Economic Analysis of Hospital Providers
in the State of Georgia – Summary
Discussion Document prepared by Deloitte Consulting LLP
Report commissioned by:
Georgia Hospital Association
Georgia Alliance of Community Hospitals
HCA Southeast Division
Georgia Safety Net Coalition
VHA Georgia, Inc.
October 2004
Table of Contents
Georgia Population Growth and Health Care Demand
2
Georgia Hospitals’ Economic Assessment
11
Future Capital—Funding of Health Care Demand
17
Final Thoughts
26
GHA Analysis: A Collision Course with Disaster
31
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PAGE 1
Georgia Population Growth
and Health Care Demand
Population Growth
Georgia has experienced significant population growth since 1990. Through
2015, population is projected to grow at an average rate of approximately
1.4% annually.
Georgia Population
12,000
9,785
(in thousands)
10,000
9,167
8,000
7,893
8,026
8,156
8,286
8,414
8,540
2000
2001
2002
2003
2004
2005
6,537
6,000
4,000
2,000
0
1990
Annual Growth Rate
1.9%
1.6%
2015
2010
1.4%
1.3%
Source: U.S. Census Bureau, Population Division, Population Projections Branch
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PAGE 3
Population Growth
Georgia is one of the fastest growing states in terms of total population.
Net Increase in Population (1995 — estimated 2025)
California
Texas
Florida
Georgia
Washington
Arizona
North Carolina
Virginia
New York
New Jersey
Illinois
0
2
4
6
8
10
12
14
16
18
Millions
Source: U.S. Census Bureau, population Division, PPL-47, 2001.
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PAGE 4
Aging of the Population
Every eight seconds
for the next 10 years
a baby boomer turns 50.
Source: CACI. CACI publishes U.S. Census data.
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PAGE 5
Aging of the Population—Demand for Health Care
Services
Hospital services are consumed at increasingly greater levels as the
population ages.
Hospital days per 1,000 Population
4,000
3,500
2007
3,000
2,500
Baby Boomers
43–61
2,000
1,500
1,000
500
0
15-24 Years 25-34 Years
35-44 years 45-54 Years
55-64 Years 65-74 Years 75-84 Years
85+ Years
Population Age
Source: National Hospital Discharge Survey, Center for Disease Control and Prevention, 1998.
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PAGE 6
Population Comparison
Georgia’s population is projected to grow and age at a rate that is faster than
other southeastern states and the U.S. average.
Growth of Population and Over 65 By State
Annual Growth from 2002 to 2010 for the
Over 65 Population
3.0%
2.5%
GA
NC
SC
2.0%
AL
1.5%
TN
FL
MS
Represents
Population of
5 Million in 2002
1.0%
U.S.
0.5%
0.0%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
Annual Growth from 2002 to 2010 for the Entire Population
The combination of population growth and aging will require greater resources for the health system
Source: U.S. Census Bureau
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PAGE 7
Population Growth
• Every day 350 people move into Georgia
• At current use rates these people will generate 37 hospital
admissions per year, and a corresponding increase in hospital
outpatient and clinical demand
• In addition, the population is aging and living longer
Hospitals Will Need to Fund
Capacity Growth for Increased
Demand
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PAGE 8
Medicaid and Uninsured
Approximately one in three Georgians is either uninsured or are eligible for
Medicaid coverage. For this safety net population, Georgia Medicaid covers a
lower proportion than other states.
2001 Medicaid and Uninsured Levels
2002 Percentage of Total Population
Proportion of Medicaid
to Total Medicaid and
Uninsured
48.6%
44.4%
58.1%
48.5%
45%
40%
35%
33%
31%
33%
16%
13%
34%
34%
71.8%
39%
11%
16%
17%
12%
15%
15%
5%
64.7%
17%
27%
20%
10%
52.9%
41%
30%
25%
58.5%
17%
12%
24%
18%
16%
AL
FL
18%
22%
28%
0%
GA
US
Medicaid Individuals
MS
NC
SC
TN
Uninsured Individuals
Source: Centers for Medicare and Medicaid Services (CMS) - MIS 2082 Report for Fiscal Year 2001, State Health Facts Online, and Kaiser Family Foundation.
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PAGE 9
Who Are the Uninsured?
Georgia’s uninsured population is composed mainly of the working poor.
