Philadelphia Reflections

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Review: Donald R. Cohodes, Brian M. Kinkead Hospital Capital Formation in the 1980s. The Johns Hopkins University Press,

Reviewed by George Ross Fisher

This book is just about perfect in every way, including the fact that it is quite short. The authors provide us with a simple, clear and fair description of how the American Hospital system finds itself with an appalling problem, and the book has been published just as Congress is getting ready to consider solutions.

The appalling problem for hospitals is the huge debt they have incurred in the past several years in order to construct or reconstruct the entire set of national hospital buildings. The nation's hospitals have never had such outstanding physical facilities, but there are about fifty billion dollars in hospital municipal bonds in circulation, most of them floated at the peak of recent high-interest rates. Perhaps the magnitude of the interest burden is clarified by a recent zero-coupon bond issued by Uniontown, Pennsylvania. A hundred thousand dollar face value bond, which comes due in twenty years, can be purchased today for eleven thousand dollars. That is, the citizens of Uniontown have obligated themselves to pay $100,000 for the use of $11,000 for twenty years. Fifty billion dollars in hospital bonds thus represent a national obligation in excess of half a trillion dollars.

Cohodes and Kinkead lead us through the history of how this situation came about, sympathetically and without being either judgemental or apologetic. We are introduced to considerations Congress was facing in 1983 when the DRG (payments by Diagnosis Related Groups) law was passed. Congress didn't know what to do about capital building costs, or about the hidden educational costs in Medicare, but Congress was determined then and there to pass a prospective payment system. So educational and capital costs were made exceptions. Hospitals are reimbursed for Medicare's share of the actual interest on their Loans and also repaid a fixed portion of the principal. Even though this system of cost-plus reimbursement had been a major incentive for overbuilding, it was hard to see an alternative which would not interfere with a prospective payment system, and so the problem was swept aside for later resolution.

Now it is late and Congress is asking for suggestions about what to do. Almost any proposal which would tighten up the availability of capital would an impact, more on some hospitals than on others. Proprietary hospitals, rural hospitals and those with a large teaching or charity load would certainly benefit or suffer unequally. It is hard to see how any fiscal stringency at all could fail to be hard on charitable hospitals. Two main proposals are in the trial-balloon stage. At one extreme, it is proposed that present cost reimbursement be continued, but limited within a fixed government budget and apportioned among hospitals through a governmental rationing system. At the other extreme, it is proposed that all hospitals simply be given an extra seven percent bonus on their DRG payment, For some, the bonus would pay off the recent buildings, for others it would be a fund out of which future buildings would be financed. Neither of these solutions is completely attractive, and quite a long list of objections can be identified. With the present surplus of hospital beds, now made more serve by the prospective payment system, it is hard to know whether certificates should be a salable piece of property, or whether past interest reimbursement levels should be transferable to new owners or merger partners, particularly if the mortgage is refinanced. Non-profit hospitals might elect to go out of business and reemerge debt free. But one thing is certain: no matter what the solution, there will be winners and losers. It seems very likely that those who read this little book will be better prepared to defend their particular type of institution, and make their views known to Congress. Congress doesn't pretend to know much about medicine, but it may have to listen.

Dr. Fisher is Chairman of the Council of Medical Economics of the Pennsylvania Medical Society.

Originally published: Monday, November 12, 2018; most-recently modified: Tuesday, June 04, 2019