Why Hospitals Are Losing Serious Money And What That Means For Your Future

A strange thing happened last year in some the nation’s most established hospitals and health systems. Hundreds of millions of dollars in income suddenly disappeared.

This article examines the economic struggles of inpatient facilities, the even harsher realities in front of them, and why hospitals are likely to aggravate, not address, healthcare’s rising cost issues.

According to the Harvard Business Review, several big-name hospitals reported significant declines and, in some cases, net losses to their FY 2016 operating margins. Among them, Partners HealthCare, New England’s largest hospital network, lost $108 million; the Cleveland Clinic witnessed a 71% decline in operating income; and MD Anderson, the nation’s largest cancer center, dropped $266 million.

How did some of the biggest brands in care delivery lose this much money? The problem isn’t declining revenue. Since 2009, hospitals have accounted for half of the $240 billion spending increase among private U.S. insurers. It’s not that increased competition is driving price wars, either. On the contrary, 1,412 hospitals have merged since 1998, primarily to increase their clout with insurers and raise prices. Nor is it a consequence of people needing less medical care. The prevalence chronic illness continues to escalate, accounting for 75% of U.S. healthcare costs, according to the CDC.

Part Of The Problem Is Rooted In The Past

From the late 19th century to the early 20th, hospitals were places the sick went to die. For practically everyone else, healthcare was delivered by house call. With the introduction of general anesthesia and the discovery of powerful antibiotics, medical care began moving from people’s homes to inpatient facilities. And by the 1950s, some 6,000 hospitals had sprouted throughout the country. For all that expansion, hospital costs remained relatively low. By the time Medicare rolled out in 1965, healthcare consumed just 5% of the Gross Domestic Product (GDP). Today, that number is 18%.

Hospitals have contributed to the cost hike in recent decades by: (1) purchasing redundant, expensive medical equipment and generating excess demand, (2) hiring highly paid specialists to perform ever-more complex procedures with diminishing value, rather than right-sizing their work forces, and (3) tolerating massive inefficiencies in care delivery (see “the weekend effect”).

How Hospital CEOs See It

Most hospital leaders acknowledge the need to course correct, but very few have been able to deliver care that’s significantly more efficient or cost-effective than before. Instead, hospitals in most communities have focused on reducing and eliminating competition. As a result, a recent study found that 90% of large U.S. cities were “highly concentrated for hospitals,” allowing those that remain to increase their market power and prices.

Historically, such consolidation (and price escalation) has enabled hospitals to offset higher expenses. As of late, however, this strategy is proving difficult. Here’s how some leaders explain their recent financial struggles:

“Our expenses continue to rise, while constraints by government and payers are keeping our revenues flat.”

Brigham Health president Dr. Betsy Nabel offered this explanation in a letter to employees this May, adding that the hospital will “need to work differently in order to sustain our mission for the future.”

A founding member of Partners HealthCare in Boston, Brigham & Women’s Hospital (BWH) is the second-largest research hospital in the nation, with over $640 million in funding. Its storied history dates back more than a century. But after a difficult FY 2016, BWH offered retirement buyouts to 1,600 employees, nearly 10% of its workforce.

Three factors contributed to the need for layoffs: (1) reduced reimbursements from payers, including the Massachusetts government, which limits annual growth in healthcare spending to 3.6%, a number that will drop to 3.1% next year, (2) high capital costs, both for new buildings and for the hospital’s electronic health record (EHR) system, and (3) high labor expenses among its largely unionized workforce.

“The patients are older, they’re sicker … and it’s more expensive to look after them.”

That, along with higher labor and drug costs, explained the Cleveland Clinic’s economic headwinds, according to outgoing CEO Dr. Toby Cosgrove. And though he did not specifically reference Medicare, years of flat reimbursement levels have resulted in the program paying only 90% of hospital costs for the “older,” “sicker” and “more expensive” patients.

Of note, these operating losses occurred despite the Clinic’s increase in year-over-year revenue. Operating income is on the upswing in 2017, but it remains to be seen whether the health system’s new CEO can continue to make the same assurances to employees as his predecessor that, “We have no plans for workforce reduction.”

“Salaries and wages and … and increased consulting expenses primarily related to the Epic EHR project.”

Leaders at MD Anderson, the largest of three comprehensive cancer centers in the United States, blamed these three factors for the institution’s operational losses. In a statement, executives attributed a 77% drop in adjusted income last August to “a decrease in patient revenues as a result of the implementation of the new Epic Electronic Health Record system.”

Following a reduction of nearly 1,000 jobs (5% of its workforce) in January 2017, and the resignation of MD Anderson’s president this March, a glimmer of hope emerged. The institution’s operating margins were in the black in the first quarter of 2017, according to the Houston Chronicle.

Making Sense Of Hospital Struggles

The challenges confronting these hospital giants mirror the difficulties nearly all community hospitals face. Relatively flat Medicare payments are constraining revenues. The payer mix is shifting to lower-priced patients, including those on Medicaid. Many once-profitable services are moving to outpatient venues, including physician-owned “surgicenters” and diagnostic facilities. And as one of the most unionized industries, hospitals continue to increase wages while drug companies continue raising prices – at three times the rate of healthcare inflation.

