What are some challenges facing hospitals in the current economy?
The key challenges have to do with the direct impact of the collapse of their investments. Hospital operating margins are holding up relatively well, but their total margins have declined to points that we have never observed historically. They are very close to zero. It represents a problem because hospitals’ operating margins are generally very small; these are organizations that operate on a 3-4 percent margin. Hospitals are now in a situation where they will have to do more with a lot less.
Our evidence shows that demand for hospital services has not markedly declined, so hospitals’ customers continue to show up for services. Hospitals are between a rock and a hard place.
What are the biggest expenses that hospitals can cut?
Hospital could reduce contract labor expenses and other types of items that can be managed by redeploying their current workforce or operations. But we need to be aware that hospitals are labor-intensive places; labor costs are 70 of their total costs. Another option is the deferral of capital expenses. We expect to see that trend.
Is the reimbursement rate for hospitals shrinking?
Yes. Medicare reimbursement has declined dramatically. It’s moved from a year-over-year increase of 4 percent to near zero. Potentially more important for hospitals is that the reimbursement rates for commercial payers have been nearly halved.
How much worse will it get for hospitals?
We have never seen anything like this. There is no historical analogy to turn to. Hospitals are in uncharted territory.