Hospitalization costs drive health-care inflation
As Cobalt (formerly United Wisconsin Services) commissions a study to determine why health-care costs in southeastern Wisconsin are higher than elsewhere in the state and the nation, independent studies and local analysts point to hospital costs as a main driver.
National trends are augmented here by regional rivalries between health-care chains and a falling-out five years ago between one of the area’s largest preferred provider organizations and southeastern Wisconsin’s dominant health-care provider.
According to the state Bureau of Health Information – a part of the Wisconsin Department of Health and Family Services – one of the best indicators of Wisconsin hospitals’ profitability has increased more than 53% in the seven-year period ending in 2000. Net patient revenue rose from $4.7 billion to $7.2 billion. Expenses also increased 53%, while actual profitability – net income – increased by 64% to $407.4 million.
Hospitalization
takes the lead
According to a representative of Wisconsin’s health-plan industry and an independent study, the cost of hospitalization has eclipsed that of prescription drugs when it comes to driving the cost of health care in the state.
Wisconsin Association of Health Plans deputy director Joseph Kachelski’s observations mirror the results of a nonpartisan policy research organization funded by The Robert Wood Johnson Foundation. Hospital spending – not prescription drugs – accounted for the largest share of increased health-care costs in 2000, according to a study by the Center for Studying Health System Change (CSHSC). Overall, health-care costs increased 7.2% in 2000 – the largest jump in a decade – with inpatient and outpatient hospital care accounting for 43% of the overall increase in the cost of health care, according to the study, "Tracking Health Care Costs."
That trend represents a departure from results of a 1994 study by the Cato Institute, which identified prescription drugs as the No. 1 inflationary pressure on the cost of health care.
"The most recent data suggest that hospital costs are the No. 1 driver of health-care inflation," Kachelski said. "That is not really surprising. But in recent years, the cost of prescription drugs was the most intransigent factor in terms of increasing health-care costs. Everybody uses prescription drugs. We all open magazines and the little card falls out – everyone sees the television ads (promoting drugs). But not everyone has a hospital stay."
Apart from the study from CSHSC, Kachelski cites anecdotal experience pointing to hospitalization costs as an inflationary driver.
"Recently, my wife was in the hospital for one day," Kachelski said. "The hospital’s bill was $3,600 – and that did not include professional services of the physicians. At the time, I remember thinking it would take a family policy premium for an entire year to pay for one day in the hospital. This system depends on a lot of people not using any services or any significant services."
Buildings cost money
While local representatives of the hospital industry claim state institutions are in financial distress, according to data from Wisconsin’s Bureau of Health Information, Southeastern Wisconsin’s 29 general medical and surgical hospitals (Racine, Kenosha, Milwaukee, Ozaukee, Washington, Waukesha, Sheboygan and Walworth counties) produced profit margins averaging 5.7% in 1999. That compares to a .08% profit margin generated by Wisconsin’s health plans in 2000.
While most hospitals in Wisconsin are run by not-for-profit companies, they still take in more revenue than they have in cost. That margin is then channeled back into the organization in the form of building projects and other capital spending – or in bonuses or other disbursements.
The reasons for the rising cost of hospital care are diverse. According to Kachelski, a trend toward aggressive building programs on the part of health-care chains is a prime driver.
"The building, I think, is what everybody can see and get their arms around," Kachelski said. "It is clear if you are going to put a half a billion dollars into hospital construction in the Milwaukee area alone, that someone is going to have to pay for that. There are multiple cardiac-care facilities being built in Milwaukee. It is a legitimate question to ask how many facilities like this does a city like Milwaukee need."
As more than $700 million is pumped into health-care construction in southeastern Wisconsin, the question of what effect building has on costs is a valid one.
"They are betting they are going to recover those costs. Those costs trickle down to health-care premiums and would not have existed if that construction hadn’t happened. The question is not whether they should or shouldn’t build – but the question is whether the demand is there or do they plan to create the demand."
But according to data from the state Bureau of Health Information (BHI), the percentage of hospital budgets devoted to capital spending – which would include building projects – has remained flat in recent years. In 2000, the percentage of hospital spending attributable to capital projects was 9.5%. In 1999, it was 9.2%, compared to 9.6% in 1998 and 9.4% in 1995. The relatively flat percentage of expenses devoted to building would still represent an increasing dollar figure given the increasing total revenue figures – and the fact that building costs are amortized over a long period of time. The costs would not reflect an immediate, dramatic uptick in the percentage of expense devoted to capital costs, but would rather increase the amount of long-term debt carried by health-care chains.
Representatives of the hospital industry and BHI also stressed that newer facilities can increase operational efficiencies and reduce the amount of expense associated with facility upkeep.
