who pays for a new hospital? We do…

There is one very essential issue that has been pushed aside in KDHHS’s rush to build a sparkling new facility on the hilltop. Who is going to pay for it?

A project of this scope ($118 million which will without doubt continue to increase with rising inflation) will require significant borrowing – I estimate something in the area of $90-100 million of money must be borrowed to fund the project and the costs related to the financing (a debt service reserve and financing costs). The balance of the funding (I have assumed $30 million from operating reserves) would be paid for from the existing cash reserves of the hospital.

The annual payments for debt of this magnitude will be approximately $6.6 million for the life of the loan (30 years) based on the current market rates for tax-exempt bonds of similar credit quality as KDHHS. If the hospital funds a greater portion of the project from their existing cash reserves (more equity and less debt), the hospital’s credit profile will be diminished which will result in higher interest rates, as bond investors require higher interest rates for projects with higher risk profiles. These annual debt service costs, which represent an increase of approximately 6.3% in KDHHS’s annual operating expenses of $105 million in 2007, can only be generated through increased revenues or significant cost cutting in order to fund these additional costs and maintain an acceptable profitability level (again, less profitable means lower credit quality and more risk to investors).

KDHHS’s has two major sources of operating revenue currently – Medicare (46% of 2007 Revenues) and Commercial Insurance Companies (i.e., Anthem, Humana, Aetna) (38.5% of 2007 Revenues). Medicare already contributes very little to the profitability of the hospital as Medicare rates are set by the federal government and are not subject to negotiation and are not adjusted for additional capital costs. That leaves one source of additional revenue to pay the increased operating costs – commercial insurers which negotiate their rates with hospitals individually. As the hospital negotiates higher rates for its services with these insurance companies, the insurance companies will turn around and pass those costs on to the various local and regional businesses, governments, and individuals who are the primary users of KDHHS services (those in the KDHHS network). Health insurance premiums, particularly for a fairly isolated market like the one which KDHHS serves and which there is minimal competition from other hospitals, are, among other things, driven largely by the costs that the insurance provider negotiates with the “provider network”, as this is where the vast majority of the basic services will be provided to the policyholder.

• In the end, a significant portion of this $6.6 million in additional profitability necessary to fund the debt service payments for this project will end up being paid through higher private insurance premiums for the businesses and families in the immediate geographic area (Jefferson, Switzerland, parts of Ripley Counties in Indiana and Carroll and Trimble Counties in Kentucky).  In light of the economic struggles that are occurring in our community every day with rising gas prices and stagnant job growth, I have to question the wisdom of the choices that appear to made and KDH’s true commitment to this community versus the bottom line of the hospital.

What is the impact of these costs being passed through to our local economy and governments?

Healthcare is unlike many large businesses (i.e., manufacturing) which generally earn their revenue from selling their products across the country or the world. Healthcare dollars are largely spent locally and paid from local sources via insurance companies (or the state and federal government for Medicaid and Medicare). I suggest that the possible “side effects” should this project be undertaken include the following:

• When these costs flow through to our local businesses, they will be forced to make very difficult choices (incur the costs themselves, ask employees to pay higher portions of their premiums, or, in some cases, decide not to provide health insurance benefits to their employees).

• Taxpayers will not be immune either as local school corporations, city and county governments on both sides of the river will face increases in their costs of providing health care benefits which again will be passed on to taxpayers and/or employees.

• Local businesses, which have a choice, may accelerate outsourcing and the movement of jobs to other parts of the world as their personnel costs continue to rise above and beyond the already steep increases they incur each year from rising prescription drug costs and inflation generally. Even the hospital with over 1000 employees will see the costs of its benefits increase.

• The likelihood that we will have an increase in the number of uninsured individuals and families increases dramatically as healthcare premiums rise. Not only will this reduce access for these individuals to obtain quality healthcare, it will also lead to additional bankruptcies and foreclosures that occur frequently when health insurance becomes unaffordable due to higher costs. Healthcare costs incurred by the uninsured and even those with insurance whose coverage is insufficient to cover a catastrophic medical event are the nation’s leading cause of bankruptcy

More to come later….