Executive Voices: An Op-Ed Column


Are Hospitals Sick?
Rising healthcare costs are hitting hospitals as hard, or harder, than other businesses

By William A. Pully

Healthcare costs are rising, again. Yours and ours. For businesses and for hospitals. Okay, that’s not freshly minted news. Healthcare premium increases have sent shock waves through human resource departments, grayed the hair of numerous chief financial officers, created grimaces on the faces of CEOs and prompted some difficult decisions around board tables.

We know. It’s happening in hospitals, as well as in most other businesses. We know because hospitals are large employers. In many counties in North Carolina, the hospital is the largest employer. We are facing increased costs for health coverage. Where we differ from many other businesses is that we know the factors that are driving the increased costs.

Utilization is a leading cause of health cost increases. There is more demand now for health service than ever before. In a 2001 study by Deloitte & Touche Consulting for the North Carolina Hospital Association, the demand for health care in our state was projected to grow by 38 percent between 1997 and 2002. Meeting this demand was expected to consume $40 billion this year. This rapid rise in utilization is being driven by multiple factors, chief among them are an aging population and an expanding clinical capability.

Baby boomers are coming of age. Many have already passed the 50-year-old mark and are encountering health challenges. While health premium increases grab our attention today, we need to be noticing the projections for growth in this segment of our population. Federal Reserve data notes a 2 percent climb in the over-50 population during the past six years and, alarmingly, forecasts a jump from 28 percent of the U.S. population in 2002 to over 34 percent by 2014.

Demand from this population is being met by clinical capability that did not exist a decade ago. With modern technology, health care professionals are diagnosing and treating illnesses that previously caused premature death and lowered the quality of life for many. This enhanced medical capability comes at increased cost.

Cost shifting is also fueling health premium increases. Business are being indirectly taxed to cover inadequate payments by federal and state health care programs, and to fill the workers compensation gap left by an increasing number of employers that do not provide health coverage. The impact of federal budget balancing was to cut payments to North Carolina hospitals by $1.2 billion during the past five years. Hospitals in our state only narrowly recoup their costs for serving Medicare patients, and some are unable to do that well. The state’s Medicaid program poses even more of a problem for business. Local, state and federal contributions to the program do not cover hospitals’ costs for treating the poor, blind, and disabled. The unfunded portions must be shared by other payers.

Businesses are also being asked to cover the rapidly rising cost of treating the uninsured. Over 1 million North Carolinians are without health insurance. Funding their care will cost $1.3 billion in 2002. Most of that expense will fall on hospitals as the uninsured turn to emergency rooms for primary care.

A variety of other factors contribute to the current health cost spike. Hospitals are paying more for blood products. Health care labor is in short supply, driving its cost upward. The life-saving technology demanded by your employees carries a higher price tag than the miracle machines of yesterday. The cost of compliance with government mandates on privacy is staggering, estimated at $22 billion compared with $5 billion to prepare for potential computer problems with the Year 2000. Prescription costs have doubled in the past seven years and are expected to double again in the next four. Prescription costs now consume a larger portion of the state’s Medicaid budget than either hospital inpatient or outpatient service.

Alarmed yet? More cost increases are coming in response to dramatic hikes in liability insurance coverage. The total premiums paid by North Carolina hospitals for medical malpractice insurance more that doubled during the past year and is now more that three times the 1999 premium. Total premiums jumped to $75 million this year from $34 million last year. Nearly one-half of hospitals were unable to get the same coverage limits as last year. More than one-half were unable to get quotes from more that two carriers. Nearly all increased their deductibles and enlarged self-insurance retentions. First dollar coverage practically vanished for many smaller hospitals.

Driving these cost increases are, according to McNeary Insurance executive Mark Francis, runaway jury verdicts, increased defense costs, a prolonged soft market, reduced cash flow, reduced investment income, erosion of policyholder surplus and the many mergers, acquisitions, and failures in the medical malpractice industry. Of particular concern is the spike in jury awards. The average medical malpractice jury award jumped to $3.4 million in 2000 from $1.14 million in 1994. Adding to the lack of competition in the market is the loss of carriers Reliance National, Frontier, Phico, and St. Paul in 2001 alone.

These price increases are easily counted. Much less traceable is the hidden cost of defensive medicine. The current liability system gives physicians incentives to order more tests, perform more procedures, and prescribe more medications in order to reduce opportunities for claims. This too drives up utilization.

Caught in a squeeze. Yes, businesses are – with higher insurance premiums on one side and hidden taxes in the form of under-funded government programs on the other. Hospitals know this position well. Many in our state are struggling. One third of North Carolina hospitals have operating deficits and another third have margins so narrow that capital markets are either closed or costly.

Hospitals and business are not without recourse. We invite business and industry leaders to join us in seeking adequate funding for federal and state health care programs. About 60 percent of the average hospital’s patients is covered by these programs. Without adequate government funding, hospitals must turn to business and industry to recover their losses. We encourage your participation in the coming medical malpractice reform debate. We need your help in addressing the issues of the uninsured and workers compensation.

We know the challenges you face in providing health coverage for your employees. We are part of your communities and will remain to serve your healthcare needs.

Bill Pully of Raleigh is president of the N.C. Hospital Association, a post he has held since 1999. He has been with the organization since 1984.

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