Georgetown administrators said they began deliberately entering contracts to serve managed care patients for less than cost when managed care accounted for only a small segment of the market. Administrators reasoned that the institution would come out ahead if payments for managed care patients exceeded incremental costs and helped defray fixed costs, even if the payments covered less than an equal share of fixed costs. If the managed care plans took their business to another hospital, each of Georgetown's remaining patients would be saddled with more of the fixed costs, they reasoned. It was easier to let managed care companies carry less than their share of the load in the mid-1980s, when they accounted for 5 percent of the hospital's revenue and other private insurers represented 40 percent, said Gerald P. Beaulieu, Georgetown Hospital's associate administrator for finance. We have to work at reducing our costs, and eventually everyone has to step up to the plate to pay what those costs are.
Health insurers can demand discounts because the nation has an oversupply of hospitals.
With about a third of the beds empty at any time, if insurers don't get what they want at one hospital, they can usually go to another. Many hospitals are closing or merging, and the downward pressure on prices is feeding the trend. The shakeout will reduce wasteful overhead expenses, but the surviving hospitals will be left in a stronger bargaining position, potentially making it harder for insurers to extract concessions. Managed care executives said the main reason their plans get discounts is that hospitals want the patient volume they can deliver. It's purchasing power.