Teasing out hospital budgets, especially how subsidizing doctors’ salaries can be financially sound

I have been doing locum tenens work as a hospitalist for nearly two years. One of my reasons for doing this is that the practice of medicine in the US is very interesting, and by working in very different places I get to see how things work and don't work, and make up cool theories. I have time to read and listen to people and have become curious about several true things which don’t seem to fit together. 

1. Hospitals are paid an absurd amount of money to take care of patients.
2. Small hospitals can barely survive financially.
3. Small hospitals, rural ones with 25 beds or fewer (critical access hospitals) are paid more generously by Medicare than large hospitals.
4. Hospitals that employ physicians subsidize them above the money they bring in as professional fees, to the tune of about $100,000 per year per physician.
5. Hospitalists and hospitalist programs are expensive, in the range of 1-2 million dollars per year for a 25 bed hospital.
6. Hospitals are willing, even happy, to start hospitalist programs.
7. Hospitals have a slim enough margin (net income divided by total revenues) that changes in payment schemes have resulted (in times past) in the financial collapse of many of them, especially those that serve vulnerable populations.

So how can hospitals be so financially tenuous despite the fact that they are the largest cost center of the huge healthcare sector of our economy? Are they just whining?

I have been eager to get my hands on a hospital budget or two to try to piece together how hospitals spend their money, to see if there is some obvious extravagance. I have asked to be allowed to see the budget of the hospital that I know best, and somehow e-mails were lost or it wasn’t very high on anyone’s to-do list or it was a deep dark secret or something. Finally I googled the right collection of words and found a link on the Washington Department of Health website where I could see quite a number of budgets for Washington State hospitals, even ones I knew something about.

I learned various things, which should be taken with grains of salt, because these budgets were not very detailed and may have misrepresented the truth in some important way. Still. It is the best I can do, and is somewhat instructive. I looked at one 300 bed hospital and one 25 bed critical access hospital and this is what I learned.

1. Hospitals have a profit margin of about 3-4%, which is a fact I have also read elsewhere. This is considered very small, and makes them vulnerable to small changes in payments.

2. Hospitals bring in about $4000-$5000 per patient per day spent in the hospital. They also make a pretty big portion of their revenues by serving outpatients (doing things like blood tests and imaging and outpatient procedures.) Since most hospitals are paid according to diagnosis rather than length of stay, at least for a large proportion of patients, they make more money with less resources if the patients are discharged sooner rather than later. Small hospitals make more per patient per day than large ones.

3. The majority of a hospital’s expenses are the salaries of the many people who work there, nurses, technicians, administrators, employed physicians, janitors, cooks etc. These costs generally go back into the communities they serve since people usually spend their money for food and rent and stuff they buy. 

What I glean from this is that significant cutbacks in hospital expenses will probably involve cutting local jobs. That may not be a bad thing, in the big picture, especially if the workers are perpetuating an inefficient system, but hospitals are often the economic heart of their communities, so cutting jobs is not ideal. There may be some extravagance in some salaries and there may be waste elsewhere, but finding it will probably be laborious. 

I also figured out how it might serve a hospital to have an expensive hospitalist program. If a hospital spends a million dollars to have a hospitalist program, with an average length of stay of about 4 days and a daily revenue per patient of about $5000, and a hospitalist program resulted in only 50-60 more patients being admitted to the hospital in a year, the program would pay for itself. This is certainly something that hospitalist programs can do, since primary doctors who don't fel comfortable taking care of their patients in the hospital are more likely, with hospitalist programs in place, to admit those patients to local hospitals rather than sending them further away. The same goes for other subsidized physicians. If a hospital has to pay each of 3 surgeons an extra $100,000 per year above their actual professional fees to work at that hospital, those surgeons would only have to bring in a total of 20 more patients to pay for their subsidy. Not having a viable surgery department in the hospital, on the other hand, would result in a tremendous loss of patient volume which would be financially devastating. 

Because the budget information is so vague, I can’t tell how much of a hospitals’ costs are fixed and how much are based on volume of patients, which could significantly alter my calculations. Still, with very very round numbers, it does appear that attracting more patients, especially those whose insurance pays well, would easily make it worthwhile for a hospital to employ physicians in various capacities. Also reduction in lengths of stays for patients whose hospitalizations are paid according to their diagnoses improves hospitals' profitability.

So how does this information fit in with my ongoing thesis that healthcare is too expensive because we do stupid things? Much of the volume of actual work done in a hospital is aimed at servicing the wasteful procedures and tests which we do because that is how we do things. If we truly want to reduce healthcare costs, we need to be thrifty in a way that saves hospitals as much money as is necessary to offset any reduction in payments. This is definitely possible, but we do need to be sensitive to details of cost efficiency and realize that spending less on healthcare, at least at the level of hospital services, will impact the folks who are employed by the hospital and the communities where they live.