For 15 years, University Hospital has taken pride in winning a consumer choice award. But in the face of funding cuts, Health Insurance Marketplaces and increasing technology costs, that won’t be enough in the near future. Joining with others in regional alliances might be the only way to survive, University CEO Jim Davis said.
“We’re playing at a national level with a very local product,” he said. As health systems join together and insurance payers consolidate, size must answer size, Davis said, a kind of Wal-Mart-ization of health care that could also lead to less local control.
Two of the biggest impacts on University’s finances are coming from two sweeping federal laws – the Health Information Technology for Economic and Clinical Health (HITECH) Act and the Patient Protection and Affordable Care Act.
HITECH requires hospitals to use electronic medical records to share data between facilities, or face penalties. But implementing its electronic medical record, mainly through the Epic system, has so far cost University more than $50 million, Davis said. And it is looking at potentially $30 million in additional upgrades, which drove University to begin exploring a shared services contract with Novant Health Inc., of Charlotte, N.C.
With $3.4 billion in net patient revenues and relationships with 20 facilities, they can take advantage of economies of scale, Davis said.
“When Novant, which has 20 hospitals, does an upgrade on their Epic system, which takes a lot of work, they spread that cost over 20 hospitals,” he said. “When I do that same upgrade, I spread it over one. If I can be the 21st hospital that (cost) gets spread over, then everybody’s costs goes down. That’s the kind of thinking we are going to have to do if we are going to survive in the future.”
That becomes increasingly important in light of funding reductions.
What at first appeared to be a $17 million cut in Medicare funding is now looking like $27 million, Davis said. Hospitals agreed to $155 billion in cuts to help fund the Affordable Care Act, with the expectation that many more people would be covered by insurance through the Health Insurance Marketplaces and through an expansion of Medicaid. But the U.S. Supreme Court decision made Medicaid expansion optional for states, and Georgia refused.
“We’re not going to get that upside we were supposed to get by having everybody insured,” Davis said. “And that’s a bad position to be in.”
The Georgia Budget and Policy Institute estimated that Medicaid expansion would provide an additional $33.2 billion in federal funding over 10 years at a cost of $2.1 billion to the state. But a Georgia State University study said when economic impact and additional tax revenue is factored in, expansion would cost much less at a little more than $350 million.
It would also cover 400,000 Georgians who will not be eligible for subsidies in the federal exchanges, the institute said, because they are below the federal poverty level. The act barred them for fear states would simply dump their Medicaid population on the exchanges. They, in turn, are exempted from the individual mandate to have health insurance.
Even when people do get insurance through the Affordable Care Act, it will likely be the cheapest monthly plans – those with high deductibles and reduced reimbursement for providers, he said.
“You’re still going to absorb a substantial part of the bill from those plans,” Davis said. “It’s a far cry from traditional commercial insurance reimbursement, let’s put it that way.”
All of this will put additional pressure on hospitals to cut costs, and most have already found what savings they could in supplies and personnel while still trying to maintain good care, Davis said.
“That low-hanging fruit has been pretty well harvested,” he said.
That means turning to what Davis called the “fixed cost” side of the business, in Information Technology, human resources and other infrastructure costs. Teaming up with larger organizations allows those costs to be spread out.
University recently did just that with McDuffie Regional Medical Center, which transferred a lot of “overhead” services (like billing) to University, allowing it to break even, Davis said. Exploring a shared services contract with Novant allows University to dosomething similar.
“That was a way for us to remain independent, but hopefully leverage some of their scale to reduce fixed costs for the most part,” Davis said.
Many recent hospital mergers have been in the $3 billion to $4 billion range and it might take being part of an organization that large to compete, he said.
Insurers may demand it.
Blue Cross Blue Shield, when it was putting together its new insurance products for the Augusta area, didn’t even talk to University, Davis said. But Novant negotiated with them market by market, he said. Size will matter, Davis added.
“I think you almost have to have a multistate regional kind of presence to get that seat at the table,” he said. There are only about five insurance companies that matter in the Augusta market and those may be consolidating as well, Davis said.
“As they consolidate, the folks that are contracting with them better be consolidating as well,” he said. “It’s just going to take that to make the playing field fair. If they’re big, they don’t really want to go market by market and make all of these little negotiations when they can get a single-signature contract for a multistate deal. That’s a different world than we are used to.”
And that might move decision making farther away, Davis said.
“I’m not sure people in Augusta are going to be making those network decisions,” he said. “Maybe people in Georgia aren’t making those decisions. It could be someone as far away as California is going to decide who is going to serve the patients in Augusta.”