Wednesday, June 06, 2007

For Students -- Hospital Business Planning

Rocky asks below, "Do you ever find that the decisions you make may be great for the hospital but not the best option for patients? This comes up repeatedly in the pharmaceutical industry, where often the products being developed are directed toward the business market and not the greater burden of illness. Hospitals generally generate surpluses from providing cardiac and cancer care but lose money providing mental health and pediatric care. Are you ever forced to put a higher priority on the well being of the hospital than on providing the best health care services for the well being of patients, and how do you grapple with that?"

I might word the question slightly differently, but essentially the answer is a sad and simple "Yes." The current reimbursement environment is such that we cannot afford to expand or maintain certain services that we know are of value to society. For example, we have one inpatient psychiatric floor and could probably have two or three, in terms of need. We used to have a transitional care unit, which was closed because of poor reimbursement. I would love to have a long term acute care facility and a hospice facility, but I cannot because they would lose money, under the rules that apply if they are part of a hospital. We are not the only ones facing this, and so you see similar trends throughout Boston and the country. Even in the surgical field, one of our neighboring hospitals shut down their ophthalmic program because there were "higher value" surgical services that would otherwise use that space. And while we have a superb obstetrics department, with 5000 births per year, I have had to limit expansion because of the relative profitability compared to other types of care.

The current reimbursement environment is a relic of the past. With regard to mental health, I believe it embodies long-standing societal prejudices against people with mental illness. Other aspects of the system reflect other societal decisions. As a hospital executive, I have to balance the need for the hospital to stay solvent with our desire to be as helpful as possible to people with different types of medical problems. While we do all kinds of cross-subsidizing within the hospital, some services, inevitably, are not affordable.


Anonymous said...

You are absolutely right. There is no mission if there is no margin.

Anonymous said...


You should start the groundwork for your upcoming book 'Running a Hospital':)

Roy M. Poses MD said...

Your dilemma is real. It points out how the current reimbursement system has pushed health care in the wrong directions.

The first big question is why Medicare, a government agency that supposedly has the needs of all the people at heart, persists with a reimbursement system that discourages many important types of health care that many people need, from primary care through mental health care to hospice care? I don't know why this is true for hospital services.

We know that Medicare reimbursement for physician services became equally perverse. But we don't know why.

In the post above I asked these questions:
* How did the system become so perverse?
* Why did nobody notice?
* Why did private health insurance companies and commercial managed care companies go along with this perverse system?

We need to ask the same questions about hospital reimbursement.

Then we need to use the answers to make some changes.

Anonymous said...

The fundamental major flaw with Medicare: They pay for quantity not quality. Dr X from Harvard and Dr Y from U of Crap both get paid same amount for procedure Z which leads both Dr's to crank out as many cases as possable. Now if they paid for Quality, Dr X would get more money than Dr Y and we would have true pay for performance.

Anonymous said...


It must be a very challenging environment to balance hospital profitibility and needs with expectations of the community.

However at what point does a free market approach prevail and say that maybe one institution can't profitable provide all the services needed? Or that a series of related services may be profitable together where others may not?

In essence, do you see a point where Beth Israel (or others) get really good at certain types of services and lets others focus on the ones it isn't? (and by good meaning able to provide the care, quality, for a given value based price)?

It appears the curent political (and reimbursement) policies aren't there yet but may be heading that way?

-Dave (

Richard Wittrup said...

You are saying that our health care financing system will not give you enough money to do all the things that you believe would be of value to society.

Our spending on health care accounts for an inordinate and rising portion of the most bountiful economy ever known.

Are you saying that the portion should be even higher? Or should we be expecting our health care delivery system to do a better job with the abundant resources already being provided to it?

Richard Wittrup

Anonymous said...

Dave and Richard,

Those are natural extensions of the point I was making. As I have commented on this blog elsewhere (specifically with regard to transplants), it would make sense to rationalize more of the health system by eliminating duplicative, small scale programs. But that will not come from the hospitals themselves because everyone feel sthey have to be full-service organizations. It would have to be imposed by the insurers.