Percentage of Uninsured in Georgia by Employment
6%
26%
68%
Working or Dependent of Worker
Not Working
Retired or Student
Source: Georgia Healthcare Coverage Project
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PAGE 10
Georgia Hospital
Economic Assessment
Distribution of the 143 Hospitals
Georgia’s acute care hospitals are a mix of small rural and large urban
facilities.
Hospital Summary
Median No.
of Beds
116
50
87
109
50
29
81
183
397
440
65
127
130
120
Number of Hospitals
110
100
90
81
80
70
62
59
60
52
54
50
44
40
32
27
30
18
20
16
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Non-Teaching
Teaching
250+ Beds
151-250 Beds
51-100 Beds
<50 Beds
Government
Taxable
Non-Taxable
Rural
0
Urban
10
PAGE 12
Median Operating and Net Margins of Georgia
Hospitals
Based on financial information from 2002 Medicare Cost Reports,
58% of Georgia’s hospitals are losing money from operations.
Median Georgia Hospital System Operating and Net Margins
4.00%
3.50%
3.20%
3.00%
2.30%
1.90%
2.00%
1.20%
1.00%
0.00%
-1.00%
-1.20%
-2.00%
Median Operating Margin
Hospital Actual
S&P BBB-Rated Credit Median
Median Net Margin
S&P A-Rated Credit Median
Most hospitals compare unfavorably with higher quality credit
comparisons, which directly determine a hospital’s cost of capital.
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PAGE 13
Projected Margins
Based on a reasonable set of operating assumptions developed from expected
industry trends, the economics for hospitals is expected to deteriorate
through 2007.
Projected Median Operating and Total Margins
for Georgia Hospitals
2.6%
3.0%
2.4%
2.3%
2.3%
1.8%
2.0%
1.3%
Margin
1.0%
0.0%
-1.0%
-1.2%
-1.1%
-1.2%
-1.4%
-2.1%
-2.0%
-2.5%
-3.0%
2002
2003
2004
2005
2006
2007
Year
Operating Margin
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Total Margin
PAGE 14
Medicare Modernization Act (MMA) of 2003
The projections include incremental new revenue mandated by the MMA over
the next four years.
Annual Impact of MMA for Georgia Hospitals
$120
$108.2
$100
$93.6
$82.3
(in millions)
$80
$60
$40
$40.8
$20
$0
2004
2005
2006
2007
MMA revenue gains will be at risk of future regulatory
reductions that address federal spending deficits.
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PAGE 15
Reimbursement Pressure
• Fiscal pressures are causing Georgia and other states to
reduce Medicaid expenditures
• Governor Perdue called for spending cuts in 2004 and 2005
• Employers seeking answers to reduce health care
expenditures
• Employees are paying more
Projected reductions in Medicaid
spending and pressure to control
commercial spending growth will
constrain revenue growth of hospitals
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PAGE 16
Future Capital
Cost of Health Care Demand
Spending Pressure
According to a recent HFMA survey, Georgia’s hospitals expect to experience
intense capital spending pressures over the next five years.
Most Intense Capital Spending Pressure
Average Capital Spending Pressure
Source: Modern Healthcare, March 1, 2004
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Least Intense Capital Spending Pressure
PAGE 18
Hospital Capacity (Beds per 1,000 Population)
Georgia’s ratio of hospital beds to population is lower than most of the other
southeastern states...
2001 Beds per 1,000 Residents
6.0
4.8
5.0
4.0
3.0
3.7
2.9
3.6
3.2
2.9
2.9
2.8
NC
SC
2.0
1.0
0.0
GA
U.S.
AL
FL
MS
TN
Source: Kaiser Family Foundation, State Health Facts Online
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PAGE 19
Age of Plant Comparison
…and the hospitals are older as well.
2002 Median Age of Plant
12.0
10.0
10.1
10.1
10.3
10.2
9.4
8.7
8.6
8.0
6.0
4.9
4.0
2.0
0.0
GA
U.S.
NC
AL
MS
TN
FL
SC
Source: Almanac of Hospital Financial and Operating Indicators, 2004
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PAGE 20
Future Capital Requirements
Due to an aging hospital infrastructure and a growing and aging population
base, future capital investments are expected to be significant.
• Between 2005 and 2015, Georgia’s population is expected to
increase by approximately 14 percent, or over 1.2 million people
over the ten year period
• An aging population will increase the historical demand for health
care services
• Hospitals will require significant capital investment to maintain the
current infrastructure, and to create new capacity for population
growth and an increasing demand for services
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PAGE 21
Future Capital Requirements
Required hospital capital investments will vary from community to community,
depending on the current infrastructure and population demographics.
