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Editorial: Troubled waters ahead for Maryland’s hospitals

Can it be that the once seemingly impervious bubble of the health care industry and its associated sectors is close to popping? Or, worse, has it already?

Maryland’s 46 hospitals, for sure, fear that they are on the brink of severe financial stress. The current precipitous situation was created by a toxic mix of ingredients: rising overall health care costs, weak or no increases in the rates hospitals can charge, new requirements via the Affordable Care Act and — perhaps most pervasive — a broad shift from inpatient models (for which hospitals are tailor-built) toward outpatient care.

The issue came to the fore in early May, when the state panel tasked with setting the rates hospitals can charge denied an increase, despite a 2 percent cut in Medicare payments that resulted from federal sequestration. For perspective, Maryland’s hospitals operated at less than a 2.5 percent margin in 2012 (it’s 0.7 percent in 2013), according to the Maryland Hospital Association.

That thin margin means that any shift in the industry’s dynamics means serious changes. In March, Frederick Memorial Hospital announced a pre-emptive plan to lay off about 40 employees in an attempt to save $6 million. This month, McCready Memorial Hospital in Crisfield revealed a plan to lay off 18 and shift five other workers to part-time employment. Just a few weeks ago, Maryland General Hospital made it known that it would shutter its ob/gyn department in June because it is a money-loser (this will mean the elimination of about 50 positions and, for the public, fewer choices in services).

Where do things go from here? They’re likely to get worse (and nasty) before they get better. This week, the hospital association released a report that points a damning finger at insurance companies, which the association suggests are inflating their costs and driving overall prices higher. In one telling statistic, the report states that national insurance company operating margins range from 3.23 percent to 8.24 percent. So far this year, insurance companies for Maryland residents have requested rate increases of between 5.3 percent and 16.8 percent (the state body that regulates insurance companies approved far less — between 1.8 percent and 5.8 percent).

Why the discrepancy? hospitals are asking.

It’s a valid question, and, to be sure, the insurance industry will likely respond with an explanation of its own challenging business model.

For hospitals, the pressure is both immediate and long-term. For now, they are struggling with a three- to four-year history of sub-inflation rate increases and broad pressure to invest in new technology. That makes for tight times. The rate-setting commission is scheduled to decide on the annual rate increase next week. Even if it’s favorable, hospitals say, they are still behind schedule based on years of weak increases.

What happens in the coming years hinges on hospitals’ ability to adapt to the new model of outpatient care, rather than one based on increases in admissions and patient volume. Plus, there’s the uncertainty of the state’s unique favorable Medicare reimbursement rate, which may not be renewed. If that happens, the entire system could be turned on its head.

Positive thinkers might view this scenario as somewhat of a crossroads. Hospitals have an opportunity to change along with the culture and laws. Ultimately, that can lead to lower costs and reduced need for complex medical procedures. On the flipside, if they can’t adapt fast enough, it will be all Marylanders who suffer.