Tuesday, September 28, 2010

Hospital Budget Problems Continue

The pattern of hospital budget problems continues. For a supposedly stable industry, there are far more expansions and layoffs than you would expect. Both may occur in succession, sometimes with a bankruptcy mixed in, at the same hospital. In total, hospitals face the same challenge of overbuilding that is affecting the housing sector.

The hospital overbuilding is, perhaps, more understandable. Hospital executives planned capacity based on population projections that have been relatively reliable in the past — and much of this planning has to be done eight years in advance, so it’s not all going to be accurate. In general, though, a 60-year-old baby boomer in 2010 doesn’t have the medical challenges you would expect by looking at the 60-year-olds of 2002, so many of the recently expanded hospitals are having trouble finding customers.

This is a trend that was already seen in 2008 and 2009. The big change this year is that more of the hospitals’ budget problem are being blamed on government programs, particularly Medicare. It’s true enough that Medicare reimbursements are disappointing at times, but the same is true of nearly all medical payment plans. The fundamental revenue problem at hospitals is a shortage of customers, who are not falling ill in the numbers that hospitals had planned on.

Hospitals have been putting the brakes on their spending, so there are not as many hospital bankruptcies now as there were last year. Unfortunately for hospital budgets, the trend toward people being generally healthier, particularly in their 60s, 70s, and 80s, is not likely to suddenly reverse. And there are other trends working against hospital revenue, even before you consider the political risks or the possibility of medical breakthroughs that may simplify the treatment of common illnesses. Many hospitals have taken on so much debt to fund their recent expansions that bankruptcy will end up being the only way out.

Eventually, I trust, hospitals will stop overbuilding, and the current thrashing in the hospital sector can begin to wind down. In the meantime, the sector‘s transition from growing to declining is sure to be awkward.