More health care dollars are spent in hospitals than any other health care sector. Nearly one-third (31%) of the $4.255 trillion in health care expenditures are spent on hospital care. Physician care is 14.9%, while drugs are 8.9%. Thirty years ago, presidential candidate Ross Perot described a “giant sucking sound” due to jobs being sucked abroad by the North American Free Trade Agreement. Nowadays the giant sucking sound is the sound of workers’ and taxpayers’ income being sucked into hospitals due to price gouging and high hospital prices.
Hospitals periodically claim they need an infusion of taxpayer money to stay afloat. Apart from rural hospitals, most are doing fine. Indeed, an economist on Twitter once said you will know health reform is working when all the construction cranes around hospitals come down.
Despite an embarrassment of riches, hospitals in California are currently seeking broad bailouts.
One of the country’s richest hospitals, which caters to Hollywood elites, accepted nearly $28 million last year from an unusual source: a charity that siphons money from other California hospitals, many of which serve the state’s poorest residents.
Cedars-Sinai Health System in Los Angeles secured the grant under California’s recession-era financing scheme that allows wealthy hospitals to take valuable health care tax money from poorer ones. Hospitals across the state agreed in 2009 to the arrangement in order to tap billions more per year in taxpayer dollars to support the state’s Medicaid program, called Medi-Cal.
Before Obamacare hospitals received federal disproportionate share hospital (DSH) payments for facilities that treated more uninsured patients than average. Obamacare was supposed to alleviate the need for federal charity care funds by expanding coverage. Yet, hospitals are now complaining about having to care for too many Medicaid patients, which don’t pay as well as privately insured or Medicare patients.
Hospitals argue that to avert a crisis, they need an emergency infusion of $1.5 billion. They also want a steady annual stream of new health care tax money despite already having their own dedicated tax intended to support struggling facilities that serve a large percentage of the state’s low-income people, such as Madera Community Hospital in the Central Valley, which closed earlier this year.
Ads by the California Hospital Association paint a scary picture: “1 in 5 Hospitals are at risk of closure.” Yet another warns, “Health care that millions rely on is at risk.” Those claims are being repeated by state lawmakers as they debate financial rescue for hospitals.
Hospitals are big employers in many cities. Hospitals also tend to provide a veritable plethora of jobs, from entry-level nursing assistants to high-paying jobs for physicians. Yet, it would be a huge mistake to think of hospitals as a “jobs program” or an economic development initiative.
“They are big fans of these giant bailouts, where the relatively rich hospitals benefit as well as the ones who really need it,” said Glenn Melnick, a health economist at the University of Southern California. “A big chunk of the hospitals, even if they’re losing money, don’t need taxpayer money to help them through this crisis.”
“Most of the facilities that have negative margins are a part of larger systems, which suggests that they have the underlying wealth of those systems to stabilize them,” said Kristof Stremikis, director of market analysis and insight for the foundation.
Back when I worked for a hospital it owned affiliated hospitals scattered around the Dallas metro area. Some of the outlying hospitals lost money but had a strategic purpose. The affiliated hospital where I worked was expected to lose money, but its purpose was to reduce the cost of caring for certain unprofitable, high-cost Medicare patients. In this regard it made money for the parent company despite having paper losses on its books.
Hospital lobbyists in California argue that Medi-Cal reimburses only 74 Cents on the dollar for treating Medicaid patients. Thus, hospitals often claim Medicaid reimbursements are below cost. How hospitals define cost matters. For example, Medicaid reimbursements may be slightly below average cost, but are probably higher than marginal cost. In other words, hospitals are not literally losing money with each Medicaid patient, otherwise they would stop. In addition, federal and state governments provide billions in incentive payments for treating Medicaid patients that boost hospitals’ bottom line.
Although this battle is occurring in the state of California, it is indicative of hospitals in other states. Metropolitan hospitals are expanding and consolidating, while rural hospitals and those not part of a larger system face financial problems. Some rural hospitals may need subsidies to stay open to serve rural patients. However, low-performing hospitals in larger cities should be allowed to fail. With $1.3 trillion dollars spent on hospital care each year, state governments have little reason to bailout under-performing hospitals.