Factors Effecting Operating Margin

Technology
Over the past few decades, great advancements in technology have resulted in the opportunity to deliver a much higher level of healthcare to more people. And with that, has come an increase in expectation of what level of service and care should be available in a timely and cost effective manner. However, there is a price tag associated with rapid technological advancements. Costs for acquiring and implementing new technology are huge and account for a significant portion of the increased costs in health care. For the past 3 years, KGH has spent an average of $2.5 million annually to upgrade and replace aging equipment and purchase new technology. Committed to meeting regional and community health care needs and to bringing state of the art care to our communities, KGH recognizes that philanthropy can play a large role in making sure there are sufficient revenues available for purchase of new and improved diagnostic equipment.

A sampling of some of the technology purchased in 2003 and 2004:

In 2005, the old CT Scanner was replaced with a $1.1 million dollar Multi-Slice CT Scanner, bringing a remarkable state of the art technology and diagnostic tool to southern Southeast Alaska.

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Reimbursement and demographics
Continued decreases in reimbursement, particularly from Medicare, are resulting in financial crises for many hospitals to the point that some have been forced to shut their doors. Reduced reimbursement creates another reason why KGH is looking to a Foundation to augment its revenues to maintain its ability to provide its current level of service and care.

KGH’s situation in a snapshot:

• 57% of KGH revenues come from government reimbursement (Medicare,  Medicaid)
• 6% of KGH’s patient population doesn’t have any form of health insurance.
• 8% of KGH operating revenues are devoted to providing uncompensated care for the uninsured

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Labor shortages
National healthcare industry labor shortages, especially for physicians, physical therapists and nurses, have a major economic impact on hospitals, forcing wages to increase in order to competitively attract and retain staff. Because of this competitive national market for key health care workers, vacant positions are open longer resulting in the need to use expensive temporary traveling labor to fill long term and critical vacancies.

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Regulations
Hospitals are subject to federal, state and insurance company regulations. Costs associated with implementing and then tracking compliance continues to increase. For example, it is estimated that KGH will spend thousands of dollars a year to comply with the changes in Health Information Patient Privacy Act (HIPPA).

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Insurance rates
Skyrocketing insurance rates have an impact on the revenue margin which supports purchase of new equipment, adding of staff and provision of additional services. Increases in liability insurance and employee health insurance are just two large contributors to this cost factor.

In recent years a number of factors have begun to threaten the hospital’s ability to maintain the healthy margin it has enjoyed in the past. That healthy margin is rapidly dwindling to the point where the hospital’s ability to meet community needs and expectations to replace equipment and bring new technological advances to southeast Alaska will be severely curtailed without additional revenues.

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