How to survive managed care.

Managed care is encroaching on hospitals' traditional business practices, with charge-based pricing rapidly becoming a fleeting memory, maintain Saad Allawi, Brian Klapper. and Neelesh Shah of Mercer Management Consulting, Inc. Depending on the status of the local metropolitan market, more than 50% of a hospital's market could be controlled by managed care within five years.

One example of this industry's metamorphosis can be seen in a study Mercer completed for a large regional medical system. I measured the projected impact o managed care on the medical system's profitability and found by 1998, managed care penetration would increase from 10 to 40% in the local market. Further penetration would result in a 40% decrease in charges, a decline of about 10% in the length of stay, and a shift in the mix of inpatient vs. outpatient care. All of these developments spell a projected 30% decline in over-all hospital revenue and a 400% drop in net income. "This is not an isolated case," Allawi warns. "As managed care penetration increases, most hospitals can expect similar situations."

Hospitals will be confronting more than just managed care. "Government regulation will mandate increased coverage at lower cost, while employers will begin to view health care as a commodity and will award managed care contracts to the lowest bidders."

According to Allawi, Klapper, and Shah, hospitals are using a number of strategies to combat the changing market environment. In the short term, some may contain costs by instituting layoffs and hiring freezes, as well as cutting budgets. Longer-term solutions include implementing total-quality management or continuous-quality improvement programs. Results from these actions typically reduce costs by one to nine percent.

What each of these solutions fails to do is to change radically the process by which health care is delivered. "These approaches are not holistic solutions designed to fix the root causes of a hospital's problem, but short-term fixes applied to a long-term problem...