SHM has been working with JCAHO on its Hospital of the Future Roundtable. JCAHO has brought together an interesting international group made up of leaders representing hospital administrators, architects, social behaviorists, nurses, pharmacists, physicians, economists, government, technology experts, and others with a stake in the evolution of the hospital as an institution.
At our recent meeting in Chicago we discussed some aspects of the economics of hospitals that I thought would be worth sharing with the hospital medicine audience.
Right now many hospitals are actually in a good economic position. For the past 12 months hospitals have had an operating margin of 3.6% with a total margin of more than 6%. A number of factors have favored the hospital’s bottom line in recent years. There has been hospital consolidation with the closing of some hospitals. Managed care’s tightening of revenue forced hospitals in the 1990s to examine their operations and many hospitals became more efficient. This reduced hospital size and forced changes in staffing and other parts of the expense equation. Now that managed care has loosened its grip on the fees paid to hospitals, revenues have risen faster than costs, especially on the commercial side. There has actually been an increase of 8.6% in revenue to hospitals in the past year.
The dark side of this equation is that while many hospitals have benefited, some hospitals continue to run in the red because of geography (inner city, rural), and patient mix. This gap between haves and have-nots is increasing. The specter of more Americans without insurance coverage (or undercovered) also raises the burden of undercompensated care on hospitals in general.
Competition and Transparency
Recently, some people have been talking about trying to make true competition work in healthcare. One step in creating a marketplace is to have price and cost transparency. The thought is if the users of healthcare (patients) and the buyers of healthcare (businesses and government) could see each hospital’s charges, then people would make their decisions armed with information like they have when buying a car or a house.
Unfortunately that is not how the healthcare marketplace (if you can call it that) operates. The reality is that the government (as Medicare and Medicaid) sets price levels fairly arbitrarily and very often below the actual cost of delivering the services. You also have to throw into the mix all the care hospitals provide to patients without any insurance coverage or means to pay for their care. This leads to cost shifting to the tune that hospitals now expect private insurers to pay 122% of costs just to balance the CMS shortfall. Price transparency makes it more difficult to cost shift because a hospital would set its “price,” but would that be the price for Medicare, for Medicaid, for the “Blues” (Blue Cross/Blue Shield) as well?
Now that employers are cost shifting to their employees with larger co-pays and basically offering a fixed benefit and asking the workers to pick up more of the health tab, it is even harder for hospitals to cost shift to the private commercial side (i.e., people under 65 with insurance).
The good old Marcus Welby, MD-era hospital as the total community resource that takes the profitable and the needy is eroding. Specialty hospitals have sprung up to siphon some of the best revenue sources and help physicians get on the facility side of the equation. Many of the most lucrative outpatient modalities (e.g., surgicenters, imaging) have moved off campus and out of the hospital’s domain. And there sits the full-service hospital left with many of the responsibilities and a disproportionate share of expense, but with less of the high-ticket revenue.
Our population is getting older, but aging baby boomers will account for only about a 10% increase in healthcare spending. The bigger problem is that as the population ages a greater proportion of healthcare spending shifts from private to public (i.e., from the Blues to Medicare). There is already a problem in cost shifting as I mentioned above with Medicare and Medicaid paying <95% of healthcare costs. You can’t make up those losses with volume. It’s predicted that more than 65% of hospital funding will come from the government by 2025. How can a hospital survive with those dynamics?
There are only three options. Faced with decreasing revenues, hospitals can further reduce expenses. With much of the fat already trimmed this is a daunting proposition. Second, the hospital can cost shift and ask a greater percentage from the private insurer. This will be difficult with price transparency and a greater portion of the bill being paid by the patient. Third, we can all pray that the government will increase its reimbursement; unlikely, when it’s such a fight just to not be cut each year.
Need to Add Capacity
With the aging population and the increasing acuity of hospitalized patients, changes need to occur in the hospital’s physical plant. Recent surveys have shown that more than 85% of hospitals plan to add or change their capacity. While this is significant in Florida, Arizona, Nevada, and other places faced with population migrations, in other places this is driven by the need to expand the emergency department, add telemetry beds, and expand the ICU.
This is further complicated by the movement of well-heeled (and well-insured) populations to the suburbs with the hospitals following them and leaving disturbing realities for the older inner city in their wake.
Technology Is Your Friend
New advances are more than gadgetry gone wild. When best deployed these 21st-century advances can lead to better outcomes, safer hospitals, and actually make economic sense. The problem: Where can hospitals go to find out just which technology to use? At many hospitals these decisions are made by committees with less than perfect knowledge in a rapidly evolving market. Once the technology is chosen, the implementation can be disruptive more than helpful, especially in the short run, and the processes of care can be thrown off course. Sometimes this can have convulsive results such as in the failed implementation of CPOE at Cedars Sinai Hospital in Los Angeles.
And whether it is new technology or the adding of capacity, just where will the hospitals get the capital to pay for all this investment in the future? Not from Medicare and Medicaid, not from big business, and not from the out-of-pocket dollars of their patients.
This is the reality of today flavored with best guesses for the future. From this vantage point will arise the ideas of how to shape the hospital of the future. This is the world tomorrow’s hospitalists will inhabit. We need to understand how this will shape resource availability, hospital design, the commitment to quality improvement and accountability, and the environment in which hospitalists will work and our patients will receive care.
Once we understand what will shape the hospital of the future, hospitalists can be better prepared to be active partners in the shaping the new reality. TH
Dr. Wellikson has been CEO of SHM since 2000.