Why Health Care Is Reshaping Itself

Costs and revenue: This is the oxygen of any business, any organization. What are your revenue streams? How much does it cost you to produce them? Life is not just about breathing, but, if you don’t get that in-out equation right, there is nothing else life can be about.

Right now this enormous sector is turning itself inside out. It has turned the “transmogrification” setting to “warp.” Why? It’s all about the in-out. It’s all about increasingly desperate attempts to get that right — and the clear fact that we cannot know if we are getting it right.

Let’s do some school on the two sides of this equation. Let’s just go over the new weirdness, and the implications for you and your organization. Revenue first.

Hunting for True Revenue

In traditional health care (the way we did business until about five minutes ago) the revenue side was complicated in detail, but simple in concept: You do various procedures and tests and services, and you bill for them. You bill each item according to a code. You bill different payers; each has its own schedule of payments that you negotiate (or just get handed) every year. There are complications, such as people on Medicare with supplemental insurance, dual eligibles on Medicare and Medicaid, and self-pay patients who may or may not pay.

That’s the basic job: aggregating enough services that reimburse more than their real cost so that you can cover the costs of services that don’t reimburse well. This is cost-shifted, fee-for-service management. Cut back on those low-reimbursement services; pump up the high-reimbursement ones. Corral the docs you need to provide the services, provide the infrastructure and allocate costs across the system.

The incentives all point in the same direction. The revenue streams are all additive. The more you do of the moneymaking items on the list, the more money you make.

Hybrid revenue streams in the Next Health Care. Fast forward to five minutes in the future, and the picture becomes not only complicated, but complex, in some ways irremediably so. Now you’re not just thinking about the revenue structure of a hospital; more often you are thinking about a system, with not just multiple revenue streams but multiple types of revenue streams. You may already have had clinics, labs, ambulance services, imaging services, primary care physician groups — in fact, a whole array of different businesses. What’s different now is how you get paid for things.

You may still mostly be working fee-for-service, but maybe now you have an insurance arm, and maybe some percentage of your patients are capitated through it: You have an incentive to provide excellent care, but any unnecessary emergency department visits or surgeries, any preventable heart attacks or diabetic shock episodes are now simple costs, while before they were revenue opportunities as well.

You may have developed a new set of revenue streams in per-patient, per-month prospective payments for “medical home” services but, the more you do that and the better you are at it, the more you keep people out of your ED and your surgical suites. That’s what those payments are for — to lower the overall costs by taking better care of the patient up front. And the costs you are lowering are your revenues.

Similarly, your primary care arm may have an at-risk contract like the Alternative Quality Contract from Blue Cross Blue Shield of Massachusetts, which literally pays primary care providers to keep patients from needing to use EDs or needing surgery or other high-end services, while holding them to quality standards that assure they are getting excellent care. It’s a revenue stream, but it’s at the cost of other revenue streams. Or it may not be your revenue stream. It may be an independent primary care physician group in town that has the contract, paid extra to deprive you of fee-for-service patients.

Or you may have dedicated clinics servicing specific groups on a per-patient, per-month basis (like, say, a spine and pain clinic for a company’s warehouse workers) in which working efficiently and well cuts into what otherwise may have been fee-for-service operations and imaging services.

Unknown factors. These scenarios lie against a background in which it is likely that actual fee-for-service reimbursement rates from Medicare and private payers will be held tightly in check. The future landscape has a number of new opportunities for revenue streams, but most of them make money by cutting into your (or someone else’s) more conventional business. But we cannot know by how much, or how the interaction between different revenue streams will play out over time.

In planning for the new environment, this tells us three things:

  • These systemic risks are not quantifiable, and so cannot be hedged. They are risks because we are entering new territory. We simply do not know how these different parts of the market will interact. Revenue estimates for most parts of the business have to be treated as “high-variance” projections, which were much harder to pin down in the past.
  • If some types of risk contracts make money by cutting into other types of business, you want to own that contract. If some organization is going to make money by costing you money, you want to be that organization. It may be cutting into your ED, surgery and imaging business, but at least you get the revenue stream for doing that. If you don’t, someone else will.
  • For any business that includes a hospital, bigger is better. At greater size, you can absorb more high-variance risk from a greater variety of revenue streams, and from different contracts serving different populations. You can spread the revenue base and try more alternatives. You have the space and breadth to try, fail forward quickly and try again.

