality people and to acquire those goods and services we buy. In the long run we will be forced to prioritize and question whether continuing all current services is a sensible use of resources," Reinert said.

Pennel agreed, noting that Cox recently identified several programs where cuts can be made and has already made some cuts such as eliminating the two vans that formerly provided transportation assistance to hospital customers.

And this is just the beginning. "We have not yet felt the complete effect of the Balanced Budget Act of 1997 because it is phased in over a multiyear period," Reinert said.

"This is the second year of a five-year process," Pennel said. "It's only going to get worse."

Hard hit by HCFA. Reduced reimbursement levels have had some dramatic results, particularly for those targeted for cuts by the Health Care Financing Administration, such as home health and skilled nursing facilities, Pennel said.

Several home health agencies have gone out of business. However, skilled nursing facilities are the worst off in terms of reimbursement, he said.

Skilled nursing facilities are reimbursed under Medicare according to the resource utilization group system, or RUGS. Payment levels are determined by the RUGS category that applies to the care.

"RUGS has only 45 to 50 categories, and the payment levels are woefully inadequate," Pennel said. "The consequences are that now, if we don't have capacity in our own system, other facilities in Springfield won't always take (Medicare patients) because the rates are so low." Nationwide, several large nursing home chains have declared bankruptcy, Pennel said.

Baby boom. With the aging of the baby boom population, harsh realities about high costs and limited resources can no longer be ignored, administrators said.

The system is insufficient, Pennel said. The retirement age of 65 was selected when few people lived much beyond that. Now, he said, he's seen estimates that "10 percent of people in the near future will live to be over 100."

"With increasing costs of new drugs, health care technology and contracting payments, we as a society will have some tough decisions to make," Reinert said. "We won't be able to render the scope and depth of care options we have historically done. We won't be able to afford it."

If there is no change for the better in government reimbursements, "I think you'll see a lot of hospitals go out of business with only the financially strong ones left, and those will have to cut their services to match reimbursement levels," Pennel said.

Can the system be fixed? "Yes," Reinert said. "However, how fast?" The system is "fairly profoundly broken, and as a result it is not a quick fix. It's going to take courageous leadership and a lot of public debate. We didn't get it this broken overnight; we're not going to fix it overnight."

Pennel agreed that the government programs can be fixed but not in their current form. And sensitive issues, such as the huge amounts of money spent on care in the last year of a person's life, are going to have to be addressed.

"Life is sacred," he said, "but it reaches a point where it doesn't make sense to prolong it. As a society, we are going to have to make some decisions."

He added, "I don't mean to paint a totally draconian picture here. There will be a health care system in the future, but people are going to have to decide what they want it to look like."