Spotting the Turnaround
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Our experience, says Neaman, has been that every 1% increase in unemployment equals a 7% increase in bad debt and charity care combined. With slim operating margins—NorthShore was at 2% last year—he says even the slightest change in the unemployment rate is very disruptive. "Anything over 5% unemployment becomes a seismic shift, causing vigilance on our part and a need to react to even pretty small changes in the environment."
While all of healthcare is eager to embrace a brighter future, Arrick says the question is not when will a turnaround occur, but rather when will things level out. "When can I start to see volume coming back and what does reimbursement look like coming out of the managed care companies?" he says. For example, "are employers willing to take 8% increases in their managed care costs so I can get whatever I can negotiate from my guys?"
On top of all this perches healthcare reform and the potential for it to significantly impact reimbursement mechanisms. All of the other problems healthcare leaders are trying to work out could get "blown out of the water by health reform," says Arrick.
And it will happen, says Wyss, noting that the U.S. spends more on healthcare than any other country, either in the absolute terms or as a percentage of GDP. "I was working on this during the Carter Administration. The arguments haven't changed, but the numbers have gotten bigger."
Michelle Ponte is senior editor of finance with HealthLeaders Media. She can be reached at email@example.com.
Internal Indicators: Watching primary care and surgery volume
By Mark Neaman's account, NorthShore University HealthSystem, with 850 staffed beds, is doing well. The Evanston, IL, hospital system has positive margins, has reduced costs through the acquisition of a new hospital, and has little trouble accessing the capital markets with its AA+ rating. But he knows NorthShore is not immune to the rest of the economy, as evidenced by a rise in bad debt and charity care numbers this year.
As such, Neaman and his team have been cautious about capital investments and are aggressively working to reduce costs. "We have made some serious efforts to improve our costs even though we are growing," he says. Neaman says in merging with 175-staffed-bed Skokie (IL) Hospital in January, the system was able to reduce costs in a number of areas. "We have taken out $40 million in costs by having an electronic medical record and by doing the acquisition."
In this environment, he says, there are two clear indicators he looks at to gauge where his operations stand—primary care visits and surgery volumes. With regard to surgery volume, Neaman says he takes a top-line view of revenue. "Is it growing or not growing?" Right now, total revenue is up 15% in 2009 over 2008.
At the same time, primary care volume is an indicator of future hospital volume, he says. The system's 300 primary care physicians experienced a 1% to 2% decrease in volume the first part of the year, Neaman says. Currently the system is flat with last year.
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