Cost and competition: Corridors hospitals work to attract patients

July 16--CEDAR RAPIDS -- There's a lot to juggle when it comes to a hospital budget: Industry shifts from inpatient surgeries to outpatient surgeries, the continued payment challenges from the state's move to Medicaid managed care, sequestration cuts to Medicare reimbursements.

And while there are cuts coming from so many sides, hospitals also must recruit and retain top-notch staff and upgrade technology to compete for patients.

"That puts pressure on us to constantly improve our cost structure," said Nathan Van Genderen, chief financial officer for Mercy Medical Center in Cedar Rapids.

"We go from setting a budget for a fiscal year immediately into a financial performance improvement process. I think that's just health care in general for the foreseeable future," he said.

Even still, the hospital recently had its A rating reaffirmed by Standard & Poor's, one of the three big ratings agencies, in May. The ratings agency said the hospital had a solid balance sheet and economically sound service area demographics.

"Why should something like this matter to patients?" Van Genderen said. "A hospital is a community asset and you want to make sure it's being managed well. If a system is downgraded over several years, that means it is dealing with enormous financial pressures and can't spend money on talent and treatment -- resources you need to deliver high-quality care that patients expect."

But competition is strong between Mercy and UnityPoint Health-St. Luke's Hospital, with neither hospital securing a dominant market share, S & P wrote. Mercy "has a market share of about 50 percent in certain specialties, such as adult-only medical/surgical, inpatient surgery, and adult emergency room visits."

"Most independent physicians in Cedar Rapids admit to both hospitals, and (Physicians' Clinic of Iowa) has been aggressively expanding its clinical capabilities, PCI opened an ambulatory surgery center midway between Mercy and St. Luke's and, more recently, significantly expanded its oncology capabilities," according to the S & P rating.

The three dominant medical entities in town are working hard to compete for patients -- this fall, Mercy will add open-heart surgery to its list of services, while just a few years ago St. Luke's purchased equipment to offer radiation therapy.

Mercy also is working to expand its ambulatory care -- or outpatient services -- opening a new center in Hiawatha this week on Boyson Road. The three-story medical park soon will offer outpatient optometry surgeries on the third floor, with Wolfe Eye Clinic renting the second floor space and urgent care and retail pharmacy services on the first floor.

The first floor will not be complete until the end of 2017.

The 60,000-square-foot building has 11 pre-op and post-op rooms and two operating rooms on the third floor, but there is plenty of opportunity to expand, said Penny Glanz, the hospital's vice president of outpatient operations.

"We're focusing on eye surgery now," Glanz said. "If we build more operating rooms, that could allow for more procedures."

The hospital views moves like this as essential in keeping its finances stable as it deals with shifts in the industry from inpatient to outpatient. Over the next 10 years, inpatient surgeries are forecast to fall four percent nationally while outpatient surgeries grow by 23 percent, according to research presented to Mercy earlier this summer by Illinois-based health care consultant Sg2.

Those shifts already are beginning to reveal themselves -- according to the S & P report, inpatient surgeries have stayed relatively flat over the past several fiscal years, hovering around 3,500, while outpatient surgeries have steadily ticked up, from 14,900 in 2014 to more than 15,400 in 2016.

In the first nine months, the hospital already had completed nearly 12,000 outpatient surgeries, according to the S & P report.

This rise reflects a number of trends, Mercy administrators said, including improvements in technology and technique, changing patient preferences and a desire for insurance companies to better control costs.

"The heads in beds -- or the number of people we're serving in the tower -- isn't going down. It's just shifting from inpatient to observation volume," CFO Van Genderen said. "The same patients are coming to us, maybe actually an increase in volume overall. It's just the insurance companies, where historically they have said, 'Yes, we'll pay that as an inpatient stay,' are now waving the magic wand and saying we're going to pay that one as observation."

That adds up -- observation stay reimbursements are only 25 percent to 30 percent of what an average inpatient stay would be, Van Genderen said. That's despite patients receiving the same services and level of care if they were admitted as an inpatient.

"It's all about cost control from the government of the insurers' perspective," said Dr. Tim Quinn, Mercy chief of clinical operations. "Because if they put pressure on the caregivers, then that's going to translate into lower costs."

A good deal of these observation pressures are coming from the state's Medicaid insurers. In April 2016, the state handed over its nearly $5 billion Medicaid program to three private insurers. The insurers each posted a loss of more than $100 million in their first year of operation, and many of the state's Medicaid providers have believed those financial problems have trickled down to them.

Mercy has seen its Medicaid population double from 6.6 percent to 12 percent since the 2014 expansion of the program, which gave government-funded insurance to an additional 140,000 low-income Iowans.

The Medicaid insurers deny first and make you fight for payments, Mercy officials said, saying reimbursements have been inaccurate or late, with some payments delayed by as much as 180 days.

To deal with these financial pressures, the hospital looks for its own cost-containment strategies, such as joining an aggregated purchasing group. Because Mercy is an independent hospital and not part of a larger health care system, it works with other hospitals to negotiate better prices and purchase supplies from vendors.

The hospital is one of 170 hospitals from across the Midwest that are part of the purchasing agreement, collectively spending $9 billion. That gives Mercy and the other organizations far more power to bring down prices than if it were buying those same supplies on its own.

Strategies such as that help the hospital spend money on staff and wage increases, which officials say is key to the overall success of the hospital.

"We need good people, and we have to pay them what their worth and not stretch them until you burn them out," Van Genderen said.

l Comments: (319) 398-8331; chelsea.keenan@thegazette.com

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