Health Care

Quality declines when hospitals have trouble borrowing

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Hospital quality drops off when hospitals have trouble borrowing money, according to researchers at the University of Minnesota and the University of South Carolina on Monday.

In the first paper to directly study the effects of a credit crunch on hospital quality, researchers found that hospitals tend to deliver lower-quality care and worse patient outcomes when they respond to tightening credit by making up the difference through increased patient revenues.

“Heightened financial constraints can lead hospitals to reevaluate and shift their decisions more towards profitability and away from healthcare quality,” the study said. “Hospitals, like other for-profit businesses, respond to increased financial pressure through changes in their operations, and in particular are dependent on credit markets.”

Researchers looked at Federal Reserve assessments—commonly known as “stress tests”— designed to gauge a bank’s ability to weather a looming economic crisis to study the issue. The stress tests date back to the 2010 Dodd-Frank Act, which Congress passed to overhaul financial regulation in the wake of the Great Recession.

The study’s authors reasoned that hospitals would have a harder time borrowing money from their usual lenders whenever those financial institutions must prove they have enough capital to survive a financial crisis. And since hospitals are particularly risky borrowers, as evidenced by higher than average yields and default rates for municipal bonds, banks should be less willing to lend money to hospitals when trying to reduce their risk or increase their capital.

That’s exactly what they found.

“Loan spreads increase while loan amounts decrease for affected hospitals, and these hospitals are more likely to switch lenders to one for which they did not have a previous relationship with. This is consistent with bank stress tests increasing the cost of credit for an affected bank’s hospitals,” the paper said. “Affected hospitals adjust for the increased cost of debt or the decline in external financing by increasing revenues from patients.”

Hospitals often shift their operations to boost profitability by increasing volume and delivering higher-margin services. The researchers found that this strategy increased patient revenue by 8.6%, with the average patient paying an additional $1,701 for healthcare services and improved physician compensation.

“In response to tighter credit conditions, we find evidence that hospitals rely more on their existing resources by increasing bed utilization and physician billing, while decreasing their use of less profitable services such as ICU beds,” the study said. “Each bed in an affected hospital is occupied by eight more days, on average, relative to an unaffected hospital, which amounts to 367 additional patients accommodated per year.”

The researchers didn’t find significant effects on the number of hospital employees or cost-to-charge ratios, suggesting that hospitals mainly rely on higher inpatient admissions and outpatient services and procedures to boost revenue.

In addition, hospitals experiencing a credit shock are significantly less likely to deliver timely and effective treatment and procedures and have substantially lower patient satisfaction compared to unaffected hospitals, according to the researchers.

This has a considerable effect on health outcomes across various measures, including an increase in risk-adjusted, unplanned 30-day readmission rates for recently discharged patients and risk-adjusted 30-day patient mortality rates. The effect on readmission rates is remarkably consistent across heart failure, acute myocardial infraction, and pneumonia and holds for a broader set of medical conditions, the paper said.

“Our results are stronger for hospitals that are more affected by the stress-test-induced negative credit shocks,” the paper said.

Researchers found that hospitals’ lack of access to credit indirectly leads to nearly 1,700 additional readmissions each year. It also leads to another 915 patients dying from pneumonia, a common hospital-acquired infection, each year.

Hospitals experiencing a credit crunch were 4.6% more likely to be among CMS’ worst-performing group for general readmissions, exposing them to the largest Medicare payment reductions. The results were similar for individual diagnostic conditions.

Discharged patients from affected hospitals were significantly less satisfied with their care across eight key measures.

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