If the revenue side is so hard to pin down, you need to create some space to try different options. The cost side can give you some of that space.

Getting Our Arms around Cost

Compared with revenue, the cost side of things seems relatively straightforward. So why can’t we get our arms around it?

When we are talking about the costs of health care, we are talking about two different types of costs. One is the cost of doing things, such as: How much does it cost to do a complex back fusion operation? Think of these as internal costs. The other is the cost of producing an effect, such as: How much does it cost to reduce back pain? Think of these as system costs.

If you are at risk for a population (as in, perhaps you have a spine and pain center with a per-patient, per-month risk contract), then both kinds of costs are true costs to you. If you can satisfy the patient and end his or her back pain through medical management instead of surgery, you have dropped a bunch of money to your bottom line.

On the other hand, if you are in a fee-for-service environment, the back operation is not just a cost, it’s also an income opportunity, and only the internal costs are actual costs to you.

More unknowns. In any environment, then, reducing your internal costs improves your bottom line. The problem here is that we typically do not actually know what our internal costs are, or what we could do to reduce them.

Some things obviously reduce internal costs — better coordination, reduced duplication, more efficiency in moving the patient through the system (not adding the cost of an extra inpatient day just because someone neglected to sign off on the discharge form, for instance), or fewer mistakes and infections.

But beyond these efforts, to truly reduce costs we need to drive our analysis to the individual patient and case level, differentiating between the general system costs imputed to the case, or the average costs that such cases are thought to generate, or the sunk costs of the facility and equipment, and the actual incremental costs that this case generated: How much did it cost us to replace Mr. Herndon’s hip? Much of the costs attributed to particular types of operations are averages, or imputed costs representing the whole organization’s overhead. These obscure the costs that are particular to Mr. Herndon’s case.

Fine-grained cost analysis. Why do we need such fine-grained cost analysis? Because if the team who handled Mr. Herndon’s workup, surgery, post-surgery and rehab did something different that actually cost less and worked better — a different kind of wound dressing, say, or a more aggressive schedule of getting him up and walking afterward — more general cost analysis would not let us pick up that difference, track it and replicate it.

Further, we need to track the costs by activity (how much did the post-surgical care actually cost, say) and across the entire care cycle.

Similarly, we need to drive the cost analysis to the team level: If a given hip-replacement team is able to find ways of doing things that are better and cheaper, we need cost analysis that can pick up that difference so we can find out what teams are doing differently, try the improvement with other teams, measure the improvement and propagate it.

Two things make this currently impossible in most of health care: Our cost aggregation software is mostly designed for billing purposes, not for discovering actual costs. It doesn’t ask the questions to which we need answers. And typically in health care, we do not work in persistent, dedicated clinical teams. We rotate people through various assignments. When there are no persistent teams, it is not possible to notice which variations of practice actually cost less and get better results. Having no teams obliterates the possibility of learning.

Still, though tracking real costs to the patient, case and team levels is difficult, costs are ultimately more discoverable than future revenue streams. With the right strategies, one can drive down costs much more dependably than one can predict revenue.

Cost and Revenue as Change Drivers

The struggle to get the cost-revenue respiration right is the prime driver of the enormous structural changes that we are seeing in health care. Recently, the head of health care for a major Wall Street bank told me that up to just a few years ago, mergers and acquisitions amounted to 5 percent of his practice. Today it is 67 percent.

Big systems, including for-profit systems, are expanding rapidly, acquiring hospitals and other health care services by the bunch. They see these acquisitions not as “revenue plays” largely, but as “cost plays.” The big systems believe they can create value and enhance their survival by mitigating the “high-variance” risks of the new environment through size and diversity, while wringing cost out of the services and hospitals they acquire through tighter coordination and more aggressive management.

These same factors make it increasingly difficult for small and rural hospitals to survive as independents. They need the scale, greater coordination, access to clinical excellence, ability to support experiments in driving cost and quality, and ability to rationalize high-variant risk across a larger system that only a partnership of some kind with larger organizations can provide.

The new era of costs and revenues likely spells the end of any notion of the hospital as a cottage industry. It is on the balance sheet and the cash flow sheet that the idea of “coordination across the full cycle of care” stops being a buzzword and becomes a structural reality.