According to Sara Stanton, vice president of Brookfield-based Seroka Healthcare Marketing, spending on capital expenses may not show up on BHI spreadsheets for a number of reasons.
"There is a lot more joint venturing and partnering going on," Stanton said. "If a hospital is going to create some sort of outpatient service or wellness service, if they are partnering up, that is going to reduce the amount of capital they are going to have to expend. Also, if you are in a bigger system, you may be able to spread your debt load when it comes to capitalizing a service. If it does show up (in BHI data), it is very minimal because they are not required to finance it individually."
Market forces
While Kachelski implied that lack of competition in some geographic areas left health plans with a lack of negotiating leverage in those regions, one hospital spokesman claimed that in the health-care industry, competition can actually be an inflationary factor. In the hyper-supplied Milwaukee and outlying markets, these turf wars create additional expenses in many ways.
An official from Oconomowoc Memorial, which recently saw a new hospital proposed for the city by Aurora turned away in a controversial zoning fight, implied that an additional player in that market would have driven costs in the wrong direction.
According to BHI data for 2000, Oconomowoc Memorial’s occupancy rate was 52.1%, and that, according to Sarah Estell of ProHealthcare, Inc., meant there was no need for an additional hospital in the area. Prohealthcare is comprised of both Oconomowoc Memorial and Waukesha Memorial hospitals.
Aurora’s entry into new markets is an inflationary factor on the market as a whole, according to Estell. State data supports the idea that competition may not drive down cost. Southeastern Wisconsin may be the portion of the state with the most competing health-care organizations, yet costs are rising faster here than elsewhere.
In the first two quarters of 2001, health plans in southeastern Wisconsin paid out $183.10 in medical expenses per member per month, according to figures supplied to the Office of the Commissioner of Insurance. That is up by 30% from $140.41 per member month in the first two quarters of 2000.
That compares to a more modest increase of just under 17% in the state as a whole. Health plans paid out about $170.90 in claims per member month during the first two quarters of 2001, up from $146.10 per member month during the first half of last year.
"What happens is there is a war for staff," Estell said. "There is an incredible nursing shortage. History has shown that Aurora will offer large sign-on bonuses. In a market where 50% of our expense is the cost of labor, this is significant."
Estell said that as new players enter a market, they wind up competing in various ways – apart from price.
"You end up in this technology war," Estell said. "You compete on who has the best amenities and the latest, greatest technology."
While some might be critical of the level of fit and finish evident in much new hospital construction – Aurora has recently opened a new women’s clinic similar to a first-class hotel – Estell is an advocate of attractive facilities.
"I think that anything that offers a nice environment for patients is a good thing," Estell said. "Oconomowoc Memorial has a strong nature-oriented theme. We also offer room service – rather than just getting what is being served, patients can order what they want. We don’t have people walking around pushing big carts of food. We are borrowing a lot of concepts from hotels."
Moen advocates regulation
While competitive factors may be creating more pleasant environs for patients, one state senator is pushing for re-regulation of the hospital industry.
According to Sen. Rodney Moen, a Whitehall Democrat and chair of the Committee on Health, Utilities, Veterans, and Military Affairs Committee, deregulation of the hospital industry plays a role in skyrocketing hospitalization costs.
"We have 124 not-for-profit hospitals in the state that generated $413 million in profit (in 1999)," Moen said. "We have no oversight by the state. In the meantime, nursing homes are very closely regulated."
Moen points to one Aurora facility – St. Luke’s Hospital in Milwaukee – as an example of a facility that turned a tidy profit in 1999.
"St. Luke’s has a 68% occupancy rate and a net profit of 6.9%," Moen said. "That represents a 6.9% margin. St. Joseph’s (Milwaukee) turned a $9 million profit at 66% occupancy."
According to Estell, occupancy rate of existing hospitals is a good determiner of whether additional hospitals are required in an area. But Moen is quick to point out that legislation requiring legislative review and approval of new health-care facilities has been repealed. Since then, he said, hospital profits have grown considerably.
"The industry was deregulated in the late ’80s," Moen said. "At that time, profit was flat at $90 million. Since then, we have seen a 300% increase in profit. We need to have some oversight."
According to Moen, the removal of prices from the economic equation necessitates government intervention.
"All that technology and equipment costs money," Moen said. "As chair of the Committee on Health, I have watched this trend toward more coverage. People want everything covered and they want someone else to pay for it. As consumers, they do not know what the cost of services are going to be. They are shocked to hear what the cost of a procedure is. If you look at deregulation, competition means hospitals compete on whose hospital looks better. Hospitals get in this medical arms race. The price of hospitalization is not due to the medical staff, but the facility and the marketing."
May 10, 2002 Small Business Times, Milwaukee
