Bending the Curve:
Hospital Cost Cutting Efforts
Begin to Pay Off
AN UPDATE TO HOSPITAL COSTS IN CONTEXT REPORT
JULY 2010
Massachusetts Hospital Association
The leading voice for hospitals.
In April, 2010, the Massachusetts Hospital Association (MHA) published a report entitled,
“Hospital Costs in Context: A Transparent View of the Cost of Care.” The report revealed
detailed information on the expenses of Massachusetts hospitals and trends from FY 2004
through FY 2008. Since that report was issued, data for FY 2009 and for the second
quarter of FY 2010 have become available.
Analysis of the most recent data reveals that the hospital cost trends observed from FY 2004 to FY 2008 have
moderated substantially and in some cases reversed, in the more recent fiscal periods as hospitals have responded to
the financial crisis and recession. As shown in Chart 1 below, as a result of hospital cost management efforts, expense
reductions worth an estimated $3.1 billion will have been achieved in FY 2009 and FY 2010. Several examples of how
this reduction was achieved are provided in this report.
CHART 1: VALUE OF BENDING THE COST CURVE
Value of Bending the Cost Curve
(in $ Billions)
At the same time, payments for hospital services in those two years have been over $2.4 billion lower than they would
have been had the FY 2004 – FY 2008 trend continued.
What this report shows is that, clearly, the trend in hospital expense growth reported earlier this year has abated. For
2009 and 2010, hospital expense growth has dropped back to very moderate levels, and the change should be
acknowledged by state policy makers and insurance companies.
Massachusetts hospitals remain committed to transforming the current payment and delivery system to achieve far
greater cost efficiencies while maintaining access to continually improving quality care. But without well planned and
well executed fundamental system reform, without fair and adequate payment to cover the cost of providing care,
without access to capital to purchase health information technology and modernize outdated facilities, hospitals will
have to accelerate the closing of services and some hospitals may not survive. That means more than lost jobs and a
drag on the economy; it means more limited access to health care, and that is not good for anyone.
Massachusetts Hospital Association | 1
Dramatic decline in growth of Total Hospital Expenses
Between 2004 and 2008, total hospital operating expenses grew at an average annual rate1 of 8.6%. But between
2008 and 2009 there was a dramatic decrease (more than 65%) in the expense growth rate so that the annual
growth rate was 3.0%. The increase in total hospital expenses between 2008 and 2009 was 57% lower than the
average annual growth rate between 2004 and 20082, as shown in Chart 2 below.
CHART 2: DOLLAR CHANGE IN TOTAL EXPENSES
$ Change in Total Expenses ($’000s)
1
2
Compound Annual Growth Rate
The expense data used in this report are based hospital DHCFP-403 cost report filings and exclude the Health Safety Net assessment, the provision for bad debts, non-allowable
expenses and other operating income offsets. They differ from figures reported on the quarterly DHCFP filings which reflect hospital financial statements and include these
items. This is consistent with the methodology used in MHA’s April, 2010 MHA publication “Hospital Costs in Context: A Transparent View of the Cost of Care”, which we believe
reflects hospital expenses more appropriately at the cost center level.
2 | Bending the Curve: Hospital Cost Cutting Efforts Begin to Pay Off
Hospital Cost Control Efforts
Positions Eliminated
>M
HA surveyed its membership with 28 hospitals
responding (representing about a quarter of all
hospitals). These 28 hospitals reported 1,226
full-time equivalent positions were eliminated during
FY 2009 and another 475 positions were slated for
elimination early in FY 2010. These 1,701 jobs
included layoffs and budgeted but unfilled position
reductions.
>F
or the 28 responding hospitals (representing about
a quarter of all hospitals), the FY 2009 and FY 2010
position reductions represent 3.8% reduction in
FTEs.
>T
o ameliorate the “pain” of layoffs, a few hospitals
said they were offering early retirement packages to
employees although the funds available for shortterm pay-outs were limited.
Cuts in Compensation and Benefits
>C
hanges in compensation programs – no merit
increases, no cost of living increases, no “step”
increases other than those that are compulsory
under union contracts.
>P
ay reductions for senior management staff.
> “ No Pay” policies for snow days. Overtime
authorization practices now reflect “zero tolerance”
sentiment among some reporting hospitals. Staff is
being sent home on low volume days without
advance notice.
>H
ealth insurance benefit policies have been modified
to increase employee proportionate contributions to
both premiums and the cost of care.
>A
nnual meetings, holiday parties, service award
celebrations and most other outside events have
been cancelled and/or downsized significantly.