With nearly 30 years’ experience, Joe Flower has emerged as a premier observer on the deep forces changing healthcare in the United States and around the world. As a healthcare speaker, writer, and consultant, he has explored the future of healthcare with clients ranging from the World Health Organization, the Global Business Network, and the U.K. National Health Service, to the majority of state hospital associations in the U.S. You can find more of Joe’s work at his website, imaginewhatif. This post was first published in the American Hospital Association’s H&HN Daily, November 27, 2012.

39 replies »

  1. I believe the PT can begin practice at the Baccalaureate level also. But really, what would masters trained nurses do at the bedside. I worked with a girl who had her masters as a clinical specialist. She worked just as I did. Think of the frustration of someone highly trained to yet not being able to use that training in the way she/he was educated to do. Nursing does have to change, but no one has the answers, its a difficult issue to talk about. Many Nurses are very frustrated with the system but just see the job as a means to a paycheck. When Nurses can only do what the Physician orders, there can be no change.

  2. What I meant by printing money is not as onerous as you describe. My point was that if a government underestimates its actuarial risk one year, they can safely run a deficit and fix whatever needs fixing the next year, or the year after. A smaller entity would be forced into bankruptcy, which is not a pretty solution either. Not every deficit year ends up being Greece.

  3. “Your hypotheses about other countries just printing money to cover for health care overspending is disingenuous to their systems, as if they are unsophisticated. In Canada the provinces actually fund health care and don’t get to print money.”

    Peter1 –

    It was actually Margalit who made the comment about governments printing money. I agree with you that this isn’t a viable strategy, at least over the intermediate to longer term, even for central governments that can borrow money to cover deficits for awhile as long as they are perceived as creditworthy by fixed income investors. As several countries across Southern Europe are learning, borrowing has its limits.

    In the U.S., Medicare, which is a single payer system that covers the elderly and some disabled people and uses dictated as opposed to negotiated prices, has not been successful at setting budgets and living within them. They just pay the claims submitted to them, including lots of fraudulent bills, and whatever it costs it costs. That’s no way to run a healthcare system either.

  4. “…no one is now advocating for the individual patient and all decisions are driven by corporate finances.”

    there are many who would say this has been the reality for several decades and many of the difficulties we now face are the result of the prioritization of corporate bottom lines over patient outcome.

  5. I would be more concerned about the technology bus than the reform bus if I was a doc concerned about tire tracks messing up my scrubs.

    and then again the latter may just be a stalking horse for the former

  6. Barry, I’ll concede in your numbers from other countries, my own look- up confirmed your data.

    I’m now thinking the U.S system may have better numbers due to what insurance will pay for, or the system operates like the restaurant industry where they get more money for turning tables.

    Your hypotheses about other countries just printing money to cover for health care overspending is disingenuous to their systems, as if they are unsophisticated. In Canada the provinces actually fund health care and don’t get to print money.

    Here is a link to see how Ontario is doing it.

  7. “…wringing cost out of the services and hospitals … more aggressive management.”

    these two phrases in the same sentence of the analysis of a ‘change’ regime never describe a good outcome

  8. “we do have less admissions and shorter stays than most”……..that’s because in other developed countires they get paid for hospital stays…….it’s all about the money….even in countrieds that have “free healthcare”….which of course is not free.

  9. I would like to point out that a lot of issues with the healthcare system stem from regulations of the Government & Managed Care. For instance, EMTALA, which influenced the closing down of many Emergency Departments, since hospitals could not afford to keep them open due to uncompensated care. The fact that Medicare and Medicaid reimbursements are never what the hospital is charging, therefore hospitals have to increase costs to the private sector. This is part of the reason why a pillow can cost $50. The courts giving out rediculous amounts of money in malpractice suits. The antitrust regulations and Certificate of Need programs, which have limited the possibility of a healthcare free market. Granted, I do realize a free market in healthcare may not be advantagious for rural areas, however, it is much better then all this regulation and management. Managed care seems to be mainly focusing on cost containment, just like the government. I would hate to be a physician during this time, it appears physicians are being the scapegoat for what is wrong with healthcare, in addition to hospitals. Healthcare is one of the most altruistic fields and it is being turned into dirty filthy business. I truly believe that most physicians what to do what is right for their patients regardless of costs, it seems bizarre that we are asking them to compromise the patient for the sake of cost. We have become a micromanager of the physician and the hospitals, it is wrong and no good can come of this. How about we look at the overall system of healthcare, what is mostly creating the problem….in my eyes it is government regulation and managed care. This is why you see health systems coming together, because they are bracing for the take down of the system. The only way they can attempt to meet the demands is to become large enough to take the hit they are about to be taking with the PPACA. I am not completely oblivious to the fact that there are some hospitals as well as physicians that could improve. I just wanted to put a counter perspective out there for discussion.

