Crit­ics, com­peti­tors fear re­plac­ing un­prof­itable ser­vices with new ones - like neu­ro­surgery - that prom­ise bet­ter fi­nan­cial re­sults will hin­der ac­ces and dam­age qual­ity

Modern Healthcare - - FRONT PAGE -

Ex­cela Health en­tered the Great Re­ces­sion as the largest men­tal health provider for the Penn­syl­va­nia county that’s home to its three hos­pi­tals. A year and a half later, as the re­ces­sion drew to a close, Ex­cela be­gan to re­fer and trans­fer out­pa­tient men­tal health pa­tients to pri­mary-care doc­tors and com­mu­nity clin­ics to stem losses.

“When you’re in good eco­nomic times you can of­ten­times carry pro­grams you know should be re­vised,” said Sam Raneri, se­nior vice pres­i­dent and chief strat­egy of­fi­cer for Ex­cela Health, based in Greens­burg, Pa. “The re­ces­sion and the drop in ad­mis­sions and elec­tive cases put more pres­sure on us to look at be­hav­ioral health in a brand new way.”

Ex­cela and other not-for-profit hos­pi­tals across the U.S. have re­duced or shed un­prof- itable ser­vices and ex­panded or opened more lu­cra­tive busi­nesses lines as the se­vere re­ces­sion and weak re­cov­ery stripped health in­sur­ance from many house­holds, while oth­ers who were still in­sured did not seek care to avoid the cost.

Those strate­gies have come as part of hos­pi­tals’ broader—and quite suc­cess­ful— ef­forts to cut ex­penses or find new sources of rev­enue to pro­tect mar­gins through the eco­nomic down­turn.

Hos­pi­tals have scaled back care for the men­tally ill since the re­ces­sion, and one sur­vey of more than 1,000 hos­pi­tal ex­ec­u­tives by the Amer­i­can Hos­pi­tal As­so­ci­a­tion found one-fifth re­ported in March 2009 that they re­duced ser­vices that lost money, in­clud­ing be­hav­ioral health, post-acute care and pa­tient ed­u­ca­tion ser­vices. Mean­while, hos­pi­tals have in­vested in ser­vices that de­liver prof­its, in­clud­ing neu­ro­surgery and in­ter­ven­tional car­di­ol­ogy.

Many hos­pi­tals came through the re­ces­sion with profit mar­gins in­tact—even im­proved— de­spite more unin­sured pa­tients, slack de­mand for prof­itable elec­tive pro­ce­dures, and pub­lic and pri­vate in­sur­ers that have squeezed pay­ment rates.

An­a­lysts and ex­ec­u­tives credit the in­dus­try’s strong per­for­mance to ag­gres­sive ef­forts to slash costs, in­clud­ing stark op­tions such as mass lay­offs and ser­vice cuts.

But if the strate­gies have pro­tected hos­pi­tal mar­gins, they raise thorny ques­tions for health pol­i­cy­mak­ers about ac­cess to care for vul­ner­a­ble pa­tients and growth of un­needed and costly high-mar­gin ser­vices.

And the na­tion’s fledg­ling eco­nomic re­cov­ery prob­a­bly won’t ease the pres­sure on hos­pi­tal rev­enue. Pri­vate in­sur­ers are ex­pected to wring hos­pi­tal pay­ments to curb health spend­ing, and fed­eral and state law­mak­ers will con­tinue to look to health­care for bud­get sav­ings.

As hos­pi­tal ex­ec­u­tives con­tinue to search for ways to shel­ter mar­gins, the re­ces­sion sug­gests hos­pi­tals will con­tinue to pare un­prof­itable ser­vices and ex­pand lu­cra­tive ones.

In Los An­ge­les, Cedars-sinai Med­i­cal Cen­ter an­nounced plans last Novem­ber to close psy­chi­a­try for pa­tients in­side and out­side the 931bed hos­pi­tal, with a few ex­cep­tions such as con­sul­ta­tions and men­tal health­care for trans­plant and can­cer pa­tients. Cedars-sinai also said it would stop train­ing new psy­chi­a­trists.

Ex­ec­u­tives with the hos­pi­tal de­clined to be in­ter­viewed. But Thomas Priselac, CedarsSi­nai pres­i­dent and CEO, seemed to sug­gest in a state­ment re­leased as the hos­pi­tal un­veiled its plans that psy­chi­a­try was a drain on hos­pi­tal re­sources.

