Hospitals' 'economic crisis' is just a paper cut

April 01, 2009|By JAY HANCOCK | JAY HANCOCK,

Maryland hospitals say: We want our bailout! Not in so many words, but that's the upshot of last week's Chewbacca-like cry of anguish from the Maryland Hospital Association.

"Economic Crisis Hits Maryland Hospitals," said the official statement, launched as the association seeks to push up prices for Marylanders needing hospital treatment.

Terrible news, if true. Health and social care make up only about an eighth of the Maryland economy, but they have accounted for well over half of the state's job growth over the past five years. The medical industry is one of the few things standing between a relatively mild recession for Maryland and a full Michigan.

Fortunately, Maryland hospitals wouldn't know a real economic crisis if it showed up bleeding in their emergency rooms. Their business is OK. As their doctors sometimes do, they have over-diagnosed the problem and are probably prescribing a very expensive remedy.

"Almost as dumb as AIG" is not normally a rallying cry for businesses seeking sympathy. But this isn't a normal year, and the hospitals have evidently noticed that the biggest government handouts go to industries most burned by derivatives, swaps and other weird financial bets. The hospital association sadly notes that Maryland hospitals have booked hundreds of millions of dollars in losses on interest rate swaps.

Maybe they're just setting us up to ask for a big rate increase.

"That's exactly what they're doing," says Chet Burrell, chief executive of CareFirst BlueCross BlueShield, Maryland's biggest health insurer. He grants that hospitals are "in more distress than they've been in quite some time." But he adds, "How grave it is, I think we have to have a dose of caution about."

No kidding.

Most hospital "losses" are on paper only. In their business of treating patients, Maryland hospitals made more money in the seven months ended in January than they did in the same period a year previously, according to the state Health Services Cost Review Commission, which sets rates.

(In last week's announcement, the hospitals noted that medical profits fell from 2.4 percent last summer to 1.5 percent for the quarter ending in December. What they didn't tell you is that margins always fall at the end of the year - people don't get elective surgery during the holidays.)

Hospitals' losses are mainly a bookkeeping figment that should disappear as the economy recovers. To protect against soaring interest rates on the money they borrowed to build cancer wings and whatnot, more than a dozen Maryland hospitals signed derivatives deals with Goldman Sachs and other Wall Street wizards.

But the contracts backfired because rates have plunged instead of risen. That temporarily increased some hospitals' mortgage payments - a true decline in cash flow - and required some to post extra collateral. But because of accounting rules that haven't been around all that long, hospitals must also treat interest-rate swaps as securities and deduct declines in their much larger market value against reported income - even though those losses may never be realized. So much for Maryland hospitals' "16 percent loss" for the fourth quarter.

Short-term interest rates will not stay next to zero forever. When they rise back to normal levels, the red ink that hospitals are complaining about will disappear.

"Hospitals are not looking to be made whole for the losses that have occurred," says Carmela Coyle, chief executive of the Maryland Hospital Association. However, she adds, "This is a time of shared responsibility. It's a time of shared commitment."

Neither Coyle nor the cost review commission, which pushes for low medical inflation, would say what increase they're asking for in rates effective July 1. But the two sides are surely far apart. We'll find out more in a couple weeks.

Of course, a hospital rate increase is not really the same as an AIG bailout. But in both cases there are huge taxpayer dollars at stake, paid through Medicare and Medicaid, in hospitals' case. Every patient will pay more, thanks to Maryland's highly regulated system. What happens will also affect Maryland employers who have been getting creamed with annual increases in medical insurance premiums of more than 10 percent.

The hospitals are also mimicking Citigroup and other bailout recipients in this respect, albeit on a smaller scale: Give us more, they're saying, to make up for our own mistakes.

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