SUSAN DENTZER: Let's talk about The Hunter Group. What do you do as a company?
DAVID HUNTER: The Hunter Group, fundamentally, is a company that specializes in performance improvement in management, and what we generally do is help our clients to improve their financial and clinical performance, and, in some cases, we help them manage the institutions, sometimes by running the institution in entirety, sometimes by just providing supplemental management assistance, one way or the other. It's pretty much the core of the business. About half of the businesses and institutions which have no financial difficulty, just wish to seek to improve their performance, and probably 40 or 45 percent are those that really do have some sort of financial difficulty, you know, currently, that they're looking to improve or to fix.
So that's really what the, what the business is all about, in a nutshell.
SUSAN DENTZER: You got into this because you had formerly been a hospital administrator.
DAVID HUNTER: Right.
SUSAN DENTZER: What made you recognize that there was a market for turnaround experts such as yourself?
DAVID HUNTER: When we, when we--when we came to start thinking about this idea, the reason--the way in which we developed it is by interviewing executives at bond funds, executives at health facilities financing authorities, investment bankers, lawyers, those people who generally deal with institutions when they get in trouble, and what we were looking for is what, what kind of assistance would be most valuable to those constituencies who are sort of integrally involved in the financing of health care, particularly on a long-term basis, and that's how we really--we came to, came to create the companies. We created around what we thought would be a deliverable that would be valuable to all of those folks who, you know, in effect, have a significant interest in what's happening to health care institutions, but they're not necessarily the owners, more the investors, if you will, in the not-for-profit side.
So that's really how we came to design the sort of basic philosophy of our company .
SUSAN DENTZER: The hospitals you're working with are almost exclusively nonprofits.
DAVID HUNTER: Yeah, we tend to work only with nonprofit hospitals, health systems, universities. We have done a couple of for-profit projects, but we would rather do the not-for-profit institutions, and that's really where our track record is. That's, that's where our, you know, our successes have been, so we sort a stick to what we do reasonably well.
SUSAN DENTZER: Okay. Let's talk about the way academic health centers have traditionally worked. They're complex institutions of multiple parts, and they've operated through a lot of cross-subsidies of one part of the enterprise to another. If you had to explain that to a complete neophyte who was encountering this kind of a system for the first time, how would you describe it?
DAVID HUNTER: The academic medical centers generally have used the revenues from patient care, the clinical portion of the enterprise, to subsidize three or four different activities. One is medical education. There is generally large transfer payments from the clinical enterprise to the medical schools to support medical education in--indirectly, in the form of payment for supervision, obviously the house officers, and in--indirectly, in other kinds of, of financial subsidies that go along with the joint relationship between the medical school.
That can be very significant in some cases. It can be quite large and fairly important. Research, generally, is subsidized to a certain extent, not quite as large in terms of the subsidy as--in our experience anyway, as the educational component. Frequently, a lot of that activity is what I characterize as the "orphan" research projects, you know, or the start-up research projects which haven't gotten any NIH funding, or any, you know, drug, or, or supply company funding for these projects.
So, frequently, the hospitals will at least sort of help to "prime the pump" a little bit, so that creates a subsidy issue. You know, indigent care is clearly an issue in many of these institutions, you know, they, they are safety net providers, and a lot of the care that's given is to people who either don't have insurance, can't afford to pay, you know, are, are--can only afford to pay part of it, if any.
Those constitute the three biggest cross-subsidies, and what we try to tell our clients, lately, is that the hospital business will pay for the hospital business. It's very hard to generate large subsidies, anymore, large margins which you can use to prop up the other pieces of an academic enterprise.
So a lot of the difficulty is in not only readjusting the clinical enterprise's activity, or the hospital's budget, if you will, but you're also affecting research budgets, you're affecting medical education programs, and you're affecting the ability to take care of the indigent population, that they historically have served, a pretty significant issue.
SUSAN DENTZER: So to put this in the simplest possible terms, what you have is a bunch of medical doctors, faculty, who essentially charge more for their services and the hospital charges more for its services than the average community doctor, or hospital, so they can subsidize these other aspects of what goes on in an academic medical center.
DAVID HUNTER: That's a simple way of putting it. It's a little bit more complicated in that a lot of them--it's not necessarily charging more, it's, it's, you know, what the rates are set at, what they're able to get from the insurance companies and the HMOs, and all that kind of activities, but, in balance, where a community hospital may use its profits, either to put in reserves or to build new buildings, or build new equipment, the academic medical center tends to use its, in effect, transfer payments or subsidies to support medical education.
I think it's unfair to characterize them as doing something that the community hospitals don't do, because the community hospitals do cross-subsidize to a whole lot of activity, but it's different activity, and it's usually not as large a cross-subsidy as the academic medical centers tend to have. But patient care has supported a lot of health care activities that, you know, aren't paid for out of direct --you know, aren't --covered in your way of thinking about them, directly, so--
SUSAN DENTZER: Okay. Now what's happened to the ability of centers to cross-subsidize this way, to basically fund the research, fund the education? Where has the system begun to come apart?
DAVID HUNTER: I think there's two significant issues that are sort of overarching. One is that I believe that the--and, and I think, as you talk to people in the business, they will confirm that revenues have dropped fairly precipitously in the last two or three years. I expect those to continue for the next four years, or three years, depending upon which expert you talk to, could be as much as between 15 and 20 percent over the next three to four years, in terms of the potential for revenue decrease as related to [the Balanced Budget Act]. You know that the condition of the insurance industry is terrible. They're not passing on a lot of dollars. We still have some revenue inhibitors to come, like HIPA, and we have the ambulatory DRGs, you know, and as those things roll out, they're gonna have differential effects, but most of that stuff tends not to be positive in terms of revenue.
So you have a lot of pressure on the revenue side. The expense side has got some real extreme pushes in it, too. I think that in, in--idiosyncracy of our time, the health care industry is experiencing significant inflation.
That inflation is fueled, fundamentally, by wages, nursing shortage--serious difficult getting nurses into the whole profession anymore, and into the health centers. Our technical people. You know, if you have a Stanford, or you have a UCSF, or if you have an Emory, and you're in these big centers where all these "techies" can go get jobs, in dot-com companies, it gets very expensive to retain those and, and hospitals are tending to run on those kind of technical support people.
And then, finally, the rank and file, fundamentally, are looking around at the economy and saying, "Where's ours?" and I think you're going to see significant pressure. So, over the next three years, you could see a 20 percent inflation push.
SUSAN DENTZER: So costs are going way up.
DAVID HUNTER: Right. Add to that drugs. You know, we're having the same problem that the old people are having, that, fundamentally, drugs are more expensive for hospitals to buy, and, and harder to pass along. And then supplies. I don't know if you're aware of this, but in some academic medical centers, the cost of, for example, a prosthesis for a hip, or a knee, the cost of that prothesis alone is more than the DRG payment for the whole procedure. So you're already losing a significant amount of dollars before you start. Same thing with aortic stents and some of the other technology that's come on the scene.
Plus we also had a, an oil crisis, and, and, you know, we--our industry runs on plastics, and we haven't see the petroleum push come--we've seen it at the gas pump, but it pushes right on through to the petroleum-based products that we use a lot of in the hospitals.
So I think all of those things, together, are going to create a big inflation push. The net result of that is that the--you get a scissor somewhere out there and you're gonna get--you know, you're gonna get some deteriorating performance.