“At a time when the health­care de­liv­ery sys­tem in our coun­try is un­der­go­ing a mas­sive trans­for­ma­tion, ev­ery med­i­cal cen­ter has a re­spon­si­bil­ity to ex­am­ine what it should fo­cus on to en­sure that it is strong over the long term to serve the com­mu­nity,” he said.

Cedars-sinai emerged from the re­ces­sion with a solid op­er­at­ing mar­gin of 6%, though lower than the 8% op­er­at­ing mar­gin go­ing into the down­turn.


“It is not sur­pris­ing that hos­pi­tals re­spond to fi­nan­cial pres­sure by chang­ing their ser­vice mix by adopt­ing prof­itable ser­vices and dis­con­tin­u­ing un­prof­itable ser­vices,” Jill Horwitz, a law and health pol­icy and man­age­ment pro­fes­sor at the Univer­sity of Michi­gan who has stud­ied the re­la­tion­ship be­tween hos­pi­tal fi­nances and health­care de­liv­ery, said in an e-mail.

Bun­dled pay­ments un­der the health­care re­form law that give hos­pi­tals a lump sum to cover pa­tients’ med­i­cal costs, called cap­i­ta­tion, could lessen fi­nan­cial in­cen­tives that make some ser­vices more prof­itable than oth­ers, she said.

But the Pa­tient Pro­tec­tion and Af­ford­able Care Act will more likely prompt more scrutiny of prof­itable and money-los­ing ser­vices as the law squeezes hos­pi­tal pay­ments. “This will put more pres­sure on hos­pi­tals,” Horwitz said, “lead­ing to more ef­forts to find prof­its. Changes to ser­vice mix are one of the more ob­vi­ous meth­ods for in­creas­ing rev­enues and prof­its.”

Eco­nomic re­search pub­lished last year sug­gests hos­pi­tals re­spond to less de­mand, or the threat of less de­mand, for more prof­itable ser­vices by in­vest­ing less in un­prof­itable ones.

The study, pub­lished last Au­gust by the not-for-profit and non­par­ti­san National Bureau of Eco­nomic Re­search, found psy­chi­a­try and sub­stance abuse ser­vices de­clined at Ari­zona acute-care hos­pi­tals where spe­cialty heart hos­pi­tals had en­tered the mar­ket to threaten acute-care hos­pi­tals’ prof­itable car­diac mar­gins. No­tably, prof­itable neu­rol­ogy ser­vices also in­creased among acute-care hos­pi­tals, the re­search sug­gests.

In Sa­van­nah, Ga., 543-bed Me­mo­rial Univer­sity Med­i­cal Cen­ter moved to com­bat slug­gish op­er­a­tions in 2009 and 2010 by ex­pand­ing can­cer and neu­ro­surgery ser­vices, two prof­itable busi­ness lines, and ex­pand­ing into mar­kets where in­sur­ers pay more fa­vor­able rates, ac­cord­ing to a credit re­port from rat­ings agency Moody’s In­vestors Ser­vice.

In Riverdale, Ga., 317-bed South­ern Re­gional Med­i­cal Cen­ter re­ported fewer pa­tients, more Med­i­caid and unin­sured pa­tients, and weak op­er­a­tions dur­ing the same pe­riod. In a turn­around ef­fort, South­ern Re­gional sought to boost vol­ume for prof­itable ser­vices such as neu­ro­science, in­ter­ven­tional car­di­ol­ogy and sur­gi­cal on­col­ogy, Moody’s said.

The trend has im­pli­ca­tions for health­care ac­cess, qual­ity and spend­ing, Horwitz said. Pa­tients who need un­prof­itable ser­vices, such as men­tal health­care, are typ­i­cally lower in­come and will find care harder to get, Horwitz said. An ex­pan­sion of prof­itable ser­vices, which can be ex­pen­sive as well, could in­crease health spend­ing and cre­ates in­cen­tives for hos­pi­tals to treat more pa­tients—in­clud­ing those who may not need it, she said.

Poor, dif­fi­cult, com­pli­cated

“I think that pro­grams that deal with poor, dif­fi­cult, com­pli­cated peo­ple and ill­ness are at risk,” said Richard Frank, an eco­nomics pro­fes­sor at Har­vard Med­i­cal School’s health­care pol­icy depart­ment who stud­ies men­tal health­care. “It’s not just be­hav­ioral health, but be­hav­ioral health in­pa­tient is one that is es­pe­cially fo­cused on poor peo­ple.”