>R
eductions have been made in employee education,
including both attendance at work-related
conferences and tuition reimbursement.
six health centers, closure of 35 inpatient
psychiatric beds and elimination of adult addiction
programs.
>H
ours of operation have been reduced in outpatient
areas, with the hope that the cost savings will
outweigh any revenue reductions.
Other Measures
Because hospital care is such a “high touch” product,
most hospitals MHA heard from hoped to wring more
income out of improved revenue cycle management
processes and more savings out of non-wage, nonstaff-related line items.
>H
ospital respondents to the MHA survey indicated
that they have re-established their group purchasing
arrangement to refresh saving opportunities.
>P
ressure on hospitals’ purchasing staff and supply
chain managers has been intensified to produce
better prices from all vendors – from those that
deliver fresh produce to those who provide
professional IT support.
>A
number of hospitals have been educating
themselves and their staff members on process
engineering discipline through Lean and Six Sigma
programs and improvement protocols. One hospital,
however, indicated that the cost of acquiring
expertise in engineered process improvement was
not immediately affordable.
>H
ospitals have reduced non-essential discretionary
spending such as travel, conferences and food
service at hospital meetings.
Impact on Services
Sometimes, staff reductions can be scattered
throughout the hospital and the workload is absorbed
by others or accommodations are made to the output
expected. Enough staff reductions over a period of
time, however, will ultimately result in the need to
eliminate programs or services.
>O
ne hospital respondent eliminated its outpatient
behavioral health program and acknowledged that
this put its inpatient psychiatric service at risk and
that would be the next potential program excision.
>S
imilarly, another hospital reported consolidation of
Massachusetts Hospital Association | 3
TABLE 1: HOSPITAL EXPENSE CATEGORIES: ALL CATEGORIES OF
HOSPITAL EXPENSES SHOW A REVERSAL OF TREND
NON-MD SALARIES AND WAGES
% OF TOTAL
EXPENSES
46.2%
MD COMPENSATION
6.3%
FRINGE BENEFITS
10.1%
PURCHASED SERVICES (NON-PAYROLL LABOR)
7.6%
SUBTOTAL - LABOR RELATED EXPENSES
70.1%
FOOD AND FOOD SERVICE SUPPLIES
0.5%
MEDICAL SUPPLIES
1.5%
DRUGS
1.3%
OTHER SUPPLIES AND EXPENSES
17.8%
SUBTOTAL - PATIENT CARE SUPPLIES & OTHER EXPENSES
21.1%
UTILITIES AND PLANT OPERATIONS
2.1%
TOTAL DEPRECIATION AND AMORTIZATION
5.4%
INTEREST
1.3%
SUBTOTAL-UTILIITES & CAPITAL EXPENSES
TOTAL
Table 1 shows the categories of
hospital operating expenses and
the percentage of hospitals costs
they comprise based on the latest
available data. These expenses can
be broadly grouped into three
major categories: labor related
expenses, patient care supplies,
and utilities and capital expenses.
All three categories of expenses
showed a reversal of growth trend
in 2009. However, it must be noted
that controlling the rate of expense
increase involved some draconian
measures by hospitals, many of
which will be difficult to repeat in
future years and several which
cannot be sustained without
serious adverse consequences.
8.8%
100.0%
Labor Related Expenses
The rate of growth of labor related expense declined by over 42 percent in 2009 from the 2004-2008 average rate.
CHART 3: REDUCTION IN THE RATE OF GROWTH OF LABOR RELATED EXPENSES
Rate of Labor Related Expenses Growth
4 | Bending the Curve: Hospital Cost Cutting Efforts Begin to Pay Off
>N
on-MD salaries and wages were maintained by lay-offs and/or position eliminations, minimal compensation rate
adjustments, elimination of overtime and other premium pay options. Few if any new clinical programs have been
started and those that have are being staffed by re-deployment of the existing employee base. Staff cannot be
retained or replaced when policies such as these remain in place too long with an adverse impact upon access to
patient care.
>M
D compensation was moderated as hospitals put their physician recruitment activities on hold. Over an extended
period of time, this will put access to hospital care at risk, as well as the success of health reform initiatives that rely
on physician access, round-the-clock specialty and subspecialty coverage, and expansion of community-based care.
The effort to recruit physicians in order to meet the imperatives of quality, patient safety, and care management in
an era of reform have been significantly curtailed despite the fact that coverage needs have remained unfulfilled in
many communities. Many physician specialties are in short supply with competition from other states and regions — if
this trend continues; the situation will become even more critical as Massachusetts loses out to other states.
