Philanthropy, emotion give children's hospitals a financial boost

Children's hospitals operate much differently than general hospitals. Patient demand is greater, competition is limited and fundraising is generally stronger, which, according to a recent Moody's report, contributes to stronger margins. But children's hospitals also rely heavily on Medicaid funding, which makes them especially vulnerable in the face of potential repeal of the Affordable Care Act.

"There's a bit of a schizophrenic life to these kinds of hospitals," said Sandy Melzer, executive vice president of Seattle Children's Hospital. "There's a lot of variability state to state for Medicaid payments for children's services, but even in the best scenarios, they don't fully cover the cost of care. In some states, it's significantly less. That's the challenge."

[Also: Children's hospitals trail in revenue growth, but generate stronger margins, Moody's says]

A repeal of Medicaid expansion under the new presidential administration would impact children's hospitals only moderately because most children had insurance before expansion started happening. But a reduction in federal CHIP funding, or a shift to Medicaid block grants, could have a greater impact, depending on how individual states choose to distribute Medicaid funds to all hospitals.

"Over 50 percent of the children that we see are on Medicaid," said Tim Robinson, executive vice president and chief financial administration officer for Nationwide Children's Hospital in Columbus, Ohio. "You're usually providing the service below cost, so you'll have a Medicaid shortfall. It's a little bit state by state, but because of CHIP, most kids are at least eligible for Medicaid, so you have a smaller self-pay population. Almost everyone is insured, so you have less bad debt and charity write-off than in a traditional adult system.

"With Medicaid, it's pretty prescriptive now, the kinds of coverage that needs to be made available," said Robinson. "If you lose those requirements and more discretion is given to the states, you could see changes as to what's covered under Medicaid, that's then adjudicated to the state level. With those funds -- do they get directed to the care delivery? With much more discretion, it could disrupt the current payment flows."

Indeed, it's the high percentage of Medicaid patients in the typical children's hospital's payer mix that is cause for the greatest vulnerability in the case of ACA repeal. If the health law is replaced as expected, states would no longer have federal funding to expand their Medicaid programs, and then they would have a decision to make: Make people ineligible, or fold them into state aid. That, said Melzer, would be a credible scenario in which funding for children in Medicaid would dip.

"Any alteration in the system and you're looking at a likelihood of reduced Medicaid funding," said Melzer. "Children's hospitals are going to have some very tough choices."

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Luckily, children's hospitals also come with some built-in advantages. They generate stronger margins largely because of higher demand for profitable services as compared to adult hospitals.

"Children's hospitals are in a pretty good position to command market premiums on the commercial side, unlike the adult market, who compete with each other aggressively for certain service lines," said Melzer. "There are relatively fewer children's hospitals, so they can command some slightly better pricing than some of the adult systems."

Fundraising is also more robust at children's hospitals, and according to Moody's numbers, median days' cash on hand, which was 361 in 2015, was quite a bit more than the median of 212 at adult hospitals. Some far exceed even that. Cook Children's Medical Center had 613 days' cash on hand when the survey was conducted. Boston Children's Hospital in Massachusetts had 799 days' worth. Children's Healthcare of Atlanta had 1,000 days.

One reason philanthropy is strong in the children's sphere is simple emotion, Melzer said.

"They tug on the heartstrings," said Melzer. "What's not to like about healthy children, especially as folks get older and they have grandchildren? Virtually everyone I meet on the street says, 'Oh yeah, I was there when I was a kid,' or 'I was there with my son.' There's a sense that it's not somebody else's issue. They can kind of connect with that."

Because of that strong fundraising base, children's hospitals have been able to invest in programs and infrastructure that support their mission of family-centric care. That's an important mission for Robinson, and it's a model that's starting to catch on with some adult hospitals as well.

[Also: 30 percent of children's readmissions to hospitals may be preventable]

"Kids have very unique needs in terms of what diseases impact them and what kind of care is required," he said. "When you're treating a child, you're treating the entire family. Family-centered care is really important, because you need their parents to be engaged in the care. You're reducing fear and anxiety in small children, creating an environment that is supportive and reduces the stressors."

Melzer also said he's seen family-centric thinking creep into adult hospitals.

I think there's a lot of great lessons to be learned in how you involve a family in care and create a healing environment," he said.

Twitter: @JELagasse