Anonymous said...

I strongly agree with Paul. There is a definite "bandwagon" which hospital administrators all jump on at once, to make sure they stay in the game. One example is where I recently read that after Mass General and Brigham and WOMEN'S (caps mine) merged, did Mass General leave ob/gyn to B and W? No, expanded it in their own place. (I presume what I read was true but Paul will have to confirm.) Go figure. My community hospital once spent major $$ to set up a renal transplant program in Md., hire a surgeon, etc. I think it did a total of 3 transplants before they finally saw the light and closed it some years and many dollars later.

Paul, excellent post. We should all be forwarding it to our congresspersons.

Toni Brayer, MD said...

For Dave W.
While it is true that institutions who provide high volume services have better outcomes and focusing on what you do well is in the best interest of patients, unfortunately most services (ER, OB, General medicine, skilled nursing) don't begin to break even on costs so hospitals all want to do the high reimbursement, tertiary procedures that bring in the revenue. It is a crazy way to run a country's health system. For more on related reform subject check out

Anonymous said...

Determining costs is far from a precise science, especially when it comes to allocating overhead to various medical departments and functions. Moreover, just defining what we are talking about adds to the confusion. There are fixed costs, variable costs, marginal costs, escapable costs, direct and indirect costs, fully allocated costs, etc.

In the case of ER's, there is also the issue of who should get credit for the revenue. If an ER patient is sent down the hall for an MRI, the radiology departments captures the revenue, but the ER department drove it. Some hospitals get as much as half of their inpatient admissions through the ER. Even if it were theoretically possible to close the ER, it probably wouldn't be wise to do so.

If hospitals were more transparent in disclosing their actual reimbursement rates from Medicare and private insurers and, for those services that are financial losers, their costs and how they determined them, perhaps patients and/or taxpayers generally could be convinced to pay enough more to make the losers become breakeven operations, or even moderate winners. Finding safe and innovative ways to reduce costs would also be helpful.

Anonymous said...

For BC-

This I think is the red herring we all seem to go down. If the ER costs more, but it drives MRI or other business, maybe the Hospital should CHANGE how they look at this. (i.e. the ER is a cost of 'sales' and feeds more than enough revenue when looked at the full 'service' provided.) and not just increase the cost.

Then it is at the Hospital's discretion to determine how to better manage costs in regards to the overall profit margin for that bundle or group of services.

For Example, If a patient who comes in for a Heart Attack is 95% of the time coming through the ER, the costs of receiving and moving them through the emergency room on their way to get a stent, Bypass, or other treatment is factored into the costs of treating someone for a heart attack, this then would be considered a 'profitable' encounter overall.

Just my $0.02...

Anonymous said...

Paul is correct that choices are made routinely between the financial viability of the insitution and the health of the community. I am with two safety net hospitals (have posted here before) and would re-phrase the question as one of doing the best job you can in meeting unlimited needs with limited resources. Our focus is on remaining viable to take care of uninsured or underinsured patients when their illnesses become acute. Should we focus more on the chronic conditions in our marketplace and on prevention so those conditions do not become acute? Absolutely, but the transition would be enormous and may not be financially viable. And, if you are not successful then the community risks losing it's safety net provider for acute services. We have a very large FQHC and our long term strategy is to create a medical home for the patients we serve within the FQHC thereby improving the coordination between the fragmented entities we now have. Of course the backbone of this will be an EMR that can flow across the spectrum. I just hope the EMR technology will keep pace with the requirements.

Anonymous said...

Dear Wise elders,

In trying to decide on a career path, I am always struggling with the question of "doing the right thing".

As people in leadership positions, which I think many of the readers here are.... What does it mean to be doing the right thing for your profession/industry/work? I know it's a big question... any thoughts or guidance is greatly appreciated.

~ the curious undergrad