Men­tally ill pa­tients who re­quire hos­pi­tal care—those grap­pling with se­vere ill­ness such

“We were tak­ing the bur­den of not only in­pa­tient, but shoul­der­ing the bur­den of all the out­pa­tient in the county as well.”

—Sam Raneri, Ex­cela Health

as schizophre­nia—also of­ten are low-in­come and cov­ered by safety net in­sur­ance, Frank said. States re­sponded to the re­ces­sion by squeez­ing Med­i­caid hos­pi­tal pay­ments just as un­em­ploy­ment pushed more peo­ple onto Med­i­caid rolls, he said.

“The prob­lem is that one of the things that we’re do­ing now is we’re split­ting the haves and have-nots a bit,” Frank said. “By putting ex­treme pres­sure on pub­lic pro­grams, you sort of give peo­ple who run those pro­grams a choice: shrink the size of the pro­gram or push down on rates or re­or­ga­nize. What you see is an at­tempt to do the last two. I think that, there­fore, ill­nesses that dis­pro­por­tion­ately rely on pub­lic pro­grams are gen­er­ally go­ing to have more eco­nomic pres­sure and that’s part of what’s go­ing on with in­pa­tient psy­chi­a­try.”

Psy­chi­atric ward closed

Chilton Hos­pi­tal in north­ern New Jersey halted be­hav­ioral health­care as the re­ces­sion ended and the hes­i­tant re­cov­ery be­gan. More pa­tients had ar­rived at 260-bed Chilton unin­sured or cov­ered by safety net plans, the hos­pi­tal told Moody’s. Rev­enue dropped by $2 mil­lion as the num­ber of unin­sured and Med­i­caid pa­tients grew. Chilton’s op­er­a­tions slid from a nar­row profit to a slim loss.

The Pomp­ton Plains-based hos­pi­tal, lo­cated in a com­pet­i­tive mar­ket, planned to bor­row roughly $40 mil­lion in Oc­to­ber 2009 to fi­nance in­vest­ment in on­col­ogy and or­tho­pe­dics, two ser­vice lines con­sid­ered more prof­itable. Credit an­a­lysts warned that if Chilton’s fi­nances did not im­prove, its rat­ing could drop. Psy­chi­atric care did not lose money, but did not earn enough to off­set other hos­pi­tal costs ei­ther, the hos­pi­tal told po­ten­tial in­vestors.

In Au­gust 2009, the hos­pi­tal closed its psy­chi­atric ward—which saw 438 ad­mis­sions in 2008 com­pared with 525 two years be­fore— and ap­plied to con­vert the beds into ones for med­i­cal and surgery pa­tients, ac­cord­ing to fi­nan­cial state­ments.

The hos­pi­tal also saved money by cut­ting 78 jobs, a squeeze on sup­ply costs and other moves, the credit an­a­lysts said. The next year, Chilton re­ported a $2.3 mil­lion profit. Chilton did not re­spond to re­quests for an in­ter­view.

At Ex­cela Health in Penn­syl­va­nia, in­pa­tient psy­chi­atric ser­vices were prof­itable, Raneri said. Out­pa­tient men­tal health­care was not.

The sys­tem was the sole sig­nif­i­cant provider of out­pa­tient men­tal health­care in West­more­land County, but “suf­fered large and es­ca­lat­ing losses” as costs grew but pay­ment re­mained low, he said. “We were tak­ing the bur­den of not only in­pa­tient, but shoul­der­ing the bur­den of all the out­pa­tient in the county as well.”

Ex­cela lost $1.6 mil­lion in 2008 on out­pa­tient be­hav­ioral health.

Dur­ing the year that ended in June 2009— the month the Great Re­ces­sion ended—the sys­tem strug­gled with fewer pa­tients than ex­pected, more un­paid med­i­cal bills and volatile mar­kets that drained cash from Ex­cela’s bal­ance sheet, ac­cord­ing to a Moody’s credit re­port. Ex­cela Health lost $2.3 mil­lion on op­er­a­tions that year.

By the fol­low­ing June, Ex­cela re­ported a profit of $7.5 mil­lion on op­er­a­tions af­ter sig­nif­i­cantly curb­ing its out­pa­tient men­tal health­care and clos­ing skilled nurs­ing ser­vices at its hos­pi­tals.

Raneri said the weak econ­omy and fi­nan­cial losses prompted Ex­cela to make the changes, but only af­ter of­fi­cials were sat­is­fied that ac­cess to ser­vices and qual­ity of care would not suf­fer.

