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Anatomy of a Bankruptcy

Crying wolf?

Thursday, January 21, 1999

It was certainly not the only reason for AHERF's stunning collapse.

But like all health systems in the late 1990s, the Allegheny Health, Education and Research Foundation suffered from curbs in the growth of federal Medicare reimbursements and cuts in the Medicaid payments that Pennsylvania funds in partnership with the federal government.

At the same time, more and more people with private insurance were being shifted into some form of managed care plan. Those plans not only seek discounts on hospital fees, they also try to curb hospital admissions, lengths of stay and costly specialty treatment. Coupled with technology that makes many more medical treatments available on an outpatient basis, managed care disciplines helped empty a lot of hospital beds.

Together, the government and private attempts to rein in health care spending have put hospitals in an entirely different economic environment than they once had.

With all that said, it's almost impossible to quantify the actual dollar impact of changes in Medicare and Medicaid for the hospital industry, much less any single institution.

Under the federal Balanced Budget Act of 1997, Congress did not make actual cuts in Medicare spending. It reduced the rates of increase in spending that had previously been projected.

Hospital industry representatives have said the constraints are already hurting them, but some analysts are skeptical. The trade magazine Modern Healthcare reported in its January 11 edition that the nation's hospitals, in aggregate, posted a record profit for the fiscal year ended in June 1997, the latest for which figures are available, and that aggregate profit margins hit 6.6 percent, the second-highest level ever. The magazine attributed part of the robust showing to Medicare business, on which the overall margin was 16 percent.

Sorting out the effect of changes in Medicaid _ part of an overhaul of Pennsylvania's welfare programs that took effect in July 1997 _ is more complicated.

Although the debate over the impact goes on, even analysts in the Pennsylvania Department of Public Welfare estimated as recently as August that welfare reform made 95,000 former recipients ineligible for Medicaid, meaning that hospitals probably saw more non-paying patients show up at their doors.

In addition, the state began shifting Medicaid's remaining beneficiaries into private managed care plans.

The Hospital and Health Systems Association of Pennsylvania has estimated that the changes cost Philadelphia hospitals some $75 million in revenues in the first 11 months after they were initiated.

According to a state House Appropriations Committee staff analysis, the medical assistance cuts resulted in a 2.7 percent reduction in patient revenues for AHERF's Delaware Valley hospitals and a 1.25 percent reduction for the foundation's Western Pennsylvania hospitals.

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