• Maintain and replace current plants and equipment, and expand hospital
capacity as necessary to meet population growth and demand (i.e.,
emergency and outpatient departments, inpatient units, and outpatient
clinics)
• Maintain and update to emerging technologies that are widely available
– “Latest” technology is often costly, but demanded by patient populations
that require access to “state-of-the-art” care
• Invest in new era of clinical information systems that are required for:
– Electronic medical records and access to electronic medical information
and care
– Improvements in disease and utilization management
– Improvements in hospital efficiency
• Invest in the recruitment and retention of a required physician base
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PAGE 22
Capital Requirements – Projected New Demand
Growth and aging of the population will increase demand for services,
resulting in the need for approximately 7,000 new beds and related services
by 2015(1).
3.3
(1)
32,000
Number of Beds
30,000
3.25
3.22
3.23
3.2
3.15
29,000
3.14
28,000
27,000
3.27
3.11
3.12
3.1
3.09
26,000
25,000
Required Beds / 1,000 Pop
31,000
Demand can be quantified under different methodologies.
Calculating expected need for new beds is one methodology.
In addition to bed need, the analysis inherently reflects the
corresponding demand for all health care services, including
ancillary, outpatient and physician services.
3.20
3.18
3.17
3.0
24,000
2004
2005
Current Beds
2006
2007
2008
2009
2010
Shortage due to Increased Pop
2011
2012
2013
2014
2015
Shortage due to Higher Use Rates
Assumptions
Current number of beds = 24,959 (2002 figure)
Bed need formula: (Projected Population/1,000) * Beds Per 1,000 Population
Assumes 3.06 beds per 1,000 in increased population scenario
Assumes beds per 1,000 population increases annually by 0.5% due to aging population in higher use rate scenario
Source: Medicare Cost Reports; US Census Bureau; Deloitte Analysis
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PAGE 23
Cost of Capital Funding
Estimated capital investment requirements necessary to meet increasing
hospital demand will be greater than the hospitals’ operating cash flow by
2007.
Projected Net Income Versus Incremental Capital(1)
$700
$600
$ in millions
$500
$422
$400
$300
$442
$354
$367
2003
2004
$383
$464
$482
$505
$530
$556
$583
$402
$200
$100
$0
2005
2006
2007
2009
2010
2011
2012
2013
2014
2015
Year
Projected Hospital System Net Income
(1)
New Capital Spending
(1) New capital investment reflects a reasonable industry standard for the estimated cost of new or replacement infrastructure to
meet the increase in patient demand.
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PAGE 24
Projection Risk Assessment—Wild Card Issues
Projected operating performance is based on one set of operating assumptions.
Given the current political and economic environment, hospital management
will be challenged to achieve these results.
Issues that have a probability of negatively impacting future hospital operations:
Potential
Financial
Impact
Cost associated with the shortage of health care professionals
Unreimbursed cost of staffing of specialists in the ER
Increasing malpractice insurance cost
Cost of technology / quality initiatives
Increasing cost of pharmaceuticals
Medicare legislatively mandated cost reductions
• CMS mandated reductions in payments based on market basket minus a factor
• Proposed rebasing of the DRGs could lower reimbursements
• Occupational mix adjustment
Medicaid funding issues (Solvency of the Medicaid Program/Changes to Upper Payment Limit)
Rising cost of uncompensated care
Employer restrictions on health care spending growth
Low
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Medium
High
PAGE 25
Final Thoughts
Trouble Ahead?
• The health system is fiscally fractured, with the majority of
hospitals currently losing money from operations
• The current approach to financing hospital operations and
investment needs is not sustainable
– Increasing cost of hospital operations, technology, and capital
– Increasing hospital demand challenging limited resources
– Pressure to help control commercial spending growth
– Risk of additional reductions in Medicaid and Medicare
spending
The hospital payment structure is not
keeping pace with inflation, growing
demand, and the cost of capital
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PAGE 27
Potential Outcomes
• Higher Demand
• More Uninsured
• Less Revenue
• Capital Crunch
Results in:
• Aging Facilities
• Services Limited
• Hospital Closures
• Access Problems
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PAGE 28
The Long Journey Ahead
Focus on:
• Efficiency and maximization
of operations internally
• Engage stakeholders in
helping to identify and solve
issues to maintain and
improve quality and access
to health care:
– Government
– Business
– Communities
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PAGE 29
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Member of
Deloitte Touche Tohmatsu
PAGE 31
A COLLISION COURSE
WITH DISASTER
As this report shows, the current and projected
mechanism to meet patient demand and fund Georgia
hospitals is unsustainable. Simply put, many Georgia
hospitals are on a collision course with financial
disaster. Based on current financial projections and
expected population demographics, Georgia residents
will experience:
PAGE 32
What to Expect
• More closed hospitals (especially in rural areas). Fifteen hospitals in
Georgia have already closed since 1998.
