What Hospitals Can Do About The Underfinancing Of Hospital Service
Robert M. Sigmond
Ever since the advent of scientific medicine, the author states, hospitals have been underfinanced. Throughout this period, however, he points out, concepts of underfinancing have changed. The author
traces these concepts and suggests a new emphasis including a program for hospitals in the current
period of hospital finance.
Prior to World War II, a hospital's underfinancing problem centered around its financial deficit.
The implications of this situation were that (1) a hospital necessarily had to provide the very best
of service to all patients in need of care; (2) these service requirements determined the hospital's
costs; (3) after the hospital had collected as much as humanely possible from patients and "third parties,"
an inevitable financial deficit remained to be made up by the community through philanthropy and government grants. The indicated program for the hospital was difficult but clear cut: raise the money to meet the deficit.
The report of the Commission on Hospital Care in 1947 provided the first indication of the inadequacy of a "meet the financial deficit" approach to underfinancing.1 This report outlined the broad service program that hospitals should make available, and suggested that the real hospital deficit was in the provision of needed services.
Seven years later in 1954, the Commission on Financing of Hospital Care presented factual analysis that showed the romantic quality of the "meet the deficit" approach and suggested a more realistic answer.2
THE SERVICE DEFICIT
These
studies demonstrated that there is an inevitable gap between
what medical science makes possible and what any hospital
offers to its patients. As new medical discoveries are translated
into new equipment and new kinds of skilled personnel to provide
additional expensive services, there is a necessary and inevitable
timelag between each discovery and its availability in most
hospitals. The CFHC found that as hospitals continuously attempted
to narrow the gap between potential and actual service, the
costs of hospital care went up.
The underlying reason for the rise in hospital costs, after
allowance for inflation and improved salary levels was found
to be this steady broadening of the scope of hospital service
resulting from advances in
medical science.
Some hospitals had comprehensive relatively up-to-date programs
of service. These had the highest costs. Other hospitals did
not make available many services needed by acutely ill patients.
These generally had lower costs. In both groups, most hospitals
did not have financial deficits. Almost all of the hospitals,
however, had some measurable service deficits.
Studies by the CFHC suggested that a hospital's expenses and
service program and therefore its service deficit, were largely
determined by the availability of income. This is the reverse
of the previous concept of
a financial deficit resulting from shortage of income.
In most cases, hospital financial deficits represented minor
or major errors in projecting anticipated income and expense.
Rarely did they reflect a stubborn determination to offer
a level of service that threatened bankruptcy for the institution.
NEED FOR PUBLIC EDUCATION
What were the implications of this analysis? Primarily,
it suggested the need for a much greater degree of public
understanding of the nature of optimum hospital service and
of its costs. The public must be educated to accept rising
costs in most hospitals as a reflection of ever better service.
They must be helped to understand that failure to provide
sufficient funds will not usually mean a financial deficit.
Much worse, it will probably mean provision of less than first-class
service.
To encourage broadening the scope of hospital services the
CFHC recommended that hospitals be assured of adequate income
through (1) support and encouragement of comprehensive voluntary
prepayment and (2) government reimbursement programs for the
indigent. At the same time, the Commission outlined a program
for control of hospital costs to assure efficient use of every
dollar spent.
HESITANT HOSPITAL'S HAMPER PLAN
After the CFHC report was presented, prepayment continued
to grow rapidly and reimbursement programs for indigent care
became somewhat less inadequate. Hospitals, however, were
slow to develop a positive approach to rising costs. They
hesitated to emphasize service deficits rather than financial
deficits. There was concern that public confidence might be
destroyed by knowledge that hospital service programs do not
always measure up to the best available, and that philanthropic
giving would decline if it became known that hospitals usually
don't have deficits.
Nevertheless, it is my opinion that the public is eager for
knowledge on the need for improvement of hospital services,
and can find it more exciting to help overcome service deficits
than financial deficits.
