Last October, executives from some of the largest and most prestigious children’s hospitals gathered in Philadelphia to talk about the future of children’s care. Panel topics ranged from the impact of the federal health overhaul law on children’s hospitals to the nation’s debt crisis and the significant role that health spending plays in it.

In the past, the mood at such gatherings was largely upbeat, reflecting the exceptional market power of children’s hospitals, which were enjoying strong profits and record growth. But now, confronted with a rapidly shifting landscape for children’s care and a battering economy, the leaders were worried.

“There was a lot less arrogance in the room than I’ve seen before,” said Marc A. Bard, a health care expert with Navigant Consulting. “There was a lot more humility. They were saying they don’t have all of the answers.”

After years of being largely immune to concerns about costs, children’s hospitals are being buffeted by powerful economic and political forces. Chief among them: state lawmakers are slashing Medicaid payments to children’s hospitals as part of their efforts to close budget gaps. The federal-state health plans account for about half of children’s hospitals’ revenues. Even small cuts, like the 3 percent payment reduction Florida lawmakers enacted this spring, will severely strain budgets, advocates say.

“In past years, children’s hospitals have been held harmless in state budget negotiations,” said Tony Carvalho, president of the Safety Net Hospital Alliance of Florida, which includes children’s hospitals. “This year, with the size of the budget deficit, the mood in the legislature was everybody had to participate.”

In California and Florida, lawmakers are shifting Medicaid populations into more restrictive managed care plans. Hospital officials estimate the moves will cost them millions in lower payments. Cindy Ehnes, president of the California Children’s Hospital Association, said children’s hospitals are suffering “from death by a thousand cuts. This year is no exception, just worse.”

Meanwhile, cuts to physician training programs have some children’s advocates worried that there won’t be enough pediatricians and specialists to provide care. That’s particularly true in Texas, where the children’s population is growing and hospitals already struggle to fill slots. Conversely, Ohio, California and other states with aging populations are seeing a decline in the number of children, even as hospitals invest billions in new facilities and payments are trimmed.

At Florida Hospital for Children, regional vice president for government affairs Rich Morrison worries that Medicaid cuts could undercut children’s hospitals’ ability to cover their debts. “That’s the question I have. Can you really sustain your capital infrastructure given what you’re going to get paid by Medicaid?”

Children’s Hospital Colorado CEO James Shmerling also worries about paying the bills even as his hospital undergoes a second expansion in five years. “Will there come a time when the demand slacks off. I ask myself that question every night,” he said.

More Growth But At A Slower Rate

Two factors will continue to help drive demand, Shmerling said. As small community hospitals abandon the pediatric business, those patients will gravitate toward large regional centers like his. Medical research will also lead to new treatments, drawing more patients. In effect, large, independent children’s hospitals will act as super providers with regional and national bases.

“We still think there’s going to be demand for children’s hospitals,” he said. “Maybe not at the same rate, but we will continue to grow.”

But even as patient volume increases, Shmerling expects revenues to decline, “squeezing margins.” To adjust, children’s hospitals will have to become even more efficient. “If the staff says we’re operating at 95 percent efficiency, that still leaves 5 percent. In our case, 5 percent equals roughly $35 million in [potential] savings.”

Some experts say it is time for children’s hospitals to share in the sacrifices. “For a long time the mentality has been we’ll do anything for any kid and costs be damned,” said Terry Dougherty, a former executive at Children’s Hospital Boston, who until recently oversaw Massachusetts’ Medicaid program.

“At the end of the day, folks have to be more realistic. We have to be thinking about things we do and how to do that in the best fashion.” 

Although some hospital leaders say they’re heeding that message, changing may be difficult. “For years, the attitude of children’s hospitals was that they had a monopoly,” Bard said. “Everyone else had to change but they didn’t. That’s a very dangerous strategy, especially with everything that is going on.”

The 2010 federal health law promises to further reshape the way children’s hospitals provide care, offering incentives for hospitals and doctors to operate efficiently, reduce fragmented care and improve communications among all those that see patients.

Doing so requires an emphasis on primary care, with a goal of avoiding expensive hospital stays for asthma, diabetes and other costly but manageable chronic diseases.

“Most serious policy experts would say to improve child health it’s about treating asthma, getting kids into early education; it’s about exercise, about nutrition, a lot of care that sometimes gets overlooked,” said Elliott S. Fisher, a physician and prominent health researcher at Dartmouth Medical School.

That could require a shift in thinking for some children’s hospitals, Fisher added, with less emphasis on “over-investing in costly hospitals” and more attention paid to “patients and communities.”

Many children’s hospitals say they are already moving in this direction, shifting as much care as they safely can to less-costly outpatient settings. Only the sickest children are admitted to the hospital, they add.

“Children’s hospitals are very much aware of the need to provide more for less,” said Larry A. McAndrews, until last week the head of the National Association of Children’s Hospitals and Related Institutions, an industry group. “Some of that focus is on quality. The focus is also to find innovative ways of delivering care by working with their physicians, providing more ambulatory care. The hope is there will be some way of controlling costs.”

The impact of all these challenges will vary from hospital to hospital, depending on geography, poverty levels and other factors, experts said.

Finding More Patients And Revenue Abroad

Elite hospitals such as Children’s Hospital of Philadelphia (CHOP) and Children’s Hospital Boston dominate their markets and enjoy national reputations.  They have continued to post profits during the economic downturn. Now, CHOP executives are looking to extend their geographic horizons, traveling to Hong Kong and Singapore as part of an ambitious plan to build international referrals of well-heeled patients.