>F
ringe benefits continued to grow faster than other categories in FY 2009 despite hospitals’ alterations in health
insurance benefit programs that included establishing selected provider networks, increases in co-pays and
deductibles, and changes in employer/employee premium cost sharing. These are tough decisions for hospitals to
make; and decisions that state government and many businesses have not made even though when done
thoughtfully, they can produce significant savings while still providing excellent access to care. The fringe increases
are attributable to continuing efforts to re-fund pension trusts after significant investment losses; increased use of
COBRA insurance extension provisions; and increased enrollment as couples and families adjusted to job losses in
industries affected more severely than healthcare in the recent economic recession.
> Purchased services (non-payroll labor) growth has been scaled back as hospitals have adjusted to labor market
shortages through trade-offs and downsizing. The continued use of contract labor reflects hospitals’ efforts to
maintain flexible staffing – i.e. hospitals are paying more on a unit cost basis for the flexibility to adjust staff and
accrue savings as shift-by-shift staffing needs change.
Patient Care Supplies and Other Expenses
The rate of growth of these expenses declined by 128 percent — in fact, hospitals experienced an absolute decrease in
patient care supplies and other expenses from FY 2008 to FY 2009.
CHART 4: REDUCTION IN THE RATE OF GROWTH OF PATIENT CARE SUPPLIES AND OTHER EXPENSES
Rate of Patient Care Supplies and Expenses Growth
Massachusetts Hospital Association | 5
> Within this category, however, the expense trend for Food increased slightly and the expense trend for Drugs
increased significantly.
> I n prior periods, hospitals were able to achieve savings in drug and pharmaceutical costs through purchasing
initiatives, adoption of cost effective drug formularies, standardization of treatment protocols, and patent
expirations. More recent data indicate that the availability of new drugs, changing patient needs, and drug use
policies and indications have led to a dramatic reversal in 2009 of the trend of decreasing drug costs. For both
providers and patients, soaring drug costs are an extremely worrisome trend; and to the extent that these are driven
by the pharmaceutical industry’s relentless quest for profits at a time when hospitals are being asked to share in the
sacrifices needed for health care reform, this trend is especially disturbing.
> I n this category of expenses (patient care supplies and other expenses), where large trend reversals are evident, it is
difficult to distinguish the savings that actually occurred from reversal of prior period accruals (reserves).
Utilities and Capital Expenses
The rate of growth in this category of expenses decreased by almost 49 percent in 2008-2009, compared to the
average in 2004-2008. The expense growth rate increase in depreciation and expense growth rate decrease in
interest tell a story of “mixed blessings.”
CHART 5: RATE OF GROWTH OF UTILITIES AND CAPITAL EXPENSES
Rate of Utilization and
Capital Growth
Expenses
>T
he increase in depreciation demonstrates that contrary to the trends in prior years, some hospitals have been able
to make moderate investments in property, plant, and equipment, which had been on a path of rapid aging and
deterioration as evidenced by the fact that median age of plant in Massachusetts was 12% higher than the U.S.
median in 20081.
>T
he decrease in interest is not just a reflection of the “rock bottom” borrowing rates in both the tax-exempt and
commercial markets. It is a blaring statement that hospitals are not building in any significant way because most are
excluded from the capital markets as their financial performance does not allow them to access these markets at
affordable rates. The substantial decrease in interest expense in FY 2009 clearly shows that hospitals either cannot
or will not borrow money and are not initiating new capital projects at least for the time being.
For many hospitals, capital projects are down to the bare essentials. Buildings are continuing to age and deteriorate,
expansions are impossible, and external financing is unavailable or unaffordable. Considering the need, and in some
cases, the mandated requirements for capital improvements, not just in facilities but also in health information
technology, this is an unsustainable situation.
Preliminary data from the first half of FY 2010 shows that hospitals are continuing the trends established in FY 2009.
1
Ingenix Almanac of Hospital Financial and Operating Indicators 2010
6 | Bending the Curve: Hospital Cost Cutting Efforts Begin to Pay Off
We estimate that if the average annual expense growth rate from 2004-2008 had continued, in 2009 hospital
expenses would have been $1 billion higher, and in 2010 hospital expenses would be $2.1 billion higher. Therefore, the
total savings in 2009 and 2010 from hospital expense management efforts have exceeded $3.1 billion.
CHART 6: VALUE OF BENDING THE COST CURVE
Value of Bending the Cost Curve
(in $ Billions)
Utilization of Hospital Services
Changes in hospital utilization are key drivers of cost. When utilization increases, costs will likely increase. When
utilization decreases, an opportunity to reduce costs arises. When patient mix changes (e.g., increases in intensity or
patient acuity or migration from inpatient to outpatient settings) cost will be affected.