Out­pa­tient treat­ment

Now Ex­cela of­fers out­pa­tient men­tal health treat­ment for pa­tients with an “acute need” or those who are leav­ing the hos­pi­tal. All other pa­tients are re­ferred to men­tal health or pri­mary-care doc­tors in the com­mu­nity.

Independent men­tal health providers en­tered the mar­ket to meet de­mand, Raneri said. The hos­pi­tal also opened a cri­sis in­ter­ven­tion cen­ter. Mean­while, Ex­cela Health cut losses on out­pa­tient men­tal health in half.

Jane Jerzak, a part­ner with the con­sult­ing and ac­count­ing firm Wipfli, said hos­pi­tals saw de­mand for prof­itable ser­vices—in­clud­ing elec­tive or­tho­pe­dic surgery and imag­ing— de­cline as the econ­omy wors­ened.

The trend left hos­pi­tals with­out prof­its to sub­si­dize un­prof­itable ser­vices, which prompted ex­ec­u­tives to scru­ti­nize sub­si­dized op­er­a­tions be­tween 2008 and 2010, said Jerzak, an ac­coun­tant and reg­is­tered nurse.

Fig­ures re­leased last week high­light house- holds’ pull­back from med­i­cal spend­ing.

Health spend­ing grew slowly again in 2010, in­creas­ing 3.9%, as house­holds put off trips to the hos­pi­tal or doc­tor’s of­fice, CMS es­ti­mates show (See story, p. 8). The slow­down was pro­nounced among hos­pi­tals and med­i­cal groups, the agency said.

Jerzak said hos­pi­tals win­nowed un­prof­itable ser­vices or sought to boost mar­ket share for more prof­itable busi­nesses lines, but few shut pro­grams en­tirely or launched en­tirely new ser­vices in re­sponse to fi­nan­cial pres­sures. “That is not a short-term strat­egy,” she said. “That is an in­ter­me­di­ate strat­egy at best.”

An upheaval

When hos­pi­tals re­vamp ser­vices, com­mu­ni­ties must find ways to meet lo­cal needs.

In West­more­land County, where Ex­cela scaled back its out­pa­tient be­hav­ioral health­care, lo­cal men­tal health of­fi­cials pledged fi­nan­cial aid for a clinic that would agree to open to ab­sorb former Ex­cela pa­tients, at first ex­pected to be 3,700 pa­tients, said Michael Quinn, CEO of Ch­est­nut Ridge Coun­sel­ing Ser­vices, based in Union­town, Pa. The num­ber later proved to be smaller, he said.

Ch­est­nut Ridge, a not-for-profit, opened its third Penn­syl­va­nia clinic af­ter be­ing se­lected by the county to treat former Ex­cela pa­tients. Since the clinic opened 2½ years ago, de­mand has grown. “The good news is it’s get­ting busier,” Quinn said. “Un­for­tu­nately, that speaks to the fact there is a lot of un­met need out there,” he said.

Losses have nar­rowed and Ch­est­nut Ridge has ex­panded into school-based ser­vices, which break even, and telepsy­chi­a­try, which earns a profit. Quinn blamed the short­fall on in­ad­e­quate pay­ment and bur­den­some reg­u­la­tions.

Pam Kowal­czyk, a clin­i­cal so­cial worker, joined Ch­est­nut Ridge from Ex­cela af­ter the hos­pi­tal cut back its ser­vices.

About one-third of Kowal­czyk’s hos­pi­tal pa­tients fol­lowed her to the clinic. Kowal­czyk said she turned down one job of­fer and held out for an of­fer from Ch­est­nut Ridge be­cause the clinic was among a few to ac­cept Medi­care pa­tients, which would al­low her Medi­care pa­tients to fol­low her, if they chose.

Pa­tients found the tran­si­tion stress­ful, Kowal­czyk said, but new clinic pa­tients re­ceive the same help with trans­porta­tion and other sup­port that hos­pi­tal pa­tients re­ceived. Some pa­tients strug­gled with fears as the move ap­proached, and she found her­self re­peat­edly seek­ing to calm their anx­i­eties.

“In their life, it’s like an upheaval,” she said. “It’s al­most like an earthquake.”


Ex­cela Health elim­i­nated Pam Kowal­czyk’s job when the Penn­syl­va­nia health sys­tem scaled back its be­hav­ioral health ser­vices. She joined a men­tal health clinic that was given fi­nan­cial aid to ab­sorb new pa­tients.

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