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Dome - A time for belt tightening

April 2012

A time for belt tightening

Date: April 11, 2012

Ronald R. Peterson President, The Johns Hopkins Hospital and Health System EVP, Johns Hopkins Medicine
Ronald R. Peterson, president of The Johns Hopkins Hospital and Health System and executive vice president of Johns Hopkins Medicine

Financially, we are heading into one of the most challenging periods in the 40 years that I have been in health care. Why? To be perfectly frank, we are still trying to figure it out. Right now, we are still in the early phase of budget preparations, and as we learn more, we will make necessary adjustments. I can tell you that we are dealing with a lot of assumptions and many uncertainties. It is complicated, but let me explain.   

First of all, there are very serious conditions related to the federal and state budgets. Especially on the federal level in dealing with the economy and spending, we are seeing political gridlock like we have never before witnessed.

We are hearing from reliable sources on the federal level that reductions in the Medicare budget are likely. Since Medicare represents a significant percentage of our patient population, this is a concern for both our hospitals and for our faculty clinicians and other physicians who practice throughout our care delivery system.

Then there is Medicaid, which jointly is funded by federal and state dollars, and there is pressure on both of those levels to make cuts. Already we are hearing that for the upcoming year, Maryland must approve additional Medicaid cuts. This would affect not only our hospitals—because Medicaid patients make up one of our sizeable patient populations—but also our managed care organization, Priority Partners, one of the largest in the state.

The federal government is talking about mandatory cuts in the Department of Defense budget in response to the inability of Congress to pass federal deficit reduction measures, and that could affect our Uniform Services Family Health Plan, in which we care for about 35,000 members.  

We are being told that there will be either reductions or flattening of NIH funding, possibly furthering financial pressures on trying to cover the costs of research projects.

One of the things we do know is that in Maryland, where we have this unique rate system in which all health insurers pay the same rate for hospital services, the Health Services Cost Review Commission recently expressed concern that the Medicare waiver test that allows this system to exist may be in trouble. That means that the difference in the rate of change in the average payment per Medicare admission in the state versus the nation is rapidly accelerating. If the waiver cushion ceases to exist, the Medicare waiver would be in jeopardy and the regulated system as we know it could be dismantled. That scenario would create short term chaos in the Maryland health care market place.

For now, we were hoping to get a one percent increase in our rates this coming year, but we could see no increase or even a reduction in rates. Every one percent reduction in rate authority results in a $20 million hit just for The Johns Hopkins Hospital. 

And speaking of Hopkins Hospital, we have undertaken huge obligations related to the operation of the new clinical buildings, stepping up fixed costs associated with more space—more clinical staff (nurses for example), more security personnel, more housekeepers, more space to heat and cool. We will also have to start paying off the debt we incurred to construct the new hospital.

On the good news side of things, despite the increased operating costs of the new buildings, we will have more ORs, a better ICU to acute bed ratio, and all private rooms. We will use these new facility advantages, along with our excellent programs and marketing efforts, to attract more patients from outside of our region, and hopefully that will produce additional revenue to help cover the fixed costs.

Providing adequate resources to support our tripartite mission is increasingly challenging. I try to explain to people that we are going to have to take more seriously the management of the expense side of our business over the next several years and pay more attention to cost improvement and productivity. We cannot grow our way out of this just by seeing more patients. It will not be that simple.

So we all will need to take some responsibility for belt tightening—not entirely different from what we have to do with our own personal budgets.

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