After eight years of waiting?

In the fall of 1996, the Wall Street Journal published a story by Lucette Lagnado that opened with the line, "All hell is about to break loose in the once sedate and antiquated world of New York hospitals." She, like many of us, was anticipating the effects of New York's Health Care Reform Act of 1996 which ended a twenty-five year-old policy of regulating hospital prices for private payers.

Lucette called a couple years later and asked, well why didn't it happen? And in January of 1999, she wrote a story that began "New York's hospitals tallied record financial surpluses for their first year operating under deregulation, according to an unreleased study by health authorities."

Perhaps the moment has finally arrived, but not in the way we expected.

I couldn't help but recall Lucette's stories when reading Richard Perez Pena's recent lengthy story in the New York Times, Hospital Business in New York Braces for a Crisis.

The "crisis" is partly the result of market changes and partly the result of politics, including all the budget debate about a hospital (and nursing home) closure commission modeled on the Federal military base closing process. Let's discuss the market first.

The market effects have been building. Perez-Pena notes:

Twelve New York hospitals have closed in the last 27 months, and others have shut wings, wards and clinics. The industry as a whole has lost money five years in a row in New York, while turning a profit nationally each year. Even some of New York's biggest, most sophisticated teaching hospitals, like Mount Sinai and St. Vincent's in Manhattan, have been hemorrhaging money. Just last week, county officials scrambled to assemble a cash infusion for Westchester Medical Center.

Perhaps what we're seeing now is unrelated or perhaps it's a delayed effect. Indeed, deregulation may have spawned behavior that made things worse.

The start of competition in the late 1990's touched off what state officials call a "medical arms race" in New York, with hospitals rushing to enter high-profile, lucrative businesses, opening cardiac catheterization laboratories, cancer centers and cardiac and orthopedic surgery centers. The result was often saturation of the market, turning expensive new projects into money-losers.

The story goes on to quote some who partially blame the State for that behavior, saying in essence that the State should not have allowed hospitals to do what they were pressing to do.

Hospital officials and industry analysts say the state is partly to blame, having fueled the arms race by approving too many expansion projects, some of which are still going on.

Gimme a break. Where were hospital governing boards when those decisions were made? "The State won't stop us so let's go ahead?" Sounds like a drunk blaming his family for not stopping him from drinking.

Finally, the Times story gets to the real meat:

The problems of New York hospitals since deregulation points toward an obvious question: If hospitals have had eight years to downsize and mold themselves to new challenges, why have so many failed to do so?

Nearly everyone agrees that mismanagement is a large part of the answer, but there is stark disagreement on the extent of the problem.

"There are some hospitals that have management and accounting systems that let them know what was going wrong, and what needed changing," said State Senator Kemp Hannon of Nassau County, a Republican and the chairman of the Senate's Health Committee. "And there are other hospitals that just plain have no idea."

That knowledge gap, Mr. Hannon said, is a remnant from the more heavily regulated days, when hospitals' costs were covered by the state, whether they had a clear notion of those costs or not. Too many hospitals are focused on fighting H.M.O.'s and getting more government money, he said, rather than asking themselves how they could be managed better.

Mr. Raske of the hospital association insisted that most hospitals were well run, noting that the ones Mr. Hannon deals with were those deepest in trouble, looking for a state bailout. Hospitals have inadequate billing and management systems, Mr. Raske said, because they have been too poor to invest in needed technology.

...

Several health care consulting firms have concluded that hospitals in New York rate poorly in efficiency and management. One leading consulting firm, Solucient, found that in 2003, the average expense of caring for a patient in a New York hospital was 9.6 percent higher than the national average, even after adjusting for the type of case and regional differences in labor costs. In 2002, it found, the administrative cost per case was 13.1 percent higher in New York.

In study after study, the biggest difference between New York and the rest of the country is in length of stay, widely considered a measure of the quality of both care and management. Patients spend about 37 percent longer in the hospital in New York than nationally for similar cases, Solucient found, which contributes greatly to higher costs.

 

Let's hazard some guesses as to why or whether it took so long for the legal change to bite.

First, New York only de-regulated private health insurer's prices. Medicare, which in 2002 accounted for about 34 percent of hospitalizations and 44 percent of hospital days in New York continued to be governed by the Federal government. Medicaid and Worker's Compensation continued to be regulated by the State. Medicaid alone was the primary payer for 24 percent admissions and 25 percent hospital days. So the prices for only about 30 percent of hospital days were deregulated.

Second, while only partially de-regulating prices the State did not de-regulate access to the market for hospital inpatient services. In fairness, the State did not regulate access to the market for ambulatory surgery in private physician's offices. (Here the hospitals have a legitimate complaint that they are held to much more comprehensive regulation than their competitors.)

Third, at the same time, hospital representatives and policymakers were colluding to keep the money flowing at ever faster rates. The subsidy systems that were ancillary to the older policy became central to the new policy and the level of subsidies for indigent care, graduate medical education and other functions about doubled from $2 to $4 billion. All of those factors propped hospitals up when they might otherwise have closed or at least reduced their capacity faster.

Lastly, though less tangible, the whole infrastructure that New York left in place helped to maintain a political/regulatory centered mindset in which hospital leaders continued to focus on the State for permission and initiative. Too many continued to rely on their trade associations (and eventually District 1199/SEIU) rather than their own wits for survival. That's still happening as many look to the same groups to protect them from a hospital closure commission. Indeed that process will increase the political nature of what would otherwise be an economic and community service decision.

But, if the market has brought us to a crisis, why now?

Much less hospital business.

New York currently has 247 hospitals with about 62,800 beds (average of 254). In 1990, there were about 71,900 beds. But reduced capacity hasn't stopped occupancy from dropping. In 1990, it was 79 percent. It's since fallen to 60 percent. And the reason?

Though the number of hospital admissions remained relatively stable, the number of days of hospital service has tanked. In 1996, the last year before  deregulation took effect, hospitals in New York provided a bit over 17 million days of service (already down from nearly 20 million just two years before). By 2002, that number had already fallen to under 15 million. (I don't have the most recent data.) 

The first hint that there had been a real change came when Ken Raske, head of the Greater New York Hospital Association began calling for re-regulation (Modern Healthcare, June 9, 1993, subscription required). Despite all the whining, if there were ever evidence that the old regulatory regime had served to raise rather than lower prices that was it. Nobody bought that idea. Perhaps that's when Ken determined that he had to get ahead of the parade and push the idea of a hospital closure commission see (here and here).

Well, now there will be a closure commission. People have already been approached to serve. It's going to be intensely political and brutal. If you extrapolate from the current numbers and what the Department of Health is telling us about occupancy and if you assume that an average of 80 percent occupancy is optimal (leaving room for surges), then we could safely take 17,500 beds out of the system. Based on an average size of 254 beds per hospital, that's about 70 hospitals.

We may have de-regulated, but we didn't de-politicize. And much of this immense brawl is going to play out as a promise of political protection. Draw your own conclusions about that.

Comments

[Rick Stevens]

Thanks very much John -

Great review of the past and the issues that brought things to this point. I watched the same thing (hospital closures) occur in NJ in the 80s when I lived there and then in Upstate NY in the early 90s.

Very Darwinian (opps, excuse me for mentioning evolution); survival of the fittest - both as hospitals as well as political entities.

Nice to be able to watch detached from afar in MI !

RICK