Hospital CEOs At Nexus Of Fight Over Federal Budget Deficits, Fiscal Survival

America’s hospital Chief Executive Officers are going to be asked to do something that will be exceedingly difficult and very unfair.

This request is based on a national economic necessity. Some fiscal conservatives would argue that it is a national security imperative.

America’s hospital CEOs, who run what management guru the late Peter Drucker described as among the most complex of all businesses, must dramatically reduce their operating costs to below Medicare’s current rates. If hospitals are to survive, CEOs and their employees must operate with much less money, not more, for every Medicare admission.

Since health insurance companies usually base their payments on Medicare rates, they, too, will work to reduce what they will pay hospitals. In other words, the anticipated reductions in Medicare spending could produce a cascading effect with financially crippling consequences.

Why are we asking hospital CEOs to make these potentially career-threatening decisions?

Because America is going broke and Medicare spending – driven by this nation’s high healthcare costs – has emerged front and center in the battle to control our country’s deficit spending. Our growing national debt has become a virulent form of cancer that is spreading so fast that we must begin today to treat the problem if we want to preserve this nation and our way of life for our children and grandchildren.

In all likelihood these cuts in Medicare reimbursement will come regardless of what happens on Capitol Hill and at the White House.

Why is it unfair to ask hospital CEOs to make these dramatic and in some cases draconian expense reductions? Because it may not be possible for them to achieve meaningful reductions that are necessary to reduce healthcare costs. As a Chicago healthcare executive put it: “America’s healthcare system is built around a post-war hospital-centered model with clinical and operational processes that cannot yield the level of savings that we will need to save this country from a Medicare-induced bankruptcy.”

Ironically, hospital CEOs will be forced to make these tough decisions at a time when everyone – from the hospital industry itself, insurers and pharmaceutical companies, to physicians, patients, employees and community stakeholders all want more, not less. There are some notable public statements regarding cooperation to reduce costs, but the lobbyists are hard at work to protect their respective clients.

Our current healthcare reform debate has become part of a larger contentious dispute spurred on by the Great Recession and the government’s role in solving the problem: America’s long reliance on deficit spending – from the federal government down to individual households. At the federal level we look for investors like the Chinese government to buy our debt. At the household level, we look to the banks and credit cards to fund our desire or need to live beyond our means, or just to live.

This crisis is compounded by our loss of national will to make hard choices, our diminished collective discipline, and a profound loss of appetite for shared sacrifice to achieve a greater good.

The biggest threat to this nation, says former Comptroller of the Public Accounts David Walker, is not some terrorist hiding in a cave on the Afghan-Pakistani border, but our government’s deficit spending. We have gone from budget surpluses in the Clinton Administration to record deficits and exploding debt, he says. Lest we begin pointing the political finger, the record shows that deficit spending has become a true bipartisan habit, an addiction that we must control if we want to prevent Chinese from becoming our second language.

Sen. Max Baucus’ reform bill may help reduce the budget deficit by $50 billion over the next 10 years, but that is only a drop in the bucket when you look at what Medicare’s unfunded liabilities will be within 20 years. Beginning in two years, and for the next 20 years thereafter, more than 78 million Baby Boomers will become eligible for Medicare coverage at a time when there will be fewer wage earners to pay for their care. At the current rate of healthcare spending, there will be a staggering unfunded Medicare liability.

Yet, Republicans and Democrats keep approving new spending that we cannot afford.

Hospitals are the biggest beneficiaries of Medicare payments. Many hospital CEOs are making the argument that currrent Medicare reimbursement is not covering their costs, that their organizations need higher reimbursement, not less. The practical economic reality is that while there may be some marginal adjustments on a DRG basis, overall, hospitals are going to get less money for Medicare cases – over time substantially less. As the ranks of the Medicare population swell, and government payments for their care becomes a bigger part of a hospital’s revenue, the only way hospital CEOs can save their organizations will be to reduce operating expenses to levels below what Medicare pays them for each admission.

This will be very hard, if not impossible in some cases. More and more hospitals are developing financial cost accounting and revenue modeling systems to monitor the impact that shrinking payments from the government will have on their financial health. For many large tertiary care medical center hospitals, their analysis of the proposed Medicare cuts have produced alarming forecasts – big losses unless they undergo a major, painful restructuring.

There are no easy solutions this time around. There is no room to kick the can down the road unless we are willing to say that we do not care what happens to our country and our healthcare industry. However, when the hospital CEOs start making these hard decisions, and when these decisions impact staff, unions, vendors and, most especially the physicians and their patients, there will much yelling and screaming. And finger pointing. Far too many CEOs will be blamed for trying to resolve a crisis which they did not create and over which they have less control than they would otherwise want to admit.

There is not a hospital CEO in this country who wants to be put in this very bad place – at the nexus of our national fiscal survival.

John G. Self is Chairman and Senior Client Advisor of JohnMarch Partners. He is a Co-Founder of the Firm.

You can contact Mr. Self at 214.220.1234 or JGSelf@johnmarch.com. He is an active member of Linked In and a frequent editorial contributor. Or you can follow him on Twitter at Self_JohnMarch.

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