IN THE INPATIENT SETTING:
> I npatient discharges, which grew at an average annual rate of 0.2% between 2004 and 2008, showed a slight
increase in growth rate in 2008-2009 at 0.6%. However, inpatient days, essentially flat between 2004 and 2008,
declined by -2.7 percent in 2008-2009.
>A
s a result, hospitals were successful in reducing the inpatient length of stay by 3.3 percent in 2009, which provided
for cost saving opportunities.
>H
ospitals have devoted significant effort to improve efficiencies in inpatient care, employing LEAN and Six Sigma
tools to achieve reductions in length of stay — efforts that appear to be paying off.
TABLE 2: INPATIENT UTILIZATION
INPATIENT VOLUME 2004 – 2009
FY 2004 – FY 2008
4-YEAR AVERAGE
FY 2008
FY 2009
FY 2009 OVER FY 2008
# ANNUAL
CHANGE
% ANNUAL
CHANGE
TOTAL
TOTAL
# ANNUAL
CHANGE
% ANNUAL
CHANGE
TOTAL INPATIENT DAYS
(1,861)
-0.5%
4,119,873
4,007,190
(112,683)
-2.74%
TOTAL INPATIENT
DISCHARGES
1,893
0.22%
856,041
861,344
5,303
0.62%
AVERAGE LENGTH OF STAY
(0.01)
-0.27%
4.81
4.65
(0.16)
-3.33%
Source: MHA Analysis of D403 Cost Report Data
Massachusetts Hospital Association | 7
IN THE OUTPATIENT SETTING:
>A
s MHA reported in April, from 2004 to 2008, visits to hospital emergency departments grew at an average annual
rate of 2.0%. Similar findings were reported by the Division of Health Care Finance and Policy in its June 2010 report
“Hospital Inpatient and Emergency Department Utilization Trends Fiscal Years 2004-2008.” which showed that ED
visits increased between 1.5% and 2.4% each year between FY04 and FY08. However, in FY 2009, according to data
filed by hospitals on the DHCFP 403 cost report, the upward trend in ED visits began to change: instead of an
increase, statewide data reflect a -0.1% decrease. This is likely the result of several phenomena:
n
n
n
ospital efforts to reduce non-emergent ED visits including LEAN and Six Sigma tools.
H
The recession – loss of coverage and lower incomes, hence, less ability to pay for care.
“Buy down” in terms of insurance benefit design — Higher deductibles and higher co-pays associated with ED use
CHART 7: EMERGENCY DEPARTMENT VOLUME
Emergency Department Volume
Rate of Growth
Changes in Hospital Revenue: Hospital Cost Reductions are Accruing to Payers
Total hospital revenue growth in 2009 declined by more than 38% between 2008 and 2009, compared to the average
in 2004-2008. There was a 33% decline in the rate of growth of revenue from employment-based payers and a 42.6%
decline for government payers.
TABLE 3: CHANGE IN HOSPITAL REVENUE GROWTH
NET PATIENT SERVICE
REVENUE
4-YEAR AVERAGE
ANNUAL CHANGE
% ANNUAL CHANGE
2008-2009
FY 2009 CHANGE RATE
OVER 4-YEAR AVERAGE
CHANGE RATE
GOVERNMENT PAYERS
7.9%
4.5%
-42.6%
EMPLOYMENT-BASED
PAYERS
9.0%
6.0%
-33.4%
TOTAL — ALL PAYERS
8.4%
5.2%
-38.4%
Source: MHA Analysis of D403 Cost Report Data
8 | Bending the Curve: Hospital Cost Cutting Efforts Begin to Pay Off
Payers have shared in the savings from hospital cost control efforts
The analysis above clearly indicates that the benefits of hospital expense management efforts and cost savings are
accruing to both public and private purchasers of hospital services.
If the rate of growth of hospital revenue had continued in 2009 and 2010 at the average rate seen in 2004-2008,
provider payments from payers would have been higher by an estimated amount of $2.4 Billion.
CHART 8: SAVINGS TO PAYERS
Reduction in Revenue Growth:
Hospital Cost Savings Accure to Payers
(in $ Billions)
The changes in hospital revenue are a function of changes in payment rates and utilization of services and the latter is a
function of changes in use rates and enrollment.
