By Lisa Kersey

Healthcare reform will require that hospitals do more with less. And unlike traditional businesses, they’re expected to provide care, even if they don’t make a profit. They are presumed to be the community caregiver, the community charity provider and the community’s economic engine, all at the same time. I call it the Sybil Effect.

According to famed business consultant Peter Drucker, “Today’s hospital is the most complex human organization ever attempted….Moreover, the hospital has become the most capital intensive of all institutions, requiring more investment per ‘customer’ than any other kind of business.”

Unlike most businesses, hospitals are open 24/7 and 365 days a year. And though statistical analysis can provide insight into patient demand for services, hospitals must abide by something called “minimal staffing” requirements and flex staffing to accommodate surges in patient demand. This contributes to an operating model in which greater than 50 percent of expenditures are related to labor costs, and another 20 percent of costs are related to supplies. Thus, resulting is an operating model in which more than half of all hospital expenditures are fixed costs.

Also, unlike any other business, hospitals are legally required to take all comers, regardless of their ability to pay. And the primary source of care for most uninsured patients is one of the most expensive venues in healthcare – the emergency department. Sadly, a significant portion of these patients qualify for Medicaid or charity care but are unwilling or unable to provide the information needed to take advantage of their eligibility. So who loses? The hospital does. Oh, and so does everyone who pays for insurance coverage, both individuals and employers.

So what does this look like in real terms? Despite what many people think about the wealth of hospitals, the average non-profit system achieves only a 4 percent operating margin. Since government payors, which represent upwards of 50 percent of the payor mix of hospitals, reimburse hospitals at less than cost, they contribute approximately 85 percent of the off-setting revenue. That means that the commercial insurers must pay greater than 100 percent of cost, in order for hospitals to “break even,” much less eke out a margin.

While many would argue that hospitals should be focused on providing health care rather than making a profit, the truth is that most hospitals are focused on the care of patients and the health of their communities. But in order to reinvest in people, programs and facilities, hospitals must also manage to the bottom line.

Let’s play out the scenario. A patient goes to see a doctor, who diagnoses and prescribes a course of treatment. The hospital or outpatient center provides the care. The payers – whether commercial insurance companies or governmental entities (Medicare, Medicaid and Tricare) — reimburse the hospital and the doctor.

Do you see the problem? The person paying for the care, the person seeking the care and the person ordering the care are all different. This disconnects between the normal economics of supply, demand and cost sensitivity. In essence, the government dictates pricing, the insurance companies negotiate how much they are willing to pay providers and the uninsured are predominantly non-payors!

Then, when you delve deeper into each of the players, you see additional conflicts. For instance, just on the commercial payer side, employer purchased insurance is a tax deductible business expense, while people’s insurance premiums are not tax deductible. Moreover, insurance may not be purchased from health plans in other states, making the market for affordable individual insurance small.

And just when hospitals thought they had figured out how to manage under these unique circumstances, many municipal governments, struggling to meet their own budgets, are questioning the tax exemptions afforded to their local non-profit hospitals. But before civic leaders and commissioners of the revenue look to hospitals to balance their budgets, they should consider the following:

1. The local hospital is one of the key drivers of economic growth in a region. Families and employers considering new homes or businesses weigh heavily the access to healthcare and education as a backbone for any community and healthy workforce.
2. Hospitals are often one of the largest private sector employers in a community, creating jobs, even when other industries are not.
3. Hospitals often provide stability through times of recession, particularly in the construction industry, as they seek to renovate existing facilities to adapt to the changing technology and care settings needed to keep people healthy and get them back to work as soon as possible.
4. Hospitals provide a significant amount of uncompensated health care to the community, not only for the uninsured, but also through community outreach and screening events to raise awareness and impact lifestyles for better health.
5. The goods and services hospitals purchase from other businesses create additional economic value for the community.
6. And when you consider the money spent by hospital employees within the local community, there is a ripple effect that occurs, as paychecks are cashed and spent on other goods and services throughout the region. According to the American Hospital Association, on average, “each hospital job supports about two more jobs and every dollar spent by a hospital supports roughly $2.30 of additional business activity.” Nationally, this translates to hospitals contributing 1 of every 9 jobs and $2.2 trillion in economic activity.

Hospitals wear many hats and struggle to balance unusual financial and economic pressures. As health reform creates new alignment and incentive opportunities, and as hospitals include building strategic local relationships in their public relations plan, hospital executives will be able to quiet most of the voices that keep them awake at night.