The Impact of Healthcare Reform on Emergency Department Profitability and Hospital Physician Spend

Today Perspectives welcomes Dr. Wes Fields to discuss a recent study on emergency department (ED) profitability.

It's common knowledge in the healthcare industry that emergency departments are expensive loss leaders for their hospitals. Their fixed costs are high. Many of their patients are elderly or low-income — and potentially quite sick. They deliver millions of dollars in free care to those in need each year.

But is common knowledge common wisdom in this case?

Perhaps not, suggests an analysis of hospital financial reports and patient claims data published in the May 2014 issue of Health Affairs.

Among other surprises, authors Michael Wilson, MD, and David Cutler, PhD, found that since 2009:

  • EDs have achieved a collective profit margin of 7.8 percent.
  • EDs were well utilized by patients with private insurance, who subsidized the care of patients from all other payer classes.

The authors optimistically titled their study, "ED Profits Likely to Continue as the Affordable Care Act Expands Coverage."

If true, this is certainly good news for hospitals. But can these findings really be applied to health systems across the country? Today on Perspectives, Dr. Fields weighs in on the study's conclusions, potential limitations and the future of acute hospital care.

For consumers or policymakers trying to understand the implications of the May 2014 study by Wilson and Cutler published in Health Affairs, it is important to remember that hospital profitability is like real estate valuation: "Location, location, location."

The authors project the impact of expansion of health coverage on ED revenue in aggregate. Whether EDs are loss leaders or profit centers, however, depends on household income within each hospital's service area, as well as how each facility accounts for revenue generated from the ED. For example, few hospitals actually attribute any revenue for unscheduled inpatient care or ancillary services back to the ED.

Although Wilson and Cutler's revenue model assumes only half of currently uninsured US residents will obtain health coverage, the red/blue algorithm will have a very different effect on hospitals within states, rather than the regional data model developed by a federal research agency used by the authors.

Because only 26 states have opted to expand Medicaid eligibility under the Affordable Care Act, low-income ED patients treated in the other 24 states will have less access to care and will generate significant losses for hospitals for both ED and inpatient care because of EMTALA — to say nothing of the tragic consequences for many individuals and families.

For hospitals in states that have expanded Medicaid (and increased private coverage through ACA-related exchanges), the effect on EDs may resemble Massachusetts after "RomneyCare" or Medicaid expansion under the Oregon Plan. Per capita ED utilization by low-income persons will likely rise. This means ED staffing costs — which the authors note are the largest hospital cost for ED care — will have to increase in many EDs. Since the authors report nearly 40 percent negative margins for Medicaid, the old managed care refrain applies: "When unit revenue is negative, it's hard to make it up on volume."

By looking at profitability in aggregate, the authors also ignore one the most important market trends. Since hospital systems know that profitability for both physician and hospital services are very local phenomena, many for-profit hospital systems are now working hard to reduce or eliminate their subsidies to unprofitable physician services they support inside their facilities, such as hospital medicine groups treating uninsured and underinsured inpatients admitted through the ED.

One national, for-profit hospital has committed to eliminating "physician spend" it puts at one billion dollars per year. As a result, it is increasingly common for hospital systems, whether nonprofit or for-profit, to bundle requests for staffing for a single physician specialty across all of their facilities — or across all physician service lines within less profitable facilities.

Another structural challenge to the authors' assumptions about ED profitability: utilization per capita for privately insured patients is already lower than any other insurance category, and likely to become even more fungible. Because health plans (including ACA exchange products) are increasing co-pays and consumer share of cost for hospital care, the urgent care industry catering to privately insured patients is seeing its most rapid growth in decades — including clinics sponsored by hospital owners. Therefore, at least for lower-acuity ED visits, revenue projections important to profitability are not likely to hold.

Regardless of household income, EDs provide an essential service to all communities. In order for everyone to receive timely care of uniform quality, Medicaid and Medicare have to come closer to covering the actual costs of ED care the authors' model. The authors' concerns are as well intentioned as their revenue projections. Many emergency physicians would hold that their healthcare service has been universal since 1986, when President Reagan enacted the original EMTALA mandate on Medicare-participating hospitals.

If nothing else, the next several years should tell us whether communities in blue states have better emergency care and health outcomes as a result of full implementation of ACA — or not. And the authors rightly suggest that even the best-insured patients will not be able to rely on the most emergent care unless our system finds ways to equitably distribute costs as well as revenue.