Balanced Budget Act drains Health System

Over the past three years, the University of Pennsylvania Health System has learned just how much Congress can influence the way it conducts business. Since its inception, the Balanced Budget Act of 1997 has drained close to $150 million from the Health System. Though the act was not solely responsible for the Health System's financial woes over the past three years -- a loss that totaled more than $330 million -- it is clear that Congress' action in 1997 was a serious contributing factor. Although recent legislation has helped the Health System regain some of its losses, University officials are now debating what to do with the financially burdensome organization. The Balanced Budget Act rolled back reimbursements the federal government pays to academic institutions as part of Medicare. "Most teaching hospitals rely on 50 percent of their revenue from Medicare," said Robert Field, director of the Health Policy Program at the University of the Sciences in Philadelphia. But according to Nancy Kane, a health care finance expert at Harvard University, the financial trouble academic hospitals find themselves in can be attributed to simple mismanagement. "The BBA certainly didn't help, but it wasn't the main problem," Kane said. In the early 1990s, university health systems across the country embarked on plans to expand -- acquiring private practices in order to compete effectively with health maintenance organizations. Their efforts were based upon market expectations that were never realized. "The projections were that markets like Philadelphia would be somewhere between 80 to 90 percent capitated [by 2000]," Field said.` Capitation refers to the most aggressive form of managed care. When a patient is in a capitated plan, the patient has little choice as to what physicians can provide health care. HMOs then have more control over how much to reimburse providers. Expansion was seen as the ideal solution. If the Penn Health System, for instance, owned the private practices, it could competitively negotiate with HMOs over payments. The Penn Health System includes the Hospital of the University of Pennsylvania, Pennsylvania Hospital, Presbyterian Medical Center and Phoenixville Hospital. Unfortunately for the Health System, the Philadelphia market ended up far from the mark and is only about 50 percent capitated, according to Field. "Even in markets in California that were the model [for the expectations], they're no more than 55 percent capitated," he said. The policies pursued during the expansion period "cost a lot of money," according to Kane. The Penn Health System was one of the hardest hit. "They're cited often as a place that just went overboard in trying to integrate," Kane said. When the BBA was enacted, institutions such as the Health System were left with a loss they could not absorb. "The BBA hit at a particularly bad time, just when [health systems] were most vulnerable to high start-up costs," Field said. Consequently, organizations such as the Health System, aided by the American Association of Medical Colleges, initiated a huge lobbying effort for relief. "For the last two years, we have been advocating to Congress that medical colleges need relief from the BBA," said Lynne Davis, director of health care legislation for the AAMC. In 1999, Congress voted to give a proportionally small amount of relief. According to Peter DeAngelis, Chief Financial Officer of the Health System, Penn stands to recoup 10 percent of its losses attributed to the BBA for Fiscal Year 2000. But that amount only accounts for five percent of the losses since 1998. "Although this relief is certainly welcome, clearly we were hoping for and lobbying for more relief than this," DeAngelis said. Congress again voted for relief last year, but the Health System still stands to lose a total of $141 million from congressional acts for the fiscal years 1998 to 2002. This picture mirrors the situation for other health systems. "It's not enough to close the gap from what they would have gotten had the BBA never existed," said Wharton professor Mark Pauly, an expert in health care finance. Pauly questioned whether hospital administrations will use what little relief there is wisely. He said some systems will "use it to patch over problems with money other than solving how to live within Medicare" restraints. "A sensible hospital administration will try to plan for [a] rainy day," Pauly added.

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