Recent efforts to increase public understanding of the interdependence
of hospital income, service, and expense have been seriously
hampered by the continuing rapid rise in hospital costs. Despite
the best explanations of the desirability of rising costs
and of the increasing efficiency of hospital management, the
public today reacts favorably to statements from responsible
and irresponsible sources that hospitals are poorly managed
and are indifferent to the burden of hospital costs on the
individual.
Why have hospitals not been more successful in convincing
the public that they operate efficiently
and in the public interest?
First,
the public does not know enough about the extent of hospitals'
efforts to control costs. Most hospital administrators who
spend nearly all their working hours controlling costs find
it almost impossible to understand that the public may suspect
hospitals of inefficiency and waste of money.
The
story of hospitals' efforts to control costs must not be thought
of as merely "shop talk." The details
must be told to the public over and over again, just as the
necessity for higher hospital costs must be repeatedly explained.
The
second reason why hospitals have not been able to convince
the public of the efficiency of hospital service is that most
of the public is not interested primarily in the institution's
costs, nor even in the cost to the average patient served,
but rather in their own out-of-pocket cost. This out-of-pocket
cost is reflected today most commonly in the cost of a monthly
prepayment premium. This premium is payable regularly in sickness
and in health, and is usually paid by individuals who are
not in immediate need of hospitalization.
In
a comprehensive community oriented prepayment program, the
premium reflects the average monthly cost of the community's
basic health program. It is this cost that concerns the public.
It is this cost around which hospitals must center their attention.
DIAGNOSIS
OF AN INSTITUTIONAL AILMENT
The
magnificent Ford Foundation grant to hospitals of $200 million
was based upon a clear understanding
of the true nature of underfinancing. The Ford Foundation's
report, The Difference It Makes, states:
"It
is easy to see why most voluntary hospitals are afflicted
with an institutional ailment known among trustees and administrators
as 'chronic under-financing'. The symptoms do not always show
up in red ink. In fact, most voluntary hospitals manage to
balance their books. Usually, though, hospital income from
payments and gifts is barely enough to meet current operating
expenses, and there is no money for adding or replacing facilities.
The result is a deficit in hospital services.
"How large and how significant has the deficit
been?"
"A study of 1400 nonprofit community hospitals by an
independent citizens' commission, operating under American
Hospital Association auspices, reported in 1954 a serious
lack of facilities: fewer than half of all short-term, nonprofit
hospitals provided more than ten of nineteen selected services
. . . The point is not that a hospital must offer all nineteen
services or be rated inadequate. The survey simply revealed,
rather impressively, but not surprisingly, that facilities
frequently fall short of the ideal.
"There isn't a hospital administrator in the country
who doesn't have in his desk drawer a list of urgently needed
equipment and personnel . . ."
SHIFT IN EMPHASIS INDICATED
In this current period, it is not enough for hospital
representatives to be concerned with control of costs of their
individual hospital's existing service program. They must
also demonstrate primary concern with their hospitals' role
in the broader program of control of the community's total
costs of providing high quality hospital medical services.
It is no longer possible or desirable for hospitals to concentrate
exclusively on attempts to identify the public with the needs
and financial problems of each hospital. Rather, each hospital
must give major attention to identifying its own program with
the needs and financial problems of the public.
Pending this shift in emphasis, hospitals may expect a continuation
of calls for more public representation on Blue Cross boards
to "deal at arms length" with hospitals, and a continuation
of proposals for government control of hospital costs and
charges. Pending this shift in emphasis, complaints about
the "high" costs of hospital care will receive a
popular response no matter how well hospital representatives
demonstrate their efficiency and the value of their services.
WHAT EACH HOSPITAL SHOULD DO
Specifically,
what should an individual hospital do to meet this situation?
First, it should thoroughly review its service program and
plan indicated revision of it so that the hospital may be
sure that it is efficiently providing health services that
are really needed and that are not otherwise provided. The
hospital should also review and revise its public relations
program, but this should follow not precede the recasting
of the
service program.
An
excellent guide for a review of a hospital's service program
is provided by the report of the Commission on Financing of
Hospital Care (as outlined briefly on pages 41-44 of the summary
report).
Five
major items require emphasis in any such program review:
1.
Elimination of duplication of services among community hospitals.
