The recent reports that Denver Health & Hospitals is financially stressed reminds me of an underground coal fire that seemingly burns on forever. When Frederico Pena was elected Mayor of Denver in 1983 he commissioned a Citizen Committee to study issues swirling around a troubled Denver General Hospital. Back then, as today, the City hospital along with University Hospital are the primary providers for indigents and the working poor.
As the citizen committee began to peel the onion on the city hospital situation, a lot was also happening at the federal level. Ronald Reagan had been elected president and the U.S. Congress passed the Omnibus Reconciliation Act of 1983. This act allowed commercial insurance and public entitlement programs to switch from cost-based reimbursement and impose fixed fees on health providers. This ushered in an era of cost shifting. ObamaCare hopes to fix the negative consequences of those public policies. In this in-between time, Denver Health is being stressed like never before.
When the Mayoral Committee reviewed Denver’s health system it quickly concluded it was of a very high quality but financially distressed. By concentrating large numbers of poor, non-paying patients in a city-run hospital, the numbers didn’t work. Initially, some members of the Committee naively toyed with the notion of giving patients vouchers so they could be served by hospitals throughout the community. After all, there was a lot of excess capacity in the health system back then.
After many years of study, we now know hospital economics differ from typical business finances. You might think technology drives health costs. In fact a hospital is far and away labor cost intensive. If you can staff the hospital exactly to meet demand everything balances out. Trouble is, hospitals are highly specialized. An oncology nurse does not work in the heart unit. The high degree of specialization in labor means that a hospital’s total costs are relatively fixed at a high level, whether there is one patient or 500 in-house. If the hospital could magically be operated at just the right level, its average costs per patient might be reasonable. Of course, that would also mean someone would have to pay the bill. If demand falls off and hospital staff idled, average hospital costs per unit of service jumps dramatically. And, if bad debts also rise because the mix of paying and nonpaying patients changes, big financial troubles develop very quickly. It’s a very tough balancing act.
Over the years, the Colorado Health Data Commission, the 2008 Blue Ribbon Commission, and the Colorado Division of Insurance all studied health costs. What we do know is that there is wide variations between hospital costs. But, premiums for insurance plans vary all over the place. And, there is a huge difference between what Medicare and Medicaid pay and what a self-pay patient is billed. This is due largely to shifting of costs between various categories of payers. Hospital systems are reimbursed below average by government and commercial insurers. They try and shift the difference to self-paying patients, but many of them can’t pay. It’s a health care system whose foundation is built on shifting sands. Large community hospitals usually make it work out by raising their sticker prices into the stratosphere they way of auto dealers. We all know that nobody really pays that price. But, public institutions like Denver Health and University Hospital have no place to shift costs.
In theory, a typical community hospital should be able to take care of a certain number of patients for the incremental costs they might incur. If the hospital is already making money, what does it really cost to put one more patient in an empty bed? Mere pennies you would think. What happens if everyone who gets checked in is poor and can’t pay? When we concentrating the poor in one or two hospitals, it shatters the economic models. You simply need paying patients to defray the fixed costs.
This reasoning is even more relevant today, because the Colorado Health Exchange knows that to make ObamaCare work they must get young, healthy people to buy insurance. Only by having a large pool of patients, some healthy and paying their way to balance out sick and poor patients can the system work.
The decision for the City of Denver to operate its own health system is both political and economic. It is political because when markets fail, as has health care, we turn to elected officials to be our loyal agents. Community hospitals are still resistant to takiing care of poor patients at the marginal, incremental cost. And, insurance companies want to cherry-pick the risk pool. Most health institutions are now run by either for-profit companies or part of a large system. Modern health care is run using goal-seeking financial models
We have to remember, Medicare and Medicaid were enacted because the markets had failed. It was not taking care of the elderly or the poor. In 1974, when Richard Nixon was President, the ERISA laws enacted allowed large corporations with healthy groups to pull out and self-insure. That destroyed the community-rated risk pool. Laws enacted over the years created a favorable ecosystem for insured groups which attracts healthy patients. But, it also shattered remaining community-rated risk pool that served small groups and individuals. The lead to enactment of the Affordable Care Act in 2010.
As we move toward the 2014 the implementation of the Affordable Care Act, there will be some unintended consequences. I remain convinced that Denver Health and Hospitals will survive and thrive because it is a high quality institution with an important community mission. From the time when Frederico Pena was Mayor of Denver, it has been run professionally. I still maintain that if you wreck the family Rolls Royce on I-25 you want to be taken to Denver General. And, if you are a homeless person living under a bridge, you can’t find a better place to care for you. It’s a model we should all support.
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