“CHOP isn’t immune to economic pressures,” CEO Steven M. Altschuler said. “We’re looking at ways to diversify our revenue. Most of these patients tend to have generous insurance paid for by their governments.”

On the other hand, children’s hospitals treating large numbers of poor patients may struggle as Medicaid budgets are cut, patients are moved into managed care and employers and insurers apply increased pressure to lower rates. That will limit the ability of hospitals to charge private insurers more to cover some of the cost of treating poor patients. It’s a common industry practice called cost-shifting.

In some areas of Texas, California and Arizona, up to three-fourths of all children are covered by Medicaid, hospital officials say, leaving little margin for error financially.

“We have hospitals in the South, especially along the border, where most of the patients are Medicaid. Those hospitals are definitely getting squeezed,” said Bryan Sperry, president of the Children’s Hospital Association of Texas.  

“Medicaid is already grossly underfunded, so even a small cut can have a big impact.”

This spring, Texas lawmakers voted to slash Medicaid payments for outpatient services by 8 percent at children’s hospitals. Those payments currently cover just 84 percent of the hospitals’ costs, Sperry said.  A fund that helps to pay for training doctors and to cover Medicaid shortfalls also was cut by about $35 million a year, according to Sperry. 

“Out inpatient reimbursement was not cut,” Sperry said. “We did manage to protect that. That’s one piece of good news.” 

In June, Phoenix Children’s Hospital opened a new 11-story hospital with 478 beds and the potential to grow to 621 beds. Including new ambulatory clinics and other construction, the project cost $538 million.

About 55 percent of the hospital’s patients are covered by Medicaid. The program has cut payments each of the last three years, CEO Robert Meyer said, leaving Phoenix Children’s with a shortfall of $52 million. Management has tried to cover the cuts by trimming expenses and charging commercial insurers higher rates.

“No doubt we’re cost-shifting,” Meyer said. “But it’s getting harder and harder to do. I’d like to say Aetna, United Healthcare and the rest will give me 20 percent cost increases to offset the Medicaid losses, but I don’t think that’s going to happen.”

California’s budget plan calls for changes large and small in its Medicaid program, called Medi-Cal, which covers nearly three million children. According to advocates for children’s hospitals, the moves range from increasing hospital co-pays for families to shifting nearly 1 million children from California’s separate low-income Healthy Families plan into Medicaid managed care.

Mandatory co-pays for Medi-Cal beneficiaries of up to $200 for hospital stays and $50 for emergency room visits are “a backdoor cut in reimbursement for providers,” said Ehnes. Low-income patients won’t be able to come up with the money and hospitals will be stuck.

Advocates worry that children shifting from Health Families to Medicaid will have to switch doctors. Not all Healthy Families physicians participate in the state’s Medicaid plan because of its low fees.

“We’re worried whether the access to care will be there,” said Kelly Hardy, director of health policy for Children Now, a nonprofit. “That’s critical. Will kids be able to keep their doctors?”

A far different issue pressing California children’s hospitals is the state’s aging population. USC researchers recently reported that the number of five- to nine-year-old children in California declined by 8.1 percent in the last decade. Even more surprising, the number plummeted by 21 percent, from 802,047 to 633,690, in Los Angeles County.

Hospital officials and advocates say the decline reflects the severe housing and budget crisis that has pummeled California for several years now. Families have moved out of state or relocated inland to areas that are still growing.

Children’s hospitals say they will continue to draw patients even with the population shift.

“It is true that because of the downturn of the economy families are leaving California for states where the cost of living is less,” said Ehnes. “However, there will always be a need for children’s hospitals because we take care of the sickest of the sick children – children that other providers and community hospitals don’t have the expertise or equipment to care for.” 

But to be on the safe side, some children’s hospitals are looking beyond their traditional borders. Cincinnati Children’s Hospital Medical Center markets its specialized services in Kentucky and Indiana, among other states. The children it attracts often suffer from complicated, expensive conditions, said Scott Hamlin, the hospital’s chief financial officer. While only a small percentage of overall admissions, they account “for a great portion of the revenue. Just shy of 50 percent of our inpatient revenue comes from kids outside of our primary referral region.”

Children’s Hospital of Philadelphia is setting its sights even farther, to the Middle East and Asia. Revenue from CHOP’s International Program has climbed from $6 million to $30 million in 18 months, CEO Steven Altschuler said in an interview. That’s a fraction of the hospital’s estimated $1.8 billion in revenue. However, the figure could swell to “100 to $150 million in a few years,” he said. “That’s real money.”

The income represents a buffer against “a lot of negative headwinds in terms of reimbursements.” Currently, most of the patients come from Dubai, Kuwait, Saudi Arabia and other oil governments with generous health insurance. The plans pay “10 to 20 percent higher than you get from the best insurers here,” Altschuler said.

In April, Altschuler and several other CHOP executives flew to Hong Kong and Singapore to meet with doctors and hospital officials to highlight CHOP’s services. That followed a series of “house calls” to Embassy Row in Washington over the last 18 months.

“We’re knocking on doors and meeting with medical attaches,” Altschuler said. “These days you can’t do too much. Even if you are as big and sophisticated as Children’s Hospital of Philadelphia, you need to be looking for an edge.”

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