Certain expensive facilities may
be eliminated entirely in some hospitals by concentrating
these services efficiently in a fewer number
| of hospitals. Admittedly, any proposal to accomplish this
objective requires the development of new
and extremely difficult relationships among the medical and
administrative staffs of different hospitals. Nevertheless,
the public will not believe that these relationships cannot
be devised, especially in the
absence of evidence that an honest attempt has been made.
Efforts at regional coordination must
be intensified.
2.
Elimination of community health service gaps through increased
utilization of the hospital.s expensive specialized facilities,
personnel and organization. Opportunities for unit cost reduction
by increased utilization include new services for the chronically
ill such as rehabilitation programs, service to nursing home
patients, and organized home care programs; new services for
the mentally ill; and preventive services including screening
and health education programs. Addition of these services
by selected hospitals will lead to greatest economy in provision
of comprehensive health services for the community. Here again,
however, extremely difficult area-wide coordination of effort
is required among hospitals and between hospitals and other
health agencies.
3.
Expansion and improvement of outpatient services in order
to reduce unit costs of providing specialized services and
to reduce the need for use of expensive and nonproductive
inpatient bed and board facilities.
4.
Elimination of any ineffective or "excessive" use
of inpatient facilities by closer integration of physicians
within the medical staff structure of the hospital and closer
identification of physicians with the hospital and its program.
Paul M. Densen's important study, recently published by the
American Hospital Association, suggests that organization
of group-practice units might lead to significant savings
by reduction of inpatient utilization.3 If this is so, the
impact would probably be greatest where the group practice
units were located at and organized in the hospital, as recently
forecast by Julian P. Price, M.D.4
In
any event, medical staffs should be encouraged to explore
the feasibility of various mechanisms designed to promote
effective use of hospital facilities and services, including
admission review committees and medical economic audit committees.
5.
Increase in hospital bed occupancy by reduction in number
of beds available. In Michigan during 1956, for example, there
was an average of over 5000 empty hospital beds throughout
the year, or about one empty bed for every three in use. Conversion
of much of this bed space to badly needed outpatient facilities
could produce significant economies. Reduction in bed capacity
might provide real opportunities for conservation of nursing
personnel and improvement of quality of care by stabilization
of the inpatient workload. With rising hospital costs, the
public is probably more ready than many might believe to accept
planned waiting lists for elective cases, and possible inconveniences
of tighter scheduling of admissions and discharges.
These
five suggestions elimination of duplication, elimination of
health service gaps, expansion of outpatient service, elimination
of any excessive utilization, and increased bed occupancy
by reduction in bed complement are only illustrative of the
elements of a thorough review of any hospital's program that
is indicated by the current public concern about rising costs.
This
suggested review and revision of the hospital's service program
should tend to hasten the transformation of the hospital from
an efficient institution for the care of acutely ill bed patients
to an even more efficient center of community health activities,
a role originally projected for the hospital by the Commission
on Hospital Care.
NEW
RESPONSIBILITIES FOR ALL
This change in the role of the hospital requires
dynamic changes in the responsibilities of the three major
elements of the hospital: the board of trustees, the medical
staff and the administrator.
The trustee has traditionally viewed his position on a hospital
board as an opportunity for community service by providing
responsible leadership and guidance in the management of the
hospital's institutional program. Today, the hospital trustee
must increasingly assume the role of representative of broad
public interest as contrasted with special institutional interest.
The trustee is in a unique position to ensure that the hospital
reflects the needs of the public. As a nonprofessional in
the hospital field, he can be more objective than the hospital's
administrative or professional staffs in evaluating the extent
to which the hospital is responsive to public needs. Intimately
familiar with the inner workings of the hospital, his influence
may be more constructive than that of other representatives
of the public not directly associated with the hospital.
If the hospital trustee does not assume the responsibilities
of a representative of the public, this role will inevitably
be given by society to Blue Cross, state insurance departments,
health departments or other branches of the state or federal
government.
