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HOSPITALS: Emergency departments and how hospitals make money. With UPDATE late afternoon 4/6/04

There’s a very interesting new(ish) and counter-intuitive web-only article out in Health Affairs from USC and RAND health economist Glen Melnick about emergency department (ED) capacity in California. The conventional wisdom is that emergency departments at hospitals are flooded with the uninsured, they on average lose money on their patients, and the prevailing trend is for the hospitals to close their EDs if they can get away with it. Melnick’s team looked at a decade’s worth of data from the state and found that:

    ED capacity, measured in terms of beds, expanded 20 percent over the twelve-year period, while the population rose 16.3 percent and visits increased 13.4 percent. As a result, ED beds per 100,000 population grew over the period. . . the percentage of hospitals with an ED at the beginning and end of each of the six-year periods. . . fell only slightly.

Although the total number of EDs declined, most of those closings were by-products of total hospital closings rather than specific closings by hospitals getting out of the market. So why was the conventional wisdom wrong? Not because hospitals made money on their ED “outpatient” visits–they lost money on their EDs on average. How come they then weren’t closing EDs in droves, with appalling consequences for access to health services for the poor and the availability of emergency care for all of us?

Two main reasons. The big hospitals that couldn’t politically afford to close their EDs because they are a major source of outpatient care in their communities (poster-child here being LA County of course) received enough money via the DSH program in Medicaid to stay alive. The rest of them were making so much money through providing inpatient services to the people admitted via the ED which accounted for 40% of all admissions, that they could afford to run the ED as a loss leader. And of course, though it’s politically incorrect to say it, hospitals have the ability to discover the insurance status of those coming in the ED in advance of admitting them to an inpatient bed.

In other words, the ED is being used as a quasi-screening program. Hospitals run these screening programs all the time trawling for people in the community who might legitimately need their services. CPM is well regarded consumer marketing company that helps them do just that. Hospitals make so much money on admitting a well-insured patient for an invasive procedure that it’s worth the cost of screening many “negatives”, in say cardiology, many times over if it generates a well-paying “positive” admission. Of course hospitals are also interested in reducing their levels of bad debt from non-paying ED patients, and this delicate balance of providing care to the needy and at the same time getting hold of the well-paying admission is being played out across the country every day.

Interestingly enough, several other loss-leaders also exist in the hospital world. As this article makes clear, hospitalists don’t generate enough fees to cover the cost of employing them but they improve the throughput of a hospital by getting DRG-based patients to discharge earlier, and increase admissions by improving the lives of admitting physicians. So overall hospitalist programs improve the hospitals bottom line and so are growing. So like the ED situation, any one aspect of the economics of a hospital must be assessed in the overall scheme of how hospitals make money. And the way hospitals make money is by filling their key service lines with patients that need services and have decent insurance to pay for it.

UPDATE: ED doc Doug Evans points out to me that the response article to the Melnick study from ACEP President Wes Fields shows that most of the bed growth related to ED admissions is in the wealthier suburban hospitals, while the inner city hospitals have EDs that are increasingly over-crowded and offering poor primary care. Ambulance diversions and other mal-effects of ED overuse are on the rise according to Kellerman, Duaner, and Siegel. None of this means that, given the hand that they’ve been dealt, hospitals shouldn’t try to make money via their EDs. It also doesn’t mean that we ought to have a health “system” that doesn’t provide insurance coverage to 15% of the population and dumps that care on a handful of inner city hospitals. I think Melnick agrees.

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