Economy sends physicians to hospitals for help

Increasingly cash-strapped hospitals are willing to listen to physicians' requests. But experts say that doesn't mean doctors can expect to have leverage in negotiations.

By Karen Caffarini — Posted Dec. 15, 2008

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Physicians and hospitals, each finding themselves in leaky financial ships, often are climbing into the same lifeboat to stay afloat.

A recent American Hospital Assn. study finds that the recession is leading to a financial crunch for its members. Hospitals are struggling with declines in admissions, elective procedures, patient payments and investment income, while dealing with a marked increase in interest expenses and a drying up of new credit.

Meanwhile, the study finds physicians clamoring for hospital support, whether through more pay for providing on-call or other hospital services, or hospital assistance in funding equipment and technology purchases. The study also found that some doctors express interest in becoming hospital employees or selling their practices to hospitals.

"It is hard to tell how this will play out. We don't know how long and deep the recession will be. Some hospitals have closed. It's hard to tell if others will," said Caroline Steinberg, AHA vice president for trends analysis.

Hospitals are putting off major building projects or cutting administrative staff. But experts say tough times have made hospitals more willing than ever to work with doctors.

"Physicians are hospitals' revenue stream," Steinberg said.

Hospitals are willing to help physicians with much of what they're asking -- provided doing so is within the hospital's means, said recruiters and other health care experts.

For their part, more physicians are taking on leadership roles in hospitals and entering into joint ventures in areas such as imaging services and outpatient surgery.

"The environment is changing; the payment system is changing. It requires close economic cooperation between physicians and hospitals," said Richard Gundling, vice president of the Healthcare Financial Management Assn., which represents health care financial executives and leaders.

Tracking a crisis

The AHA study, "Report on the Economic Crisis: Initial Impact on Hospitals," was conducted in October and released in late November. It was based on responses from 736 hospital chief executive officers.

Steinberg said this is the first time AHA has done a study like this, so she had no numbers for comparison. "We never had a situation like this before. We wanted an early indication of what's going on."

The study also looked at financial details from 557 hospitals participating in DATABANK, a Web-based reporting system used in 30 states. According to those filings, declines in the stock market are most responsible for turning the hospitals' collective $396.1 million in nonoperating revenue -- revenue not directly related to patient care -- in the third quarter of 2007 into a collective $831.5 million loss in the same quarter of 2008.

Meanwhile, 31% of the executives surveyed by the AHA said their hospitals fell short of projected levels for elective procedures from September through November, while 38% said they experienced a similar situation with admissions. And those patients who came to the hospital were less likely to pay. DATABANK figures showed an 8% increase in uncompensated care between the third quarters of 2007 ($853.5 million) and 2008 ($923.6 million). The collective hospital operating margin declined from 6.1% to minus 1.6%.

To get finances back in the black, 59% of hospital CEOs wanted to cut administrative costs, 53% would reduce staff and 27% would consider cutting services, according to the AHA study. The CEOs could choose more than one option.

"We're just above where we need to be financially, but if something should happen, it could go the other way, into the red. It's a scary thought," said Renda Jones, practice manager for Margaret Mary Community Hospital in Batesville, Ind. "We have no overtime. Some employees need to step up to the plate and do double duty."

As hospitals' financial health declines, physicians are actively seeking help from hospitals. Fifty-six percent of CEOs reported such requests at their hospitals in the last three months, according to the AHA. Of those CEOs, 83% reported physicians wanting more pay for on-call or other services, 69% heard physicians ask about hospital employment, 31% got inquiries about whether they would buy physician practices, and 23% got queries to partner on physician equipment purchases.

But experts say their collective financial problems make it a good time for both hospitals and physicians to make deals to work together. Hospitals could get more admissions and patient revenue, while physicians could get more financial stability.

"Hospitals want to work with physicians who are having a difficult time with decreased reimbursements and higher insurance costs," said Ed Strogen, owner of Strogen & Associates Inc., a Berwyn, Pa., consulting firm specializing in the valuation and sale of medical practices. He said he is seeing both doctors and hospitals actively recruiting each other.

"We may be in a situation now where it makes financial sense for both parties," Strogen said.

Who has leverage?

Past surveys have found physicians moving toward employed or hospital-based situations long before today's economic crisis. For example, a survey by the Center for Studying Health System Change found that there was a marked increase in the percentage of physicians joining large, single-specialty groups and employed situations. The survey, released in August 2006, covered 1996 to 2005.

Some experts say many hospital positions are still going begging.

"It is still a very attractive, viable market for physicians," said Ellen Politi, president and director for the physicians service division of Medical Staffing Associates Inc. in McLean, Va. "There are more opportunities than there are doctors. Physicians still have bargaining power."

But hospitals are not necessarily giving physicians everything they want.

Jeffrey Bailet, president of Aurora Health Care, consisting of 13 hospitals and two under construction in Wisconsin, said it is buying some elements of a practice, like equipment, but physicians aren't making a windfall as a result. The group, like many hospitals, is not paying for goodwill, which reflects the cash value of intangible assets of a practice.

"The report reflects what we've been seeing -- independent-minded physicians wanting to incorporate into Aurora. But this has been going on for a long time, before the economy started to decline," Bailet said.

Experts say the best way for physicians to gain leverage is to lay out their cash value for the hospital.

For example, neurosurgeons in some areas have received increased pay for on-call services by showing hospitals that such pay is but a small reward for the amount of business neurosurgeons bring in, said Robert E. Harbaugh, MD, chair of the American Assn. of Neurological Surgeons/Congress of Neurological Surgeons' Washington Committee and chair of the Dept. of Neurosurgery at Penn State University.

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What doctors are seeking

An American Hospital Assn. report found increased requests for jobs as well as money. During the past three months, 56% of hospital CEOs said their facility got more physician requests for aid. Of those CEOs:

83% reported more physicians wanting increased pay for on-call or other services provided to the hospital.

69% reported more physicians seeking hospital employment.

56% reported an overall increase in doctors asking for financial aid.

31% reported more doctors looking to sell their practices to hospitals.

23% reported more doctors seeking to partner on buying equipment.

Source: "The Economic Crisis: Initial Impact on Hospitals," AHA survey, November (link)

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Money crunch

The American Hospital Assn. asked chief executive officers of all nonfederal hospitals how the capital crisis is affecting their revenues and business decisions. For hospital utilization increases and declines, percentages represent CEOs who reported moderate to significant changes. For technology, percentages represent CEOs reporting purchases postponed or reconsidered.

Capital crunch effects CEOs
Uncompensated care increase 51%
Admissions decline 38%
Variable-rate bond interest
expense increase
Elective procedures decline 31%
Pension funding increases anticipated 31%
Bond issuance forestalled 11%
Debt acceleration 7%
Cutbacks considered
Administrative costs 59%
New capacity, renovations
postponed, reconsidered
Staff 53%
Clinical technology/equipment 45%
Information technology 39%
Hospital services 27%
Asset divestiture 12%
Mergers 8%

Source: "Report on the Economic Crisis: Initial Impact on Hospitals," AHA survey, November (link)

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Falling short

Hospitals are seeing lower levels of utilization than projected.

Measure Moderate
Elective procedures 25% 6%
Admissions 29% 9%

Source: "Report on the Economic Crisis: Initial Impact on Hospitals," AHA survey, November (link)

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External links

"Report on the Economic Crisis: Initial Impact on Hospitals," American Hospital Assn., November, in pdf (link)

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