The medical staff will need to recognize that the public's
demand for economical quality care in a period of advancing
medical science and advancing costs requires an even closer
working relationship with the hospital. This is a time for
less attention to outmoded legal fictions for artificially
separating medical and hospital services, and more attention
to invention of mechanisms for closer integration of an independent
medical profession with the community's basic health agencies.
The hospital administrator will need to be as concerned with
community organization and professional coordination as with
institutional management. He will tend to spend more time
outside of the hospital and will require additional trained
assistants. Within the hospital, he will find that the medical
record department, rather than the accounting office alone
provides the basic facts for control of the costs of the
hospital's program.
EXPANSION
OF HOSPITAL COUNCILS
The
suggested new emphasis in hospital service and cost control
programs will require a great acceleration in group action
among hospitals. Metropolitan and regional hospital councils
can be encouraged to develop coordinated activities to help
achieve the five-point program outlined above. Acceptance
by individual hospitals of such voluntarily developed hospital
coordination programs even at the expense of some cherished
"prerogatives" is the only alternative to compliance
with ever more specific
government regulations.
In
summary, hospitals have been and still are underfinanced.
As hospitals have gradually become basic public service institutions,
the solution to underfinancing of the individual hospital
has shifted from an emphasis on meeting the financial deficit
to an effort to demonstrate that hospital service is efficiently
provided and that rising costs are in the public interest.
Today, the current situation calls for re-evaluation
and recasting of hospitals' service programs to assure that
they are properly related with other community agencies to
the needs of the public for comprehensive, efficient, high
quality health services.
The
cost of comprehensive health services will inevitably continue
to rise. As costs rise, the time available
to voluntary hospitals to retain leadership in the reorganization
of hospital service programs grows shorter and shorter.
AN
EDITORIAL FROM HOSPITALS
He points out that the studies of the Commission
on Financing of Hospital Care suggests that "a hospital's
expenses and service program and therefore its service deficit
were largely determined by the availability of income. This
is the reverse of the previous concept of a financial deficit
resulting from shortage of income."
He argues, validly we believe, that "the public must
be educated to accept rising costs in most hospitals as a
reflection of ever better service. They must be helped to
understand that failure to provide sufficient funds will not
usually mean a financial deficit. Much worse, it will probably
mean provision of less than
first-class services."
We have to tell the cost story. But we must tell it in a framework
of health services. Mr. Sigmond contends that the public can
"find it more exciting to overcome service deficits than
financial deficits."
Hospitals must continue their efforts to keep costs as low
as they can in relation to the services they render. They
must demonstrate, again and again, that they are doing that.
They must destroy the shibboleth of the inefficiently managed
hospital.
More importantly, they must encourage public understanding
of what the hospital could be doing for the public if the
public will underwrite the costs. Indeed, our attack is on
the service deficit rather than
financial deficit.
A welcome reaction to the telling of the hospital story would
be: "I don't see how you can give us so much and yet
charge us so little" or, even better, "why don.t
you charge us more and give us more."
We know of no cost-beleaguered administrator whose life has
been made happier by such a comment. And the fault lies to
some extent with all of us. Service underlies cost but when
we talk about costs we usually embark into an elaborate explanation
of them instead of putting the horse before the cart and detailing
hospital services. We talk, as Robert M. Sigmond says in this
issue of our Journal (page 34), of financial deficits rather
than service deficits.
REFERENCES
1.
Commission on Hospital Care. Hospital Care in the United States.
New York.
The Commonwealth Fund, 1947.
2.
Common Financing of Hospital Care. Financing Hospital Care
in the United States. (three volumes). New York, Blakiston
Company, Inc., 1954.
3.
Densen, P. M., Balamuth, E., and Shapiro, S. Prepaid Medical
Care and Hospital Utilization. Chicago, American Hospital
Association, 1958.
4.
Price, J. P. The health of the nation HOSPITALS, J.A.H.A.
32:48 Jan. 1, 1958.
Robert
M. Sigmond is executive director, Hospital Council of Western
Pennsylvania, Pittsburgh. This material is adapted from a
speech presented at the 39th Annual Convention of the Michigan
Hospital Association, Mackinac Island, June 1958.