  10. I think in most cases, the budget is defined by tax rates. It is infinitely easier to compute risk when the pool is the entire country. I would assume that sometimes they go over budget, but governments can print money. Also remember, that in most places prices are controlled through three way negotiations.
    We don’t need huge delivery systems that take risk. We need one huge payer that performs that function, and the smaller the providers, the better.

  11. Hi Joe,

    Have you seen your P.A. today?

    An apple a day keeps the P.A. away.

    Medical care indeed sucks with so many on the take.

  12. How do other countries establish annual budgets for health care? They don’t just open taxpayer flood gates. Here hospitals have more control over revenue I’m guessing than OECD countries, why else would they actively advertise and engage in the technology/amenity arms race.

  13. But the non-Medicare insurers generally pay Mayo their 400 percent mark- up.

  14. Peter –

    A knowledgeable U.S. physician wrote some time back about more hospital days abroad being devoted to rest and recovery. According to Commonwealth Fund data, though, the two biggest reasons that U.S. hospital care is considerably more expensive than elsewhere are prices per service, test and procedure are higher in the U.S. and we make more use of expensive medical technology.

    Regarding utilization and resource trends generally, here are some statistics, again from the Commonwealth Fund:

    Practicing physicians per 1,000 of population:

    U.S. 2.4
    OECD median 3.0
    Range: 4.0 (Norway) to 2.2 (Japan)

    Consults per capita:

    U.S. 3.9
    OECD median 6.3
    Range 13.2 (Japan) to 2.9 (Sweden)

    Hospital beds per 1,000 of population:

    U.S. 2.7
    OECD median 3.2
    Range 5.7 (Germany) to 1.8 (Canada)

    Average hospital length of stay:

    U.S. 5.4 days
    OECD median 5.9
    Range 7.7 (Canada) to 4.6 (Norway)

    Hospital discharges per 1.000 of population:

    U.S. 131
    OECD median 160
    Range 263 (France) to 84 (Canada)

    In Japan, a significant amount of hospital capacity is used for long term care which makes comparisons with other countries difficult.

    Regarding the idea of an annual budget for hospitals, they can’t estimate their costs a year in advance with anywhere near the accuracy needed to take on the inherent financial risk. Moreover, they would need considerable financial reserves to tide them over when costs exceed their budget. It’s not just about efficiency but about estimating the number of patients needing services and the average acuity of the case mix. Interestingly, the bigger the hospital system and the population it serves, the easier it would be to forecast costs and accept the financial risk inherent in a global budget payment model. The more of the continuum of care the hospital and its employed physicians control, the easier it would be to live with a global budget. Such a system might amount to the equivalent of three Kaisers in every large city / region and two in smaller cities / regions. I’m not sure how such an approach might work in rural areas.

  15. ” Lots of inpatient care in other countries is devoted to rest and recuperation…”

    Barry, hard to believe when most other countries are some form of tax supported/controlled care. It would not pay them to keep patients in expensive hospital beds when other care was available. I’d like to see a link.

    “The US has less hospital beds per capita, of every category, than the average OECD and most developed countries.”

    Filled, or waiting to be filled?

    “Check out today’s NYT for what happens when hospitals gain market share: colonoscopy fees going up by 400%.”

    Exactly!!! Local imaging center here was charging $40 per shot until bought out by local (semi-public owned) hospital, then per shot price went to $250!!!

    This system won’t get costs under control until the concept of “revenue” vanishes and the is replaced by the concept of “cost”. Give hospitals a fixed budget they have to work off and see how fast appropriate care replaces revenue gaming.

  16. Separating and insulating the hospitals from the doctors might address this issue, too – if a pcmh model can assist private outpatient doctors in achieving both higher quality and lower costs, then why can’t an analogous incentive payment and operations structure work in a hospital – where teams can work to achieve better, more coordinated, and more streamlined outcomes – and share in savings where such can be measured? It may well be that we are overemphasizing the role of financial incentives at this early stage of reform; with things like HIT, increasingly standardized protocols, sharing and interoperability of records, and a new nomenclature and system of common metrics, it actually just might make intuitive sense to do what is best for patients and reasonable for docs and hospitals. And the patients don’t necessarily have to be under the same hospital-clinic umbrella; this could be pleasantly diverse and with healthy competition among the various players. The more patients attracted to each the better; and the better care provided through the relationship or experience, the better – because it is being measured and reported, and reimbursed.

