Hospitals' fixed costs drive up healthcare expenditures

Despite national calls to reduce costly hospitalizations and readmissions and enhance primary care, such initiatives don't always take off because they hurt hospitals' bottom line, the Pittsburgh Post-Gazette reported.

That's because hospitals still have to pay for fixed costs regardless of how many patients they admit or if their services aren't used. And hospitals that carry more fixed costs find it more problematic to have fewer admissions, Harold D. Miller, president and CEO of the national Center for Healthcare Quality and Payment Reform, wrote in the Gazette.

Fixed costs include overhead expenditures for electricity, facility maintenance, equipment and the hospital's property.

To highlight the problem of fixed costs, Miller cites a hypothetical hospital with $200 million in annual costs and 15,000 patients a year that paid an average of $13,500 per patient for $202.5 million in revenue. Fixed account for two-thirds of the hospital's costs while one third are variable and would decrease with fewer patients.

Therefore, if a community improves primary care so 10 percent fewer people need hospital care, the hospital's variable costs would decrease by 10 percent to $60 million while its fixed costs would remain at $133 million, according to the Gazette. Its total costs drop to $193 million but its revenue also would decrease to $182 million with 10 percent fewer patients for an $11 million loss.

With industry changes and Affordable Care Act reforms, some hospitals are looking to horizontally integrate to spread fixed costs over a larger revenue base, according to a recent Fitch Ratings report.

To learn more:
- read the Post-Gazette article
- here's the Fitch Ratings statement