Times are Tough, But We Are Charting A Course Through The Changing Landscape

Oct 28, 2016 | From the SVH CEO

So many of you are now asking me, how are you managing through the seemingly major changes in health care?  My answer is… pretty well, all things considered!  While health care is expensive, the significant decline in health care reimbursement continues to affect our industry and is having a profound effect on community hospitals like ours. Because of our smaller scale, even small reimbursement reductions by payers have significant financial impact. This has been the top concern for SVH for the past few years.

I’ve noted previously that SVH, like most community hospitals, is heavily dependent on reimbursement from government sources. In the past fiscal year, over 60 percent of our revenue came from federal and state reimbursement, mainly Medicare. At the same time, commercial insurance continues to decline and now represents just 20 percent of our revenue.

This trend is important because only commercial insurance reimburses SVH at a rate higher than our costs; federal and state reimbursements are below our costs. Looking at the coming year, there are three payer trends that will continue to affect Hospital revenue.

Emergency Care. Emergency Department volume has increased by over 20 percent since it opened in 2014. That was also the year that the Affordable Care Act went into effect. The broader ACA coverage among people who do not have primary care providers has resulted in greater ED use. In addition, the number of Medi-Cal patients who use our ED has grown from 7 percent to 17 percent in recent years.  In these cases, our reimbursement is below the costs of providing care.

Changing Payment System. Fewer people today have traditional forms of commercial insurance and, when they do, it is often “capitated,” which means payment reflects a set capitated amount versus traditional payment for service.

Kaiser Permanente has the largest share of commercial patients in our valley with more than 25 percent market share for inpatients, reducing our potential patient population. Most other commercial patients are in HMO’s whereby the hospital and the primary care physicians receive a fixed monthly payment for each member, and then are at risk for medical costs incurred beyond that.

It is difficult for a small hospital and a small community of primary care physicians to take this risk because we can’t spread it over a large patient population. In addition, our District has a higher percentage of seniors than does the state, and medical utilization increases with age.

Reduced Utilization. All payers understandably focus on reducing utilization and continue to tighten regulations to decrease the number of patients admitted for inpatient care. All of the insurance products such as Medicare, Medi-Cal, commercial plans and Workers Compensation require authorization or have a set of criteria that must be met before we can treat most patients, so patients must be very ill to be admitted to the Hospital now.

Outpatient care is also changing. Insurers are authorizing fewer procedures than ever, including many common outpatient services such as diagnostic imaging and rehabilitation, two major service areas for SVH.

What are we doing about this?

We are doing our best to stay viable and manage through these industry changes. With careful cost analysis, we’ve been able to improve margins in a number of service areas without reducing quality of care, and we’re seeing better margins in highly regarded services such as Obstetrics, Home Health and Skilled Nursing.

I’ve never seen the landscape change this rapidly. With strong support from the board, physicians and our community, we can remain healthy and viable until things in the health care industry stabilize.

In good health,


Kelly Mather

President and Chief Executive Officer

Sonoma Valley Hospital