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Childhood's end? Children's hospitals face stark changes

Medicaid cuts, shifting care landscape present new industry challenges

Topics: Pediatrics, Service Lines, Medicaid, Reimbursement, Finance

September 30, 2011

No longer insulated from the health industry's rising cost pressures, children's hospitals are revamping operations and seeking new revenue in the face of major financial and political shifts, Kaiser Health News reports.

State budget cuts loom over Medicaid

Many cash-strapped states are scaling back their contributions to Medicaid—which accounts for at least half of children's hospital revenues—and shifting some beneficiaries into more restrictive managed care plans.

According to advocacy groups, even small reductions in Medicaid funding have a significant impact on children's hospitals' bottom line. For example, three straight years of Medicaid cuts in Arizona have left Phoenix Children's Hospital executives struggling to manage a $52 million budget shortfall.

Meanwhile, cuts to physician training programs have left some advocates concerned that there will be too few pediatricians and specialists to provide pediatric care, pointing to children's hospitals in Texas that have had trouble filling openings. KHN also notes that demographic shifts have led to fewer children in states like California and Ohio, even as hospitals ramp up their infrastructure to serve them.

Slower demand curve, reform implemention leads to shifting approach

Industry leaders note that overall demand is expected to grow, but at lower rates than in previous years and with tightening margin pressure. The sector also is facing changes with the implementation of the federal health reform law, which is expected to reshape care delivery and greater emphasize primary care.

Many children's hospitals are already shifting care to less expensive outpatient care settings and Larry McAndrews, former head of the National Association of Children's Hospitals and Related Institutions, says that children's hospitals are focusing on finding "innovative ways of delivering care by working with their physicians."

Seeking patients from across borders

Surveying the broader market, Children's Hospital Colorado CEO James Shmerling says that the pediatric service closures at small community hospitals will continue to drive new volumes to children's hospitals, and the largest children's hospitals will increasingly become "super providers" regionally and nationally.

At the same time, hospitals are seeking new ways to expand their reach and find new patients. For example, Cincinnati Children's Hospital Medical Center is marketing its services in other states, including Kentucky and Indiana. According to CFO Scott Hamlin, admissions of children who live outside the primary referral area account for almost 50% of inpatient revenue.

Meanwhile, Children's Hospital of Philadelphia has expanded efforts to reach patients in the Middle and Asia, where citizens often benefit from robust health insurance. Over an 18-month period, the hospital grew its international program revenue from $6 million to $30 million—and CEO Steven Altschuler forecasts that the program may produce as much as $150 million within several years. "These days you can't do too much," says Altschuler, adding, "Even if you are as big and sophisticated as Children's Hospital of Philadelphia, you need to be looking for an edge" (Gaul, KHN, 9/27).

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