  17. Barry, I completely agree that hospitals should work hard to manage costs down, but as long as they are big enough to command whatever price they feel is right, there is no compelling reason for them to bother. Those bundled payments are also subject to negotiation.

    There are many things that hospitals must adhere to in order to remain open, and I don’t see why a maximum infection rate cannot be one of those things. The readmission game is not at all to my liking. In short, fee for service or otherwise is pretty much irrelevant in my opinion, if and only if, hospitals don’t control doctors orders.

    Unfortunately, we are choosing to let hospitals control physician choices, and through that, patient choices, and hoping against all odds that negotiating bundled payments will prove a better bargain for insurers. Since those hospital administrators seem to be pretty savvy when it comes to money, I am willing to bet that the bundled system will end up costing us more in aggregate.

  18. “Saving significant money for payers will always mean less revenue for hospitals, regardless of payment models.”

    I define saving money for payers as paying less than they would have paid under pure fee for service. With a capitated or shared savings / shared risk model, payers can pay less and hospitals can make more profit if the hospitals are successful in reducing costs attributable to avoidable infections and readmission rates just to name two possible areas of meaningful potential savings. So, even if hospital revenue declines, if they make more money as avoided costs exceed reduced revenue, they are net better off financially.

    At the same time, I’m all for PCP’s referring patients to the most cost-effective high quality providers. To do that, though, they need robust price and quality transparency tools at their disposal and they need to view it as part of their job to know and to care about costs. PCP’s can also help to reduce costs by doing an effective job of managing patients with chronic diseases and conditions like diabetes, asthma, hypertension, CHF, COPD, etc. Patient behavior is also a factor here though. Patients need to not smoke or stop smoking, control their weight and take their prescribed medications among other things. No doctor can force patients to do any of those things.

  19. “getting rid of the hassles of running a business in favor of working for a salary and leaving the business end of medicine to others while insisting on maintaining complete independence in how you practice”

    Seriously, I’ve never met those docs. Everyone I know who goes into an employed situation wakes up at 2 AM and realizes they’ve sold their testicles/ovaries, their Hippocratic oath duties, and their soul.

    But, more relevant to the discussion, I’ve never seen that more employed docs leads to reduced costs for non-Medicare patients. To hire good docs, a hospital has to have a large market share, i.e. higher charges.

  20. Saving significant money for payers will always mean less revenue for hospitals, regardless of payment models.
    It makes no sense whatsoever to put hospital administrators in charge of efforts to shoot themselves in the foot.

    On the other hand if you put independent primary care doctors, who have absolutely no financial interest in over-utilization or over-charging for services, in charge of reducing overall costs, I think you have a more realistic chance of succeeding. And no, I am not suggesting that independent docs take risk for hospital utilization. I am suggesting that we empower them to do their job.

  21. Barry,
    I would suggest that we can’t have it both ways either…

    On one hand we want people to become consumers of health care, comparison shop and reduce their utilization, and on the other hand, we obliterate price and quality competition for hospitals, while empowering them to use (abuse) doctors to drive up utilization.

  22. Southern doc –

    Having it both ways means getting rid of the hassles of running a business in favor of working for a salary and leaving the business end of medicine to others while insisting on maintaining complete independence in how you practice. Sometimes hospitals make legitimate efforts to streamline care processes to reduce costs and improve care quality and patient satisfaction. Cooperation and buy-in from doctors are critical if those efforts are to be successful. As Virginia Mason in Seattle and others have learned, often saving money for payers means less revenue for the hospital under a fee for service payment model. Such efforts would work out better for the hospital under capitation, bundled payment or shared savings models. How ACO’s ultimately work out remains to be seen.

    I’m not a fan of paying doctors, in part, based on relative value units billed or pressuring them to refer only within the hospital system even when they think an outside doctor or facility would serve the patient better and at lower cost. On the other hand, patient satisfaction scores should be a factor in compensation. Commercial payers, for their part, need to see the individual patient instead of the employer as the customer.

  23. “the docs can’t have it both ways”

    Both ways? I’m not sure what your “both ways” are.