• Even more overcrowding in hospital emergency rooms.
• Aging hospital buildings and equipment that fail to keep pace with
today’s rapidly evolving health care advances.
• An underfunded, overutilized system of care that fails to address
the health care needs of Georgia residents.
• A growing, severe shortage of qualified health care
professionals.
• A continued reduction in vital health care services due to
skyrocketing medical liability insurance costs.
PAGE 33
A CALL TO ACTION
As the demand for care increases and hospital
profits continue to shrink, Georgia hospitals
desperately need legislative relief. In the 2005
Georgia General Assembly and the 109th
Congress, it is imperative that lawmakers:
PAGE 34
Preserve Medicaid Funding
MEDICAID
• Over the past two years, Medicaid payments to hospitals in Georgia have been
cut by more than $70 million.
• Presently Georgia hospitals receive approximately 88 percent of costs for
treating Medicaid inpatients. Proposed cuts could drop future payments to
approximately 80 percent of costs
• In the 2004 General Assembly, legislators reduced Medicaid eligibility to those
with incomes exceeding 200 percent of poverty level. Those people will most
likely end up in the hospital ER with no insurance.
Further Medicaid cuts could force some Georgia hospitals to close!
PAGE 35
Support Medicaid
Care Management
• A comprehensive care management model for the most chronically ill Medicaid
recipients ultimately creates a healthier population and reduces the utilization of
high-cost hospital services. By properly managing asthma, cardiovascular
disease and diabetes cases, Georgia can save between $150-350 million over the
next four years.
• Georgia hospitals are strongly opposed to any efforts to move Medicaid
recipients into a traditional managed care/HMO model. An HMO model, which
typically manages costs rather than care, would do irreparable financial harm to
Georgia hospitals.
Care management, not cost management, will create a healthier
Georgia while saving Medicaid millions of dollars.
PAGE 36
Preserve Medicare Funding
MEDICARE
• From 1998 to 2004, the federal Balance Budget Amendment resulted in an
estimated $3 billion in Medicare cuts to hospitals in Georgia.
• On average, the 2002 Medicare inpatient care margin in Georgia was 1.9%
and the outpatient margin was -12%.
• BBA II? New Medicare cuts are widely anticipated in the 2005 federal budget.
With the population aging and more than 39 million
Americans currently on the Medicare rolls, future Medicare
cuts will have a devastating impact on America’s hospitals.
PAGE 37
Pass Meaningful Tort Reform
• Skyrocketing medical liability premiums have forced many Georgia hospitals to
reduce services to their communities and caused many Georgia physicians to
retire early or move their practices to another state.
• Recent study by the Georgia Board for Physician Workforce found that:
One in three OB/GYNs, one in three general surgeons, and one in three
radiologists in Georgia plan to stop high-risk procedures, including delivering
babies because of the state’s tort environment.
The report also found that 1,750 Georgia physicians stopped or plan to
stop working in hospital emergency rooms due to the high cost of insurance,
including one in three plastic surgeons and one in four orthopedic surgeons.
• The American Medical Association reports that Georgia is one of 20 states
currently in a full-blown “medical liability crisis.”
PAGE 38
Pass Meaningful Tort Reform
• To relieve this problem, Georgia hospitals are asking members of the 2005
Georgia General Assembly to vote to:
Abolish joint and several liability – limiting damage awards to the degree
of fault by the defendant
Place reasonable limits on what juries can award for “pain and suffering”
Enact expert witness qualification reforms
Enact collateral source reform – Allow juries to consider compensation
received from other sources in deciding amounts to be awarded
Grant limited immunity to hospitals and physicians to participate in
emergency room call and trauma services
Meaningful tort reform will preserve health care access
for every Georgia resident.
PAGE 39
Parting Thoughts
Georgia’s hospitals are committed to serving
the needs of our communities.
We can’t do this without the support of Georgia’s
citizens and elected officials.
PAGE 40
