The Healthcare Breakdown No. 030 - Breaking down why health systems are such cry babies
Brought to you by the oldest grift in the book
What we’re breaking down: Why health systems are always talking about how broke they are
Why it matters: It’s a huge driver of ever rising healthcare costs
Read time: How long it takes your 5-year-old to answer the question, “what do you want for breakfast?” IYKYK (5 minutes for real though)
Missed you too.
Now that the sappy stuff is out of the way, let’s address the elephant in the room. Well, maybe not THE elephant, but definitely AN elephant.
Why would a health system want to look like it’s making less money than it is?
For any for-profit business, it totally makes sense. Lower your tax burden. The less profit, the less you owe in taxes.
Interruption! Healthcare needs a revolution. It needs you. Don’t let numbers and finance be the thing that stops you.
Healthcare Breakdown - The Finance Course! will show you how to read and understand financials like a pro, build financial models, and go toe-to-toe with any CFO.
In an afternoon.
There’s templates, jokes, and all kinds of good stuff in there.
Stop avoiding finance. It’s cool.
But, we’re talking about non-profit hospitals. They already don’t pay taxes. Which is a whole different game of, “I feeling like I’m taking crazy pills.”
So, if they don’t pay taxes, then why, please lord, why do they keep yelling about all this money they seemingly don’t have?
Let me ask you another question, are you going to give a dollar to the guy with no shoes in winter or the guy with Uggs on?
Well, that may be a bad example, the dude with Uggs probably needs help too. But for totally unrelated fashion reasons.
Welcome to the oldest grift in the book.
The sympathy play.
Make it look bad, people will feel bad for you. It applies to companies as well.
Here’s how this terrible metaphor plays out for health systems:
When you see this…
You feel bad. Even the most soulless, heartless, chortling insurance executive feels a little bad. Or at least on some subconscious level they, the insurance lad, give a modicum of extra credence to the bulldog sitting across from them negotiating hard for payment increases.
I mean, it’s impossible to carry on like they have. Did you see the recent Kaufman Hall report? We’re losing our shirts. We are lucky if we break even. We may shut down, then your customers have one less place to get their care. I don’t want to be in this position, but we have no choice. We are trying to do our best for the community.
Funnily enough, if you listen to these discussions closely, you can often hear a tiny violin playing in the background. It’s usually drowned out by the irony, but it’s still there.
Here’s the deal in health systems. There’s this thing called Payor Mix. While the term “Payor” is horse phooey (they don’t pay for anything, they process your money), it is still critical to operations.
Let’s look at two examples.
Here’s one hospital with one helluva processor mix:
Here’s another with one helluva processor mix. Just in the other direction….
Why does this matter? Well, so glad you asked.
Firstly, here are the pertinent financials for both processor mixes we just looked at above:
Now take into consideration the volume differences of these two systems.
Vail Health’s flagship hospital is 56 beds.
DCH runs a total of 848 acute hospital beds and 122 long term care beds.
The revenue difference is $133M. 32%.
That’s what processor mix (and service line focus) does to you.
You probably know this, but on the best day, the best hospitals will break even on Medicare payments. And if you think about it, they should. Medicare determines what it will pay in an effort to allow people to get care through funding care sites and to contain costs.
So, good day, break even. Bad day, losing about 9%.
Not gonna lie, it’s hard to run on negative margin. It’s extra hard when you’re used to making up that shortfall by hitting the charge master like a slot machine that always cashed out.
How you ask? Private insurers pay anywhere from 100% to over 300% more than Medicare for certain services and care settings.
Hold up, why would insurers do that? None of this makes sense.
No it does not. Until you remember that insurance companies are just processors. They aint paying dookie. The rest of us foot the bill. They process and collect management fees.
When health system rates go up, our premiums don’t stay the same, they too, go up. Which is all well and good because, that’s revenue growth for the processor.
Processors don’t have to do anything at all except let hospitals charge them way more than they should.
Win-win, in the worst way.
It’s in the processors best interest to have healthcare be more expensive. Do you want to own stock in a company doing $324B or $324M?
It is also how the processors make their margin. The higher charge from the hospital, the more they get a cut after their 85% medical loss ratio.
So, as crazy backwards bananas as it sounds, the processors love a good Medicare underpayment. Oh, they also make lots of money on administering and processing Medicare plans too.
Let’s step back to why it behooves a health system to let everyone and their sister run around screaming that the sky is falling.
Because they know, as they have always done, it helps them at the negotiation table with processors. And for the most part, the processors put on a good show, but just plan to pass the buck to you anyways.
It also allows them to go to the government and ask for more money. Through Medicare reimbursement and through other funding mechanisms. The government only hands out money to people who need… wait, sorry, that’s not a real sentence.
Anyways, it lets them ask the government for more. It’s their proof. Not that anyone asks they’re so bad at managing money, but that’s another ball of wax.
It’s all a dance, where ultimately, we lose. 4.3 trillion times.
The take away here, other than being super sad now, sorry by the way… Hey, at least we can all read headlines about Taylor Swift and Travis Kelce after the game today. The takeaway is there is a reason health systems cry poor. Two actually.
(1) They hate welfare for you and love it for themselves. Free government money is always on the menu.
(2) They also use it as a bargaining chip. Is it reality for some, sure. It’s tough out there. But good times make soft managers. And hospitals are a mess. The easy button is the highest possible reimbursement.
Free money covers all manner of sin.