Despite praise,state's cost-control efforts unable to restraint hospitals' inefficiency


For a decade, the managers of Baltimore's Harbor Hospita Center have turned to the latest medical fads to attract patients: The most powerful imaging machine. Occupational therapy clinics. Free mammograms.

It didn't work. The seventh floor was rented out in 1985. The fifth floor and parts of the third are next. With fewer than 60 percent of its beds occupied and in search of revenues, Harbor now is trying its hand at real estate development.

Harbor demonstrates the plight of many hospitals across the country, caught in a price squeeze and strug- gling to compete as the traditional role of general hospitals is being challenged by more efficient specialty outpatient centers. In the past few years, Harbor has spent millions of dollars on high-tech equipment and satellite sites to lure new patients, only to see costs skyrocket, patients go elsewhere and red ink on its operating budget.

As the Clinton administration moves toward health care reform, it is examining the role of hospitals and the nation's huge hospital bill -- 40 percent of overall health spending. The federal task force led by Hillary Rodham Clinton is considering price controls and regulatory solutions and has looked to Maryland as a model because it has a unique system of setting rates for Harbor and 51 other acute-care hospitals.

Regulators claim that their system has made a dramatic difference here, controlling costs so that they increase at a fraction of the national average. Maryland hospitals also have the lowest markup -- 14 percent profit compared with a national average of 53 percent.

But some critics say that Maryland's regulations are not tough enough, raising questions about why hospitals like Harbor are still in business.

The system might not have done enough to encourage doctors and hospitals to treat patients more efficiently over the years. A recently published article in The New England Journal of Medicine shows that Baltimore's hospital admission rate is 21 percent above the national average and that, once in the hospital, patients undergo more procedures -- 11 percent more than the average. Medicare payments per admission were 10 percent higher than the national average, according to the study, which is based on 3-year-old data.

And Maryland just might have too many hospitals. The occupancy rate for the state's hospitals as of June 30, 1992, was 69.8 percent. Maryland could save as much as $88 million annually if its hospitals operated at capacity, a move that would require closing enough hospitals to eliminate 2,000 beds, but the system doesn't encourage it. Only two hospitals have closed in recent years, and two more are about to open.

Even though Harbor has a lot of empty beds and is ranked among the least efficient of Maryland hospitals, Harbor officials don't question that their facility should survive. In addition to providing health care for a poor and aging population, they argue, Harbor is an economic development catalyst for South Baltimore. "Hospitals are not just inpatient facilities," L. Barney Johnson, Harbor's president, said in a recent interview.

Bottom line is rates

The goal of the Maryland hospital regulatory system is three-fold: to insure hospitals are efficient, make money and care for the poor. A state panel appointed by the governor, the Health Services Cost Review Commission, looks into a hospital's costs, decides how much it must charge for certain procedures, and adjusts it for inflation annually.

John M. Colmers, executive director of the hospital cost review commission, believes Maryland's regulatory system has been highly effective, saying the ability of Maryland hospitals to earn profits while caring for the uninsured and keeping down costs shows the system is working. Still, he says, "We've got a long way to go."

Under the cost review system, it doesn't matter what a hospital spends. Regulators are not concerned, for example, about what a hospital pays its chief executive (the salary for Harbor's chief executive officer tripled in a decade, to $240,000) or whether it buys too many fancy machines, loses millions on a bad investment or gives business to friends.

Instead, what regulators focus on is whether the average charge for an appendectomy or a session with the physical therapist is reasonable for that hospital. Rates are supposed to cover costs, including those for the uninsured, whose bills are picked up by apportioning them out to all patients at that hospital. A hospital that cuts its costs below the specific rate established for it by regulators gets to keep the difference -- that is its profit.

But there's a loophole: the cost commission doesn't look at what revenues hospitals generate. As more and more hospitals earn money from unregulated side businesses, they can be making profits that aren't considered in deciding a hospital's overall costs.

When the system began in 1971, the average admission charge at a Maryland hospital was 25 percent above the national average. That has dropped to 14 percent below the norm, according to the cost review commission.

Despite success at controlling costs, hospital revenues in the decade still rose 89.9 percent.

