SOS: Public Hospitals

Philip Betbeze and Jim Molpus, for HealthLeaders Magazine , March 12, 2009
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On the brink even during good economic times, many public hospitals are operating in technical insolvency amid a painful recession. But they can take heart from following the example of two that have managed well.

Public hospitals are in trouble. Whether because of mismanagement, political meddling, byzantine civil service rules, a poor (and growing poorer) patient base that can't pay for care, or any number of other issues endemic to public institutions, they have been beset by a multitude of problems for years. Many public hospitals operate at a perpetual annual loss and depend largely on the charity of local governments, which have seen the yearly tab for supporting these hospitals grow to the tens of millions of dollars. Loath to raise taxes to support institutions tarred with a broad brush as chronically mismanaged—or to a more cynical observer, that don't serve voting constituents—cities have allowed dozens of safety-net hospitals to close, including Philadelphia in the 1970s or, in this decade, Los Angeles and Washington, DC, which have seen public hospitals shutter only to shift the burden of caring for the uninsured onto neighboring private nonprofits.

The credit crisis and accompanying recession are placing unprecedented pressure on public hospitals. Grady Memorial Health System in Atlanta is trying yet another turnaround, this time by reorganizing governance from a politically appointed board to a new private nonprofit board stacked with local business leaders. Monetary support from local governments has been sporadic, with many wondering if by supporting the public hospital, they are throwing good money after bad. But public hospitals, to some degree, are the canary in the coal mine, says Larry Gage, president of the National Association of Public Hospitals and partner in the healthcare group of Ropes & Gray law firm in Washington, DC.

"You can boil a lot of it down to getting paid for what you do. Many are not paid adequately at all." That's because of the complex nature of getting paid for what a hospital does, complicated by the fact that many of these institutions' efforts to modernize to deal with a changing reimbursement climate have been abject failures. Medicare and Medicaid, the primary sources of funding for such hospitals, aren't particularly good payers.

Depending on the state, Medicaid pays between 50% and 70% of a hospital's cost for treatment, while Medicare pays between 90% and 105% of the cost. Some 80% of public hospital funding nationwide comes from such sources, says Gage. So it's almost impossible to operate these facilities without subsidies.

When so-called "cross-subsidies"—commercial payers footing the bill for government payers' shortfalls—are all that's keeping many hospitals afloat, those that can't attract commercial patients are having a particularly tough financial time. But there are public hospitals that are managing—if not exactly thriving—in this environment. Denver Health and Dallas' Parkland Health & Hospital System are two, but even they don't have all the answers. Denver Health CEO Patricia Gabow, MD, worries that support for public hospitals is thin: "The fact that DC General could fail in the nation's capital and no one really wanted to study what that meant leads me to believe that no one really understands that the safety-net hospitals are our national health insurance by default. If they implode, it will bring down the rest of the system."

They are imploding, one by one. So how to fix them?

Local support
Governments in areas with poor-performing public hospitals could take some lessons from Denver Health and Parkland Health & Hospital System. The truth is, whether or not the traditional public hospital in a city has closed, the problems with treating people of little or no means remains—sometimes to be taken on, like it or not, by the remaining hospitals in the area. Many private nonprofits recognize that fact and work to support public hospitals, as they did in Dallas to support Parkland's recent $747 million bond referendum, which passed handily with more than 80% of the vote.

Ask a similar ballot question in any number of other cities where the public hospital has hemorrhaged money for years and expect a drastically different result. But in Dallas, the bond issue backed by property tax revenues will accrue only slightly more than half of what it's going to cost to build a new Parkland on hospital-owned land across from its current site on Harry Hines Boulevard. In addition to the bond revenues, philanthropists pledged $85 million toward a five-year goal of $150 million, another $250 million will come from current cash reserves, and $100 million will come from anticipated future cash reserves.

"These are not just well-intentioned folks," President and CEO Ron Anderson says of the philanthropists who helped support the referendum. "They're also strong businesspeople who look at us as a value proposition. That tells the community that we're of value. Taxes usually fund mediocrity, not excellence, so if we want excellence, we have to do it ourselves."

Parkland, which gained infamy in 1963 as the temporary seat of U.S. power when President Kennedy was taken there following his assassination, will finally move out of its old building in 2014. One might expect private nonprofit hospitals in the area to at least quietly oppose the Parkland referendum. But they publicly supported it, for reasons that are less obvious.

"Our job is to be a good player with community hospitals so we don't cost shift down the street," Anderson says. "They endorsed us and they realize this interconnectedness."

Denver Health, meanwhile, has managed to grow despite being essentially abandoned to fend for itself in the city when three city hospitals—including the University of Colorado Hospitals—moved the suburbs in recent years. Denver Health's level of funding from the city has been set at $27 million for years.

Integrated delivery
Both Denver Health and Parkland boast integrated delivery systems, which both CEOs credit for being able to navigate a difficult financial hand. Denver Health CEO Patricia Gabow, MD, says a significant reason Denver Health is able to remain in the black financially year after year depends on its IDS structure.

"People were in love with integrated systems a while ago, and then they sort of fell out of favor because they didn't work, but I say they didn't work because none of them were [truly] integrated delivery systems," she says. "What people had was a couple of hospitals, and they bought a couple of physician practices, and they thought that was an integrated delivery system. An IDS is really a system that is able to care for patients across the continuum of their illness and across the continuum of their life."

One of the keys to Parkland's IDS is a network of 12 community clinics whose function is to keep patients healthier outside the expensive inpatient setting. Denver Health has a similar network of eight primary care clinics. Because of Parkland Community Health Plan, which connects Dallas' uninsured with Medicaid managed care and the Children's Health Insurance Program, Parkland has an incentive to prevent admissions to the 675-staffed-bed main hospital.

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