Hospitals are cutting their operating costs in order to adjust to reduced revenues as Medicare tightens payments.
A new study by the Center for Studying Health System Change (HSC) found that as Medicare tightens their payments to hospitals, hospitals are not shifting costs to private payers, as has been the common belief, said Chapin White, HSC senior researcher.
“There’s this ongoing debate over what happens when Medicare makes cuts to what it pays hospitals, and one story you hear is that they make it up by increasing costs to private payers,” said White. “The other story you hear is that if hospitals face constricted revenue measures, they adjust the way they do business. I was surprised with how much the lost revenues are made up with fewer operating expenses.”
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The study, which was funded by the nonprofit National Institute for Health Care Reform, examined Medicare cost reports for 2,043 hospitals between 1996 and 2009 and analyzed the effect of changes in Medicare inpatient payments on hospitals’ overall revenues, operating costs, profits, assets and staffing.
[See also: HSC study shows safety net providers finding ways to protect bottom line]
Hospitals are reducing operating expenses largely through personnel savings. According to the report, about 90 percent of lost revenues will be offset through personnel savings. “For each $100,000 reduction in Medicare inpatient revenues, a hospital reduces its total staff by 1.69 full-time employees (FTEs),” researchers noted in the report. One-fifth of that staffing reduction is registered nurses.
In addition to savings on personnel, to reduce operating expenses, hospitals will also delay or forgo capital improvements.
The study also found a difference between for-profit and nonprofit hospitals in that nonprofit hospitals will reduce operating expenses to maintain profits, while for-profit hospitals, which tend to already have lower operating costs, will see profits decline. This could indicate potential insolvency for some of the for-profits, the report said.
“The question today is whether these cuts are sustainable for hospitals over the long term,” said White.
[See also: Medicare adopts 2009 payment changes for hospital outpatient and ASC services]