Hospitals Face a Baby-Boom Bust

Congress needs to tinker with Medicare anyway, since the so-called "physician fix" demands annual attention. By law, Medicare must cut payments to physicians when the overall economy slows down. After an initial cut in 2002, however, it has chosen to simply postpone those cutbacks instead.

As a result, Villwock estimates, physicians will face a staggering 20% reduction in Medicare payments at the end of the year unless Congress takes some action. Instead of passing yet another temporary fix, he predicts, Congress will finally address the matter in a comprehensive Medicare package that solves the problem for good.

"The Democrats are walking into 2009 with a strong majority," Villwock states. "With any finesse at all, they will pass a massive Medicare bill sometime next year."

Ultimately, Villwock predicts, the government will find a way to pay hospitals enough money to treat Medicare patients without going out of business. Under that scenario, he says, hospitals would recoup their costs and clear a small return -- totaling about 5% of revenue -- for routine capital expenditures. Although not-for-profit hospitals have grown efficient enough to survive those cutbacks, he says, for-profit hospitals would likely lose investors accustomed to returns that are sometimes three times that size.

Skolnick wonders if hospitals could really withstand that kind of hit. For years, she notes, they have been plagued by falling patient admissions and rising bad debts from the uninsured. In recent months, she adds, they have seen the credit markets tighten and further threaten their health.