Friday, September 21, 2012

The Economics of University Hospitals

UCLA is about to learn an economics lesson in revenue generation at research hospitals .  The LA Times reports that UCLA's and Cedar-Sinai are being cut out of public health insurance plans in the City of LA

"Anthem Blue Cross has eliminated doctors affiliated with the hospitals from a health plan offered to about 60,000 employees and dependents at the cash-strapped city of Los Angeles.
The city opted for Anthem's plan because it will save $7.6 million in annual premiums next year by excluding physicians from the two institutions known for tending to the Southland's rich and famous."
The article claims that UCLA doctors charge the insurance company almost double what the same patients would be charged at non-research and training hospitals.  This is the tip of the iceberg.
For years, major urban hospitals have been allow to cross-subsidize their teaching and research missing using big bills to insurance companies.  A nasty haircut is now unfolding as insurance companies face pressure to not raise premiums (think of Obama jawboning) and profit maximizing insurance companies will now play hard ball with the costly providers of health care to either lower their cost or face being dropped in the roster of covered doctors.  If UCLA has signed long term contracts with doctors guaranteeing their salary but these guys are no longer covering their salary by treating patients (because the reimburse rates are down or they have open slots as insurance companies drop UCLA) then UCLA is losing $ on its star doctors.  That wouldn't be good!   If UCLA has short term contracts with doctors, then these doctors will suffer a sharp pay cut and the stars will leave to private universities who can guarantee their pay.
So, urban hospitals such as UCLA face a fundamental revenue issue.  Private insurance reimbursement is going to fall sharply.  Such insurers will stop covering "fancy procedures" that are quite costly and use cutting edge technology.  The National Institute of Health's budget will fall sharply in 2013 and this means less grant $ and overhead money for the Medical School.  As the research hospital's costs rise and its revenue falls sharply, how will they keep going?  Can private philanthropy really fill this void?   
Perhaps the leaders believe that patents on drugs and IP can provide a flow of $ to the University. I hope that is true but this is a risky path with 99 failures for every success story.
The rest of the University could be affected by the economic decisions made by UCLA Hospital because their budget is 50% of the University's budget.  Thus, I hope that the leaders of South Campus consult with the economists and management experts at Anderson before making any major decisions.    As usual, I am willing to offer free consulting.  I have a logical mind and I can often see the future.