    You say on one hand, the docs could kiss the asses of brain-dead hospital administrators so the hospitals could increase their profits, OR they can passively accept that hospitals get paid ridiculous amounts for lousy service. Doesn’t seem like much of a choice to me.

    Why not just pay non-hospital owned docs the same as their indentured confreres? Then, if the hospital wants to up their charges by 500%, see if the patients think it’s worth paying for.

  24. Margalit –

    Most of a hospital’s fixed costs and total costs are wages and benefits. At least 60% of a typical hospital’s top line is compensation and, if you exclude uncompensated care which will presumably decline with the implementation of the Affordable Care Act as more people become insured, it’s closer to 65%. About 15% or a bit more goes for equipment and supplies. Most of the rest is for utilities, different types of insurance, depreciation, and operating profit. Most of the labor and benefit costs can not be easily and quickly reduced if patient volume declines unless the decline is substantial. The basic economics are very similar to the hotel and cruise ship business – both labor and capital intensive where the last few points of occupancy are highly profitable because they require little incremental cost to serve.

    I’ve long said that I would love to see a comparison of the number of employees per licensed bed in U.S. community hospitals and academic medical centers vs. their counterparts in other developed countries. I’m sure the numbers are considerably higher in the U.S. but I don’t know if most of the difference is attributable to inefficiency (excluding the billing department) or the fact that most patients are undergoing a lot more tests and procedures per bed day which require more people for transporting, monitoring, evaluating test results, administering drugs and the like.

    Southern doc –

    The increasing market power of large hospital systems is a very significant issue as they use their market power to increase the contract rate per service, test or procedure vs. what those prices were in a more fragmented and competitive market.

    At the same time, when the market was more fragmented and a hospital attempted to improve efficiency and cut costs by improving care processes, including the use of checklists, it was often no easy task to get cooperation from highly independent doctors who were not hospital employees but independent contractors who had practice privileges at the hospital.

    I often joke when I say when hospitals aren’t killing us with infections; they’re killing us financially by extracting high prices from commercial insurers for routine care that non-hospital owned facilities and independent doctors do for a lot less. At the same time, the docs can’t have it both ways.

    The only large healthcare systems that I’m aware of that don’t use some measure of “productivity” to determine at least a portion of physician compensation are Mayo and Kaiser. I’m not sure about Gundersen Lutheran. Mayo, for its part, is not shy about charging very high prices for the services, tests and procedures that its doctors perform. I remain a big advocate for price and quality transparency and for special rules related to pricing for care that must be delivered under emergency conditions.

  25. This is not the tip of the iceberg. It is the full iceberg in plain view, but those steering the ship are insisting that it’s really just melting a snow-cone.

  26. Check out today’s NYT for what happens when hospitals gain market share: colonoscopy fees going up by 400%. This is just the tip of the iceberg.

  27. Barry,
    I still don’t think that capacity in and of itself is the problem. I do understand the fixed costs, but perhaps by reducing the intensity (and with it the FTEs) per bed, you could also reduce the fixed costs.

    Another thing that I think is adding to hospital costs, with no solid indication of better quality, is the entire hospitalist notion. This also goes to Dr. Walker’s point of hospitals increasingly assuming roles that they are ill suited for.
    If we allowed independent ambulatory care to drive hospital utilization, like it used to, instead of empowering hospitals to harness ambulatory care for the sole purpose of driving revenue by filling beds and then piling up services on each bed, perhaps both intensity and cost would go down.

    I think an interesting study to see, would be a comparison of costs between patients with independent community doctors admitting and caring for them in the hospital vs. similar patients, with hospital employed doctors, admitted and cared for by hospitalists.

    The only check on these consolidated systems is to force them to take risk, effectively turning them into a vertically integrated entity, in which case no one is now advocating for the individual patient and all decisions are driven by corporate finances.

  28. Margalit –

    I think maintaining a reasonable amount of hospital surge capacity is desirable. We want to maintain sufficient capacity to handle expected demand but a balance needs to be struck to prevent unduly high costs. In many rural areas, even though wages are lower than in more populated areas, lots of small hospitals are very costly to run because of persistently low occupancy rates. I don’t have a good answer on how to address that.

