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The Microeconomics of Long-Term Care Can Cause Problems

Published August 6, 2009 9:40 AM by Brian Garavaglia

It is no secret that our country is currently going through some very difficult economic times. With job losses increasing, the subprime problems leading to many issues of foreclosure, and many financial institutions failing or needing to be bailed out, many people hold the misconception that health care as an industry is immune to the larger economic problems that are found in society. I often hear many individuals saying that if you work in the health care industry, you do not have to worry about your job. It is interesting how many people feel that the health care industry is somewhat disconnected from the larger problems of society and are inoculated from many of the problems that other face in today's world. Health care, including long-term care, has to deal with issues that are faced by the rest of society. Yet, in doing so, one would hope our industry addresses them prudently due to the lives that are often dependent on our decisions.   

The economic climate of long-term care has always been an important consideration for administrators. It is amazing how many think that nursing homes are making a large amount of money in the business of caring for the elderly. On the basis of fact, most nursing home's margins are often not very far from zero, being at times slightly above or slightly below.  However, the reality is that nursing home care has always been about just that, care. 

Yet, even though these facilities have been predicated on caring for those that have not been able to care for themselves, many facilities nevertheless have tried to maximize their profit margins. Strictly speaking, there is nothing wrong with this, especially since health care is a business. However, the problem begins to rear its ugly head when management losses sight of the special business they are in, which is caring for the elderly, and starts to evaluate their entire business on the basis of the economics of the facility. If they attempt to maximize their profit margin at the expense of resident care, it is here that the problem exists. Unfortunately, and all too often, health care management, including long-term care managers and administrators, fail to understand that conducting business is not the same as conducting other forms of business.  In the business of long-term health care the lives of frail and dependent individuals are reliant on the decisions you make on a daily basis. 

We have witnessed that many forms of reimbursement have not kept up with the rate of inflation in the medical industry.  Because of this one of the most common ways that administrators use to control their economic environment is to target the workforce of the nursing care facility. In fact, health care organizations have introduced many tools to be used for control, such as various metric systems that informs management staff how many workers are needed for a given number of residents. Also common in the nursing home environment is using the metrics of hours per patient day, often referred to as HPPD's. Using measurements to help control excesses in any area are important. However, the administrator has to be aware that these numbers are not etched in stone and that in addition to staff-patient/resident ratios, one has to also calculate many of those intangibles that often do not lend themselves nicely to quantitative analysis. For instance, the acuity of an environment, based on wounds, bariatric issues, the number of acute illnesses that are currently exacerbating chronic conditions, or the increased number of roaming and confused residents, just to name a few, have to be considered and factored in to the control area. Again, as one can see these are not always easy to capture through a measurement device. Beyond attempting to post positive bottom line numbers is the need to post positive bottom line care. This must be first and foremost in the mind of administration.             

Also, during our current macroeconomic hardship that society is facing, the impact that it has on many businesses, including nursing home care, is prominent. As mentioned previously, health care organizations are not divorced from the larger economic problems in society as many have come to believe. On a daily basis workforce reductions are happening in all areas of society, including healthcare. Although long-term care often has some resistance towards engaging in this type of activity, especially with nursing staff, the problems of workforce reduction still exist. In some cases workforce reduction may be needed, but again, one has to be quite prudent in using this type of financial control mechanism. Administrators have to be aware that although they may be reducing overall labor costs that may have an important impact on the economic environment of their nursing home, here again, one has to be aware of many costs that cannot be measured, those intangible costs of losing social capital. Making workforce reduction often entails losing important social capital, such as those qualities of knowledge, experience, care, and quality that again are not easily quantifiable. Although reducing the workforce by two or three tangible and measureable units may come to save the administrator those measureable costs found in their income statement, the two or three tangibles units reduced could actually entail intangible social capital losses that may amount to really losing five, six or seven units of quality care. 

The business mindset, especially during difficult economic times, is often based on reducing those tangible and measureable units to bring greater harmony to those financial instruments that are often used in measuring the performance of a business entity. However, administrators and long-term care organizations that want to manage a health care organization exclusively in this manner are really deadwood. Unfortunately, health care administrators and health care organizations engaged in long-term care attempt too often to manage on a strictly business-based mindset. As we have witnessed currently in our society the common classical and neoclassical economic principles do not always work and attempting to use tangible economic measurements without paying attention to those intangible behavioral economic features has caused considerable problems for our society. This also applies to health care, including long-term care.  Attempting to navigate difficult economic times by using these so-called time honored traditions of managing microeconomic environments can ultimately impact quality care, which is the ultimate goal of any health care facility, in a negative manner.               

posted by Brian Garavaglia


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About this Blog

    Brian Garavaglia, PhD
    Occupation: Long-term care administrator
    Setting: Sterling Heights, Mich.
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