Hospital Chain's Turnaround Raises Health Spending

(MoneyWatch)  Caritas Christi Health Care, a six-hospital chain based in Boston, lost $20.4 million for the fiscal year ended Sept. 30, 2008. For FY 2009, Caritas Christi expects to post operating income of $31.1 million.

How did a not-for-profit healthcare organization that was financially impaired even before the recession began achieve this turnaround during a period when other Massachusetts hospitals were slumping? It did what any business--for-profit or not-for-profit--has to do in this situation: it cut costs and boosted revenues. On the cost side, it consolidated operations, cut jobs, and froze salaries. And to pump up income, it negotiated better rates with insurers and hired a number of specialists who perform big-ticket procedures. One urology group, for example, has performed hundreds of prostate operations this year, according to the Boston Globe.

Ralph de la Torre, MD, a cardiac surgeon who was hired away from Beth Israel Deaconess Medical Center to become CEO of Caritas in April 2008, has been the key figure in the turnaround. Under his leadership, Caritas restructured its management team so that it made decisions that helped the organization rather than just individual hospitals in the chain. The healthcare system became more efficient by adopting bulk purchasing and inventory tracking and a more effective billing system. Caritas allowed union organizing to increase rapport with its staff, and it offset the additional cost by consolidating the administration of its physician group.

Good management decisions seem to have been the catalyst for Caritas' newfound success. But there is also a lesson for healthcare reform in this upbeat story: Caritas is in the black because consumers and employers are paying increased costs. Not only are the higher rates negotiated with Blue Cross Blue Shield of Massachusetts and other health plans being passed on to policyholders, but the higher number of procedures being performed at Caritas may be raising the total number of procedures being done in the Boston area. While hard data are not available, it is unlikely that other institutions are seeing a drop in elective procedures commensurate with the increased number of such procedures at Caritas hospitals.

In addition, as George Halvorson, CEO of Kaiser Permanente, pointed out many years ago in his book Strong Medicine, growth in competition among hospitals raises costs, rather than lowering them. As hospitals add service lines, such as open-heart surgery or joint replacement, they have a fixed cost of maintaining those services. Since there are a limited number of patients in the market who need those procedures, hospitals have to raise their charges to make a profit.

None of this should be interpreted as a criticism of Caritas Christi. It did what any business must to do to survive in our market economy. But if we really want to control spending, we have to budget healthcare organizations in some way. Only when today's profit centers become cost centers will costs go down.