Division of Health Facilities Evaluation and Licensing

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Report Of The Advisory Commission On Hospitals - 1999

Executive Summary

On any given day, one out of every three staffed acute care hospital beds in New Jersey is empty. The health care system's success in creating alternative preventive and ambulatory care services is a major reason for empty beds. If current trends continue through 2002, that figure could rise to one out of every two beds. The cost of this excess capacity, which could be as much as $1 billion annually, puts New Jersey hospitals at a staggering competitive disadvantage in today's healthcare marketplace. High length of stay and staffing levels, among other factors, have contributed to the inability of New Jersey hospitals to cover costs with available revenues.

In addition to having eliminated the need for many acute care beds as well as changing hospital missions, a number of external factors are also reducing revenues available to New Jersey hospitals for remaining capacity. Reductions in Medicare reimbursement, some already in effect, others yet to be implemented, will reduce annual revenues by an estimated $515 million by 2002 to this $10.5 billion industry. Managed care, which is an increasingly popular insurance option for New Jersey employers, is also exerting downward pressure on revenues by seeking to eliminate unnecessary hospital days and services through utilization review. The insolvencies of two managed care organizations further reduced revenues to hospitals during 1998. The state's Medicaid program has turned to managed care as well, in an attempt to provide quality care at reasonable prices.

Further exacerbating the situation is the increasing number of New Jersey residents without health care insurance. As a result, the amount of charity care provided by New Jersey hospitals and physicians has also increased. Although state subsidies have helped offset these rising costs, the growth of care for the indigent has put more financial pressure on the state's hospitals.

The cumulative effect of these trends is a hospital industry with rapidly deteriorating financial performance. By 1998, the median profit margin in the state fell to .55% and 42 out of 84 hospitals had negative profit margins. Other financial indicators, notably cash reserves, had declined as well.

After studying the issues since April 1999, the Advisory Commission on Hospitals has concluded that significant structural changes to the hospital industry in New Jersey are necessary to put the state's hospitals on a sound financial footing. The recommended changes are organized into three areas:

  • assistance to hospitals and communities in the transition of hospitals to more efficient organizations providing services in the appropriate physical setting;
  • modifications to the state's financial, regulatory, and leadership responsibilities to ensure access to and the quality of health care services in the state; and
  • actions to ensure a climate of fair business practices between payers and hospitals.

Those responsible for implementing these changes will include hospital management, boards of trustee, physicians and other health care professionals, the state, payers, managed care companies and the general public.

Assistance to hospitals and communities to appropriately configure the state's health care system should include:

  • creation of a Hospital Asset Transformation Program to assist facilities that that are no longer needed nor financially viable as acute care hospitals in transitioning to other uses that the market can support;
  • creation of a Hospital Transition Group within the Department of Health (DOH) that will coordinate state actions to facilitate hospital changes;
  • establishment by the DOH of a quarterly financial monitoring system to identify fiscal problems before they become unmanageable;
  • creation of a Post-acute Care Study Group to assess how availability of services and financial incentives hinder efforts to reduce acute care length of stay; and
  • education of boards of trustees, health care professionals, and the public of the changing realities of the health care marketplace.

The state's financial, regulatory, and leadership practices should include:

  • establishment of a supplemental charity care fund to ensure that all hospitals receive some funding for charity care services provided in excess of a minimum standard;
  • more flexible charity care documentation requirements to ensure that eligible patients are appropriately identified;
  • establishment of affordable health insurance programs that will reduce the burden of charity care;
  • consideration of changes to Medicaid reimbursement, including rebasing to a more current year, establishing a new peer group to recognize facilities serving a disproportionate share of low-income patients, and implementing a periodic interim payment system for Medicaid managed care plans;
  • uniting with industry groups to: advocate for changes to Medicare reimbursement cuts where they are excessive (the Balanced Budget Act); maximize revenues to New Jersey hospitals from the federal government (e.g., disproportionate share payments); and align payment incentives between physicians and hospitals;
  • adoption of measures to reduce the likelihood of insolvencies by managed care companies and adoption of a plan to pay hospitals money due to them as a result of insolvencies by managed care organizations in 1998; and
  • attaining favorable rulings from the Health Care Financing Administration (the federal agency that administers Medicare) regarding the close to $400 million in disproportionate share payments for which New Jersey hospitals may be eligible.

Actions to ensure a climate of fair business practices between hospitals and payers should include:

  • completing a study of claims processing and billing processes to accurately assess where problems exist;
  • enforcement of existing prompt payment regulations; and
  • strengthening of regulations where needed.

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