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A case can be made for converting a hospital's clinical care departments from profit centers into standard expense centers.
In recent years, profit centers have proliferated in both teaching and community hospitals. Originating in the early 1900s in the private sector, they were introduced to hospitals in the mid-1970s, when Robert Heyssel, MD, former president of Johns Hopkins Hospital in Baltimore, used them as part of a highly successful turnaround effort at that hospital.
The underlying idea is to encourage physician chiefs of service to manage their departments like small businesses. If all chiefs do a good job, the hospital will earn a surplus, which can be used to upgrade facilities, replace equipment, expand programs, and engage in other activities that require substantial equity capital.
However, if a hospital is to use profit centers successfully, it should resolve several philosophical, organizational, and accounting matters. Unless the senior management team addresses these matters carefully, there can be a variety of unintended consequences. Indeed, because these consequences appear all too frequently, many hospitals would benefit from converting their profit centers into standard expense centers.
Philosophical Issues
Designating clinical care departments such as surgery, medicine, and pediatrics as profit centers is only a preliminary step. A hospital's senior management team then needs to address two philosophical issues: decision-making latitude and cross-subsidization.
Decision-making latitude. Will clinical care chiefs have relatively unfettered authority to pursue a "profitable" case and payer mix for their departments? If so, the hospital may find that it has compromised its strategy. Suppose, for example, that the chief of surgery recruits only certain kinds of specialists so as to tilt the department's case mix in a more profitable direction. He or she also may decide to use commercial payers to subsidize free care. By contrast, the chief of pediatrics may not have the luxury to subsidize free care with commercial payers, and thus may (however subtly) encourage uninsured patients to use another hospital.
One potential result is that the hospital will have both a fractionated strategy in terms of the kinds of patients it treats and an inconsistent free-care policy. The strategy to serve certain disease conditions, for example, will be frustrated by a clinical chief who minimizes the number of patients with those conditions...