Flatlined: Resuscitating American Medicine

Chapter 13. Three Pathways to Hospital Profitability

This story illustrates one of the undesirable effects of rational business decisions that hospital administrators must make in order to maintain solvent hospitals. The problem is not bad people but good people working in bad systems that reward the wrong decisions. Jack Devoe had been the chief operating officer of a financial services company in southern California for fifteen years and was vigorous at age forty-five. After spending years in a wholly profit-driven industry, he had cashed out and now welcomed the prospect of starting anew and serving the common good. In1998 he eagerly accepted the top financial job at the Episcopal Hospital. When Jack was recruited, he was assured that a hospital’s financial principles are not much different from those of any other business. The Episcopal’s reputation had been built on its ability to provide high-tech surgery services, which attracted patients both in the California market and worldwide. The hospital had one of the best reputations in southern California and, at 1,000 beds, was one of the region’s biggest facilities. Yet despite its size and reputation, it had been posting financial losses since the advent of managed care in 1994. Because the hospital was a not-for-profit institution (that is, any excess revenues had to be used for charity care, research, or education) and several bishops 139 13 Three Pathways to Hospital Profitability Hospitals have three pathways to profitability: they must gain market leverage in the community, promote highly paid procedures , and avoid the uninsured. Efficiency is not profitable. CH013.qxd 10/7/08 10:04 AM Page 139 served on the hospital board, Jack concluded that it must possess purity of purpose. Jack found a friend on the board—cardiac surgeon Simon Brown. He was one of the few physicians on the Episcopal board and was widely respected, if not widely loved, by the hospital staff. Brown did not gracefully tolerate mediocre performance. He had been one of the hospital’s top-ten producers for years, was a professor at the medical school, and also taught residents and medical students at nearby Bayview County Hospital. (Both the Episcopal and Bayview served as teaching hospitals for the medical school.) Brown had managed to bridge the opposing camps of the medical school, the hospital, and the private doctors by always coming down on the side of good patient care, no matter what the dispute. In his new job Jack began to calculate the winning and losing cost centers dispassionately and accurately, just as he had done in industry; and his regular meetings with Brown provided critical insights into the Episcopal’s workings. Sixty percent of the hospital’s patients were commercially insured, 25 percent had Medicare, and the remainder were either uninsured or insured by Medi-Cal (California’s Medicaid program). Three groups were responsible for the hospital’s financial losses: emergency Medicare patients, Medi-Cal patients, and uninsured patients. In Los Angeles County, 20 percent of the public was uninsured and 24 percent were on Medi-Cal; and numbers of people from both groups appeared in the hospital’s emergency room. The Episcopal could encourage profitability by caring for privately insured patients and Medicare patients who needed total knee and hip replacements, back fusions, and heart procedures and by avoiding Medicare emergencies. The trick therefore was first to reduce the volume of emergency Medicare business and eliminate Medi-Cal and uninsured business without compromising the hospital’s non-emergency business and then to promote surgeries in the freed-up space. An analysis of the hospital’s intensive care units identified the sources of profit and loss. The ICUs for heart and transplant surgery were profitable. The neurosurgeons’ patients were mostly non-emergencies and not very sick, so a small ICU that functioned more like an observation unit than an ICU sufficed for their care. This little ICU offered a positive financial profile, and both Jack and the neurosurgeons wanted to avoid WHY HEALTH CARE IS SO EXPENSIVE 140 CH013.qxd 10/7/08 10:04 AM Page 140 emergencies. Expanding the unit would make room for them, so there was no consideration of enlarging it. The units showing major losses tended to be the medical ICUs, which housed older patients with heart failure, diabetes, stroke, lung failure, and infections and usually served emergencies. Jack’s first recommendation...