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Memo to Hospitals: Don't Count on the Newly Insured Flocking to Your Doors

Just as there's tremendous uncertainty over how state insurance exchanges will affect employer-provided health plans, no one really knows how other aspects of healthcare reform will play out in the medical marketplace. That's not stopping hospitals from making some big bets that could easily go bad.

In northern California, the 22-hospital Sutter Healthcare system reigns supreme. Because of its size and importance, Sutter has been able to wring one rate increase after another out of insurers. In 2009, the cost of a day in a Sutter hospital was 37 percent above the state average. The big CALPERS retirement system and, more recently, the University of California have excluded some Sutter facilities from their provider networks because of their high costs. But Sutter is still sitting pretty.

Recently, the giant system built a $618 million hospital in the upscale Mills Peninsula area of the San Francisco Bay; the facility, which has all private rooms, will open in February. Some observers suspect that Sutter is simply going where the best-insured patients are. But Sutter President and CEO Patrick Fry told the California Report that hospitals need to be ready for "the enormous wave of new business" that the expansion of health coverage will bring them, starting in 2014 when the state insurance exchanges open for business.

Following this logic, any hospital that's sitting on a pile of cash should invest it in new construction. But Sutter and other hospitals might be better off looking at what's happened to hospitals in Massachusetts since that state passed its healthcare reform law in 2006. According to a new study by the National Bureau of Economic Research, the state's hospital costs haven't grown very much since 93 percent of Massachusetts residents became insured.

One reason is that fewer people are visiting emergency rooms, perhaps because the newly insured are receiving better preventive care. In addition, a study coauthor said, Massachusetts insurers have been driving harder bargains with hospitals. So, while reform has reduced the number of uninsured among hospitalized patients by 36 percent, average hospital revenues haven't increased.

The study points out that demand for inpatient care has not risen as a result of the growth in coverage. In fact, treatment intensity, as measured in the average length of hospital stays, has declined slightly. The researchers also observed a 2.7 percent decline in preventable hospital admissions.

Now, it's unclear whether Sutter and other dominant healthcare systems can continue to ram big price increases down the throats of payers. But even if they can do it for a while, it may not be smart for hospitals to base their long-term strategies on expectations of a big increase in paying customers as a result of healthcare reform. There are too many other factors, many of which vary from one market to another. And if providers are rewarded financially for keeping patients out of the hospital, acute-care facilities that expand today may have their heads handed to them tomorrow.

Image supplied courtesy of Geograph.