Despite praise,state's cost-control efforts unable to restraint hospitals' inefficiency

May 20, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

For a decade, the managers of Baltimore's Harbor Hospita Center have turned to the latest medical fads to attract patients: The most powerful imaging machine. Occupational therapy clinics. Free mammograms.

It didn't work. The seventh floor was rented out in 1985. The fifth floor and parts of the third are next. With fewer than 60 percent of its beds occupied and in search of revenues, Harbor now is trying its hand at real estate development.

Harbor demonstrates the plight of many hospitals across the country, caught in a price squeeze and strug- gling to compete as the traditional role of general hospitals is being challenged by more efficient specialty outpatient centers. In the past few years, Harbor has spent millions of dollars on high-tech equipment and satellite sites to lure new patients, only to see costs skyrocket, patients go elsewhere and red ink on its operating budget.

As the Clinton administration moves toward health care reform, it is examining the role of hospitals and the nation's huge hospital bill -- 40 percent of overall health spending. The federal task force led by Hillary Rodham Clinton is considering price controls and regulatory solutions and has looked to Maryland as a model because it has a unique system of setting rates for Harbor and 51 other acute-care hospitals.

Regulators claim that their system has made a dramatic difference here, controlling costs so that they increase at a fraction of the national average. Maryland hospitals also have the lowest markup -- 14 percent profit compared with a national average of 53 percent.

But some critics say that Maryland's regulations are not tough enough, raising questions about why hospitals like Harbor are still in business.

The system might not have done enough to encourage doctors and hospitals to treat patients more efficiently over the years. A recently published article in The New England Journal of Medicine shows that Baltimore's hospital admission rate is 21 percent above the national average and that, once in the hospital, patients undergo more procedures -- 11 percent more than the average. Medicare payments per admission were 10 percent higher than the national average, according to the study, which is based on 3-year-old data.

And Maryland just might have too many hospitals. The occupancy rate for the state's hospitals as of June 30, 1992, was 69.8 percent. Maryland could save as much as $88 million annually if its hospitals operated at capacity, a move that would require closing enough hospitals to eliminate 2,000 beds, but the system doesn't encourage it. Only two hospitals have closed in recent years, and two more are about to open.

Even though Harbor has a lot of empty beds and is ranked among the least efficient of Maryland hospitals, Harbor officials don't question that their facility should survive. In addition to providing health care for a poor and aging population, they argue, Harbor is an economic development catalyst for South Baltimore. "Hospitals are not just inpatient facilities," L. Barney Johnson, Harbor's president, said in a recent interview.

Bottom line is rates

The goal of the Maryland hospital regulatory system is three-fold: to insure hospitals are efficient, make money and care for the poor. A state panel appointed by the governor, the Health Services Cost Review Commission, looks into a hospital's costs, decides how much it must charge for certain procedures, and adjusts it for inflation annually.

John M. Colmers, executive director of the hospital cost review commission, believes Maryland's regulatory system has been highly effective, saying the ability of Maryland hospitals to earn profits while caring for the uninsured and keeping down costs shows the system is working. Still, he says, "We've got a long way to go."

Under the cost review system, it doesn't matter what a hospital spends. Regulators are not concerned, for example, about what a hospital pays its chief executive (the salary for Harbor's chief executive officer tripled in a decade, to $240,000) or whether it buys too many fancy machines, loses millions on a bad investment or gives business to friends.

Instead, what regulators focus on is whether the average charge for an appendectomy or a session with the physical therapist is reasonable for that hospital. Rates are supposed to cover costs, including those for the uninsured, whose bills are picked up by apportioning them out to all patients at that hospital. A hospital that cuts its costs below the specific rate established for it by regulators gets to keep the difference -- that is its profit.

But there's a loophole: the cost commission doesn't look at what revenues hospitals generate. As more and more hospitals earn money from unregulated side businesses, they can be making profits that aren't considered in deciding a hospital's overall costs.

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