    In more populated places, in theory, it would be easier for a large hospital system to reduce their capacity when necessary than for a single community hospital. On the other hand, increased hospital consolidation also increases market power and drives up reimbursement rates per service, test or procedure, at least for commercial insurers and self-payers. Regulation will probably be needed to address that, especially for care that needs to be delivered under emergency conditions. Price transparency would also be helpful especially if more physician groups have contracts that include shared savings and shared risk to increase the incentive for them to provide high quality cost-effective care.

    As for the aging population increasing demand for hospital beds, it’s not necessarily the case if people can be kept healthy for longer. For example, if we find ways to push off the debilitating effects of a disease like Alzheimer’s so those afflicted spend much less time incapacitated before they ultimately die, the cost of treating the disease could decline materially even as more people are diagnosed with it.

  29. The post enlightens a key potential quagmire in an otherwise promising era of PPACA-related reforms: hospitals are forced into a role of taking over even the outpatient sector, but in doing so they inevitably must place the right foot on the accelerator and the left foot on the brake of the reform bus – and regardless, to throw doctors under it as they struggle to maximize profits / cut costs. None of the parties really wants this; yet in the current iteration, the reform process is at this very point. An honest question then would be, does it make any sense at all (besides financial) why a hospital should own or otherwise manage outpatient clinics or doctors? And could this little sticking point be easily solved by a Stark-like antitrust-style rule against hospitals owning clinics? It just seems like keeping the inpatient side insulated from the outpatient side might align the incentives aright. If not, it seems like consolidation will potentially be the only way to survive the changes in 2014, and then suffocate the real reforms originally intended, because of the realities described in the post.

  30. That may very well be true, Barry, but unless we want to deal with those dreaded “waiting times”, we’d better make sure that hospitals at the very least maintain their capacity, considering the demographic changes coming up in the next few decades.

  31. Hi Dan, I do remember that humungous lunacy ridden thread… I hope we manage to salvage a couple of psychiatric beds though, because it looks to me like the authors may need them….

  32. I agree that we shouldn’t aim for closing hospitals – but there are some who believe that many won’t survive the “reformation.” One team went as far as to claim that 1/3 of all hospitals won’t be around by 2020.

  33. “The US has less hospital beds per capita, of every category, than the average OECD and most developed countries”

    Margalit –

    I think you’re comparing apples and oranges. Lots of inpatient care in other countries is devoted to rest and recuperation that would be done in a rehabilitation center in the U.S. or even at home. Length of stay is much shorter in the U.S. but a lot more happens to patients while they’re in the hospital.

    I think wasteful and inappropriate care is spread broadly across the healthcare system. It encompasses everything from unnecessary imaging done for defensive medicine reasons to futile care at the end of life in ICU’s to dialysis for elderly patients who may not benefit anymore than they would from medical management without dialysis to inappropriate cardiac procedures and back surgeries. Surgical procedures and cancer treatment are the big money makers for most hospitals. Many of these would not be done or even offered as an option in other developed countries.

  34. The US has less hospital beds per capita, of every category, than the average OECD and most developed countries. We do have more FTEs per bed though.
    We also have less admissions and shorter stays than most.
    I am not certain that closing hospitals should be something we should aim for. Perhaps that legendary 30% waste is somewhere else….

  35. If payment policy continues to shift away from fee for service toward a combination of capitation, bundled pricing, and shared savings, there should be more incentive for doctors and hospitals to reduce unnecessary and inappropriate care including futile end of life care. To the extent that they are successful in doing so, hospitals will wind up with more excess capacity. Since a large percentage of hospital costs are fixed, at least in the short to intermediate term, hospitals will need to reduce their number of licensed beds or even close altogether so the hospital sector overall can maintain an efficient occupancy rate.

    In theory, suppose we could eliminate two-thirds of the estimated 30% of healthcare spending that experts tell us is wasteful or inappropriate. The acute care hospital sector would need to shrink from roundly one million beds today to 800,000 or so with commensurate cuts in hospital employment. Regardless of how hospitals allocate costs to different departments and procedures, it would be a big win for the economy if we could free up those resources for other individual and societal unmet needs more of workers’ total compensation coming in the form of higher wages as less is needed to pay for health insurance.

  36. Joe, if this entire “transmogrification” is about shifting allocations from one balance sheet to another, or about dropping bunches of money directly to bottom lines, what is the mechanism by which consumer pricing is reduced?

    If we want to, say, reduce expenditure by 30%, are we saying that pursuit of excellence and economies of scale will reduce costs by 30% on the delivery side, and that those reductions will be passed on to consumers or public payers?