Money spent on Maryland hospitals per person is up even though fewer beds are in use and an entire industry of specialty free-standing outpatient centers has sprung up to compete. The reason, experts say, is that while Maryland hospitals are undoubtedly more efficient, they have found new ways to fill beds -- psychiatric units or other specialized treatment -- and new treatments for patients who are admitted.

Trying to compete

Built in 1901 to serve the industrial working class, Harbor, formerly known as South Baltimore General Hospital, prided itself in providing quality care for a low price. Its biggest growth came under the leadership of Carl Behm, a self-described "hard-headed" German whose conservative spending habits translated into profits.

NTC The hospital on the harbor south of downtown Baltimore never achieved the occupancy levels it promised 25 years ago in seeking publicly financed construction loans. In 1985, to stem more than $4 million in operating losses, Harbor gave up beds, renting out its seventh floor to a private company specializing in psychiatric patients.

In the 1980s, under new leadership and facing growing competition with St. Agnes to the west, Mercy Hospital to the north, and North Arundel General to the south, the renamed Harbor Hospital Center began a multimillion-dollar spending spree.

Much of it has been on machines and strategies to attract and increase patients, rather than to improve care or reduce costs of existing services.

The strategies include opening a kidney dialysis unit managed by a private company across the street in the hospital's family care clinic and a radiation oncology practice operated by University of Maryland doctors in Harbor's professional building. Inviting these groups to run services at unregulated prices allows Harbor to try to undercut prices at nearby hospitals. (These centers can charge less, in part, because they aren't assuming costs for the uninsured.)

All told, Harbor has spent $22 million in projects and renovations in the past three years. That includes the purchase of eight acres outside Harbor's door for what could be a $25 million retirement community. The hospital also is creating a state-of-the-art "extended care" wing in a separate, for-profit venture on the fifth floor.

Such activity is by no means unique. Statewide, hospital expansion is continuous, and nobody looks to see whether investments by hospitals improve patient care or simply add to the cost.

Rise in costs

In the short term, the spending at Harbor has hurt. As late as 1987, its costs per patient were 25 percent below average. Now those costs are about average. The increase can be traced to costs for many procedures or services that far exceed the norm. For example, Harbor's laboratory services are 30 percent higher than average. A unit of blood is $70, three times the fee charged by Johns Hopkins Hospital.

Robert P. Lally, Harbor's chief financial officer, said quality care demanded that Harbor upgrade its facilities. He also said that Harbor is competitive with nearby hospitals. Such comparisons, however, are not used by Maryland regulators, who only want to know how Harbor is doing compared to where it should be. And today, it's not doing so well in controlling costs.

In the thick of a population base that is aging and poor, Harbor gets 40 percent of its revenues from Medicare patients. Regulators say its fees are nearly 11 percent higher on average than warranted, making them among the highest in the state. The basic problem is that Harbor is keeping these patients longer than necessary, a practice it explains by noting that many of its patients have no one to care for them at home.

Even after paying a penalty for this, Harbor gets enough money from regular rate increases to keep going. Indeed, one of the system's flaws, observers say, is that the automatic annual adjustment to a hospital's initial rates -- an adjustment based on inflation, labor costs and the types of cases handled -- is just too generous. It averaged 7 percent last year, compared to a Consumer Price Index of between 4 percent and 5 percent.

"The base cost is probably too high," said Bob Vaughan, senior associate with MacLeod Associates, a Lutherville firm that helps hospitals improve their productivity.

Few hospitals have undergone a full review since initial rates were set in the mid 1970s. In fact, they avoid them, in part because costs have dropped as more efficient technology and same-day services have increased. Harbor was last reviewed in 1986.

Harbor's managers and directors say they have begun cutting costs and expect a $1.8 million profit in June after two quarters of operating losses.

L. Patrick Deering, who chairs the holding company for Harbor Hospital and its affiliates, said the hospital is undergoing the same transition facing all acute-care institutions, although Harbor's finances may be slightly more precarious.

"An institution of this kind goes through periods of ups and downs in a cycle. Sometimes it shows high costs and adjustments are made," Mr. Deering said. Now, he said, "We are going through a period of identifying costs and taking action."

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