With financial strain, others urban hospitals could follow West Penn's example

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West Penn Allegheny Health System's decision to lay off 1,500 workers, close West Penn Hospital's emergency department and move other essential services to Allegheny General Hospital was portrayed as a matter of survival for the financially at-risk health system.

But health care experts, both local and national, say other major urban hospitals -- particularly those with high Medicare and Medicaid patient volumes -- will be facing similar difficult consolidation decisions in coming years once the full impact of national health care reform hits.

"Hospitals will be under pressure to reduce costs," said Martin Gaynor, health economist and professor at Carnegie Mellon University's Heinz College. "Exactly what form it will take, how intense it will be and how fast it will happen, I don't know."

Nor does anyone else, but the uncertainty is enough to give a hospital CEO heartburn.

"There is great trepidation among hospitals that are 'government dependent,' where the majority of their care is Medicare and Medicaid, and they see their state budget in crisis, so their Medicaid payments are scary looking to the future," said Ellen Kugler, executive director of the National Association of Urban Hospitals in Washington, D.C.

That aptly describes southwestern Pennsylvania, where Health Care Cost Containment Council data show all but six of the region's 29 hospitals got at least half of their net patient revenue from Medicare and Medicaid in fiscal 2009. Net patient revenue is a hospital's primary source of money.

At West Penn Hospital, 41.2 percent of its net patient revenue was from Medicare, and 12.2 percent Medicaid. Still, that was far from the highest percentage locally. UPMC McKeesport had more than 70 percent of its patient revenue from Medicare and Medicaid.

But from fiscal 2006 through fiscal 2009, West Penn was one of only two local hospitals recording negative net patient revenue, at minus 2.5 percent. The other hospital was UPMC South Side, which has since been converted into an urgent-care center.

WPAHS officials also cited decreased inpatient volume as a key impetus for West Penn's major restructuring. That is part of a recent trend in which large, urban health centers have lost patients to suburban hospitals that now offer high-end procedures such as open-heart surgery and, for lesser ailments, to ambulatory surgical centers that have sprung up.

By 2014, an estimated 32 million previously uninsured Americans will have health coverage thanks to health reform, which presumably will increase patient volumes everywhere. But more patients will not necessarily mean a better balance sheet for urban hospitals, at least not at first, experts say. Many of the newly insured will be seeking care for the first time in years, many with underlying, long-ignored health problems.

Across the board, "hospitals are anxious" as they try to anticipate future revenue streams, said Carolyn Scanlan, president and CEO of the Hospital and Healthsystem Association of Pennsylvania.

And large, urban teaching hospitals, she said, tend to see patients "who have multiple conditions, chronic conditions that are more vulnerable to readmission to the hospital," which can mean reduced reimbursements under the health care reform legislation.

The financial upside for hospitals is that with millions more Americans insured, a decrease in free care they have to provide should follow -- a welcome development as hospitals locally have seen a 50 percent increase in uncompensated care in the past year.

But, while some payment is better than none, "it's probably not enough to make up for the lost Medicare and Medicaid revenue and, in some cases, it's nowhere close to enough," said Ms. Kugler of the National Association of Urban Hospitals.

Reimbursements for Medicare and Medicaid will be cut back to help pay for the newly insured, based on the theory that hospitals will recoup that money through increased patient volume and efficiencies realized through steps such as adopting electronic medical records and integrating care services.

"You need to have a very strong IT structure throughout your entire network and that's expensive," said Ms. Kugler. While some federal money will be available to offset the cost, she added, "It doesn't come close to paying for the infrastructure that you need."

Integration of services will be important because health care reform appears to be moving toward "bundling" payments for care, with a lump sum meant to cover the overall procedure, before, during and after hospitalization. It is still unclear who will decide which entity gets what share of the money, but the message to hospitals is that they need to start building those networks now if they don't have them already.

"The health system that is weaker is at a great disadvantage because they are not necessarily in a position to create the model and integrate the way the larger, more capitalized system can," said Ms. Kugler.

When that happens, she added, "hospitals that are cash-starved remain cash-starved, then they cannot invest in the services and the integration to create what is necessary for the future."

Through the first three quarters of the current fiscal year, WPAHS recorded a $7.2 million net profit, but an $11.6 million operating loss.

The troubling prospect is that just as more Americans gain access to health insurance, there may be fewer urban hospitals offering the services they are seeking.

Steve Twedt: stwedt@post-gazette.com or 412-263-1963.


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