HOSPITAL REVENUE FROM A PAYER
PAYER’S PAYMENT RATES FOR HOSPITAL
SERVICES OR “RATES”
USE RATES OF HOSPITAL SERVICES OR
“UTILIZATION” BY MEMBERS COVERED BY PAYER
SERVICE USE RATE PER MEMBER
NUMBER OF MEMBERS COVERED AND USING
SERVICES OR “ENROLLMENT”
Massachusetts Hospital Association | 9
Evidence on decline in employment based insurance
According to the Division of Health Care Finance and Policy’s February 2010 report: Health Care in Massachusetts: Key
Indicators, “From December 2008 to September 2009, private group enrollment declined by 2.3% as the
unemployment rate rose and individuals lost their employer-sponsored insurance.”
TABLE 4: ENROLLMENT BY INSURANCE TYPE
NUMBER OF MEMBERS (ROUNDED TO THE NEAREST 1,000): JUNE 30, 2006
Private Group
30-Jun-06
31-Dec-06
30-Jun-07
31-Dec-07
30-Jun-08
31-Dec-08
30-Jun-09
30-Sep-09
Change
Since June
30, 2006
4,333,000
4,395,000
4,433,000
4,457,000
4,467,000
4,474,000
4,413,000
4,374,000
41,000
Individual
Purchase
40,000
39,000
36,000
65,000
76,000
81,000
89,000
90,000
50,000
MassHealth
705,000
741,000
732,000
765,000
785,000
781,000
804,000
828,000
123,000
Commonwealth Care
0
18,000
80,000
158,000
176,000
163,000
177,000
150,000
150,000
5,078,000
5,193,000
5,281,000
5,445,000
5,503,000
5,499,000
5,483,000
5,442,000
364,000
Total
Members
>T
he table above is taken from the DHCFP report. Enrollment in private group insurance and individual purchased
insurance combined declined by 2.0% between December 2008 and September 2009. This enrollment decline alone
does not explain the 33% decline in the rate of growth of revenue from employment-based payers referenced earlier.
>T
he inpatient and outpatient utilization trends seen between 2008 and 2009 and described above also cannot by
themselves account for the dramatic decline in growth of revenue from employment based payers.
>C
learly, increases in payment rates have been moderated. In fact, there have been reports of flat to declining rates in
recent negotiations.
>G
overnment underpayment to health care providers is a widely known financial problem. State programs for lowincome individuals such as MassHealth and the Health Safety Net, as well as the federal Medicare program reimburse
hospitals below the cost of care in the aggregate (see sidebar below).
Already Inadequate Government Payment Rates Set to Decline Further
1.MassHealth: For 2008, MHA estimates that
hospitals were reimbursed by MassHealth at 85.8%
of cost. However, due to the state’s financial
challenges and the choices that it has made,
hospitals have experienced significant reductions in
their reimbursement rates. MHA currently
estimates that acute hospitals will be paid on
average approximately 75% of cost in FY 2010, and
will most likely experience reimbursement rates
below 70% in FY 2011.
2.Health Safety Net reimbursement is a problem for
many hospitals. The Division of Health Care Finance
and Policy reported that the Health Safety Net
reimbursed hospitals 92 percent of cost in FY 2008
and FY 2009. This percentage is greatly
overestimated because it does not reflect the
funding contributed by hospitals themselves (more
10 | Bending the Curve: Hospital Cost Cutting Efforts Begin to Pay Off
than $175 million annually), nor any funding
shortfalls which are paid entirely by hospitals and is
expected to exceed $100 million in FY 2011 alone.
3.For years, Medicare payment policy has been aimed
at lowering program costs by reducing payments to
providers – particularly acute-care hospitals. MHA
estimates that the Medicare program reimbursed
hospitals 92.7% of cost in the aggregate in FY
2008, a payment level that is projected to worsen
going forward.
Conclusion
As the FY 2009 figures show, Massachusetts hospitals have responded to the call for cost reduction by health plans,
government, and employers. However, they have done so in many cases by means and measures that will be difficult to
sustain into the future.
It is clear that the enduring solution to the societal dilemma regarding the cost of health care will be embodied in
comprehensive reform of the entire healthcare system, not in strangling hospitals, not in superficial rate limitations,
and not through creative budgeting and short-term, short-sighted, stop-gap measures.
Data Sources and methodology:
Unless otherwise stated, the source of the data used in the report is the Division of Health Care Finance and Policy-403 Hospital Statement of Costs, Revenues and Statistics
(DHCFP-403 cost reports) , a detailed cost report that each Massachusetts-based hospital is required to submit to the Division of Health Care Finance and Policy (DHCFP) each year.
For the purposes of this paper, the average annual growth rate used is the compound average annual growth rate.
Massachusetts Hospital Association | 11
NOTES
12 | Bending the Curve: Hospital Cost Cutting Efforts Begin to Pay Off
Massachusetts Hospital Association | 13
Massachusetts Hospital Association
The leading voice for hospitals.
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