January 21, 2013

Hospitals facing tough choices

Vincent G. Capece Jr., CEO, Middlesex Hospital
Stephen Frayne, senior vice president of health policy , Connecticut Hospital Association

Connecticut hospitals are warning of layoffs and reductions in programs and services as they face a one-two punch of budget cuts from the state and federal governments that could cost them billions of dollars in revenue over the next decade.

Immediately, Connecticut hospitals are being hit with a $103 million cut in Medicaid funding from the state, which is trying to close a projected $415 million budget gap for the current fiscal year.

Yale-New Hospital and The Hospital of Central Connecticut are taking the largest haircuts, ceding $16.5 million and $10.4 million in Medicaid funding respectively, according to estimates from the Office of Policy and Management. Hartford Hospital ($8.1 million), Connecticut Children's Medical Center ($6.8 million), and St. Francis Hospital ($6.7 million) also face significant cuts.

The reduced funding is causing headaches for senior executives like Vincent G. Capece Jr., the CEO of Middlesex Hospital in Middletown. Capece said the state budget cuts will cost Middlesex nearly $4 million in revenue, which will wipe out about 40 percent of the hospital's budgeted bottom line in the current fiscal year.

The hospital is trying to figure out how to better streamline its operations and reduce purchasing costs so it doesn't have to resort to layoffs.

"It's not catastrophic for the hospital, but it's going to make things more difficult in terms of meeting our operating goals and the needs of patients," Capece said.

If it's a one-time hit, Capece said Middlesex Hospital can absorb the lost revenue. But what really keeps him up at night is funding cuts that loom on the horizon.

With the state facing billion-dollar budget deficits for the next two fiscal years, Gov. Dannel P. Malloy and state lawmakers could cut hospital funding even further.

Meanwhile, on the federal level, Connecticut hospitals are facing a $2.9 billion reduction in funding over the next decade as part of changes related to federal health care reform and proposed cuts being considered as part of the fiscal cliff negotiations to help close the nation's trillion-dollar deficit.

Hospital officials say the potential cuts make planning extremely difficult and pose significant challenges for an industry that has already been operating on thin margins in recent years. Most of the state's 29 acute care hospitals are nonprofit organizations but they need to maintain positive margins in order to reinvest in facilities, operations, and staff, officials said.

Typically hospitals like to have an operating margin of at least 3 to 4 percent. For the first time in many years, Connecticut hospitals saw their average operating margin creep over 3 percent in fiscal year 2011, to 3.8 percent. That's up from 2.44 percent in 2010 and 0.96 percent in 2007.

Even though hospital margins improved overall in the state in fiscal 2011, six hospitals lost money from operations including New Milford, St. Francis, Johnson Memorial, Windham, John Dempsey and Milford hospitals, according to the Office of Health Care Access.

Financial constraints and a lack of access to capital have forced many Connecticut Hospitals to seek out merger partners in recent years. Just last week, for example, St. Francis Hospital signed a letter of intent to be acquired by a for-profit Catholic health care system in Missouri and Eastern Connecticut Health Network said it is considering four proposals for a possible merger or affiliation.

Capece said Middlesex Hospital budgeted a $10 million bottom line for the current fiscal year, which would have put it at a 3 percent operating margin. With the nearly $4 million funding cut from the state, however, that wipes out about 40 percent of that cushion.

To make ends meet, Capece said the hospital will have to continue to streamline operations, which will include scrutinizing all contracts with outside vendors including medical supply and drug manufacturers and better optimizing its labor resources.

A particular challenge for hospitals is matching staffing and patient levels because of large and sometimes unpredictable volume swings.

"We are doing everything we can to streamline operations and reduce costs," Capece said. "We have a bottom line that can absorb some of this. But there are some hospitals in the state that don't have that level of cushion. If there is a second round of cuts, I think we are really going to be challenged."

Malloy spokesman Andrew Doba said although the funding cuts to hospitals "presented some tough choices for lawmakers and the Governor," the state's health care providers did benefit in recent years from increased funding as a result of changes made to the state's health care program for disabled and low income residents called the State Assisted General Assistance (SAGA) program.

SAGA was converted to the Low Income Adults (LIA) program, which allowed the state to tap into federal dollars. Doba said hospitals will receive $200 million under the LIA program this year even after the budget cuts. Hospitals received only about $71 million from SAGA.

"We recognize that many institutions around the state face their own tough decisions in the months ahead," Doba said. "But the LIA program is providing a level of funding to hospitals that was unheard of just a few years ago, funding that will grow once the Affordable Care Act is fully implemented in 2014."

Doba declined to comment on whether hospitals will face further cuts under Malloy's two-year budget plan scheduled to come out in the weeks ahead.

Stephen Frayne, senior vice president of health policy for the Connecticut Hospital Association, said the extra revenue from LIA helped hospitals, but Medicaid reimbursements still don't cover the cost of providing care to those patients.

Meanwhile, potential cuts from the federal government could pose even more of a challenge.

Connecticut hospitals could lose as much as $2.9 billion in funding over the next decade from the federal government under certain proposals being considered by Congress.

Some of those cuts are likely to move forward, including about $2.2 billion in reductions slated to take effect as a result of the Affordable Care Act. Part of the way the sweeping health care reform law is being paid for is through reductions in Medicare reimbursements to hospitals. Those cuts could total $2.2 billion in Connecticut starting this year through 2022.

Hospitals should make up for some of that lost revenue, however, by having a larger pool of insured patients as a result of the expansion of federally subsidized insurance benefits.

Meanwhile, Connecticut hospitals could lose an additional $435.7 million in Medicare reimbursement cuts under a fiscal cliff deal that Congress still has to address in the coming months.

Cuts to Medicare funding are a sore spot for Connecticut hospitals because those dollars make up about 50 percent of their total revenue, Frayne said.

The tidal wave of funding reductions could force hospitals to lay off workers or cut back on services and programs, although the CHA's Frayne said he hasn't heard of any widespread layoff plans yet.

"Hospitals are looking at the future with an understanding that the funding environment is going to be depressed," Frayne said.

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