Though these factors should inspire hospital leaders to exercise caution when investing, many are spending millions in capital to expand their buildings and infrastructure with hopes of attracting more business from competitors. And despite a $44,000 federal nudge to install EHRs, hospitals are finding it difficult to justify the investment. Digital records are proven to improve patient outcomes, but they also slow down doctors and nurses. According to the annual Deloitte “Survey of US Physicians,” 7 out of 10 physicians report that EHRs reduce productivity, thereby raising costs.

Harsh Realities Ahead For Hospitals

Although nearly every hospital talks about becoming leaner and more efficient, few are fulfilling that vision. Given the opportunity to start over, our nation would build fewer hospitals, eliminate the redundancy of high-priced machines, and consolidate operating volume to achieve superior quality and lower costs.

Instead, hospitals are pursuing strategies of market concentration. As part of that approach, they’re purchasing physician practices at record rates, hoping to ensure continued referral volume, regardless of the cost.

Today, commercial payers bear the financial brunt of hospital inefficiencies and high costs but, at some point, large purchasers will say “no more.” These insurers may soon get help from the nation’s largest purchaser, the federal government. Last month, President Donald Trump issued an executive order with language suggesting the administration and federal agencies may seek to limit provider consolidation, lower barriers to entry and prevent “abuses of market power.”

With pressure mounting, hospital administrators find themselves wedged deeper between a rock and a hard place. They know doctors, nurses, and staff will fight the changes required to boost efficiency, especially those that involve increasing productivity or lowering headcount. But at their same time, their bargaining power is diminishing as health-plan consolidation continues. The four largest insurance companies now own 83% of the national market.

What’s more, the Centers for Medicare & Medicaid Services (CMS) announced last week a $1.6 billion cut to certain Medicare Part B drug payments along with reduced reimbursements for off-campus hospital outpatient departments in 2018. CMS said these moves will “provide a more level playing field for competition between hospitals and physician practices by promoting greater payment alignment.”

The American healthcare system is stuck with investments that made sense decades ago but that now result in hundreds of billions of dollars wasted each year. Hospitals are a prime example. That’s why we shouldn’t count on hospital administrators to solve America’s cost challenges.

Change will need to come from outside the traditional healthcare system. The final part of this series will explore three potential solutions and highlight the innovative companies leading the effort.

This post first appeared at Forbes.com and appears with the author’s permission. Dr. Robert Pearl is the bestselling author of “Mistreated: Why We Think We’re Getting Good Health Care–And Why We’re Usually Wrong” and a Stanford University professor. Follow him @RobertPearlMD 

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12 replies »

  1. Change is absolutely needed – and quickly – if we are to avoid drowning in our own healthcare spending. Surveys from The Kaiser Family Foundation have found between 2006 and 2016, the average premium contribution paid by US families with employer-sponsored health insurance increased by 77 percent, from $2,973 in 2006 to $5,277 in 2016. In that same timespan, median household income rose by just below 19 percent, from $48,451 to $57,617. A 2012 study published in the Annals of Family Medicine, found that if these trends continue and we don’t change the health care system, the average cost of a family health insurance premium will consume 50 percent of household income by 2021 and exceed the average household income by 2033. At what point will our health care system become obsolete due to the inability for anyone to be able to pay for it?

    So yes, change is needed, however I don’t believe radical transformation of the healthcare system is required to begin lowering expenses. Reducing wasteful expenditures on inefficient processes, excessive procedures and over-prescribed drugs could lower spending by 30% or approximately $750 billion, according to some estimates. Cutting back on the purchase of redundant machinery, as was mentioned, is one approach. Not only would this lower costs, but it would reduce the incidence of illnesses associated with overexposure to radiation, such as cancers linked to the repetitive use of x-rays and CTs, particularly in children. In the same vein, limiting the excessive use of antibiotics, leading to the rise in drug resistant bacteria, would cut prescription spending and start to correct the bad habit of handing out antibiotics at any sign of infection. Furthermore, patients and physicians alike will tell you there is a mountain of administrative hoops that does little to improve, or may actually impede quality patient care. Health record systems that decrease physician productivity and the ever-expanding healthcare facilities, as mentioned above are two examples, as well as the administrative power needed to constantly adjust to the fluctuating mandates being handed down by Washington. More is not always better in many scenarios, but particularly regarding US health care spending. To make the most appropriate cost-reductions and systems improvements, health care would be more effectively managed at the level that is more familiar with patients’ needs and has better visibility in to the areas where spending can be reduced: at the community level.

    A bottom-up approach to delivery and payment systems gives more room and flexibility to the diverse needs that exist among communities and markets throughout the country. At this level, more accurate information about services being utilized, services that are needed and corresponding drivers of cost can be determined. With the many stakeholders that are involved in the payment and delivery of health care, ranging from the patient to government, I agree with Elizabeth Mitchell, CEO of the Network for Regional Healthcare Improvement, who asserts in her article entitled The Road To Affordability: How Collaborating At The Community Level Can Reduce Costs, Improve Care, And Spread Best Practices, “the most effective strategy for reducing costs and improving the health of populations is to develop and support multistakeholder community strategies based on accurate and actionable data and scale them nationally”. This may not be what Dr. Betsy Nabel had in mind when she wrote to her employees about needing to work differently in order to sustain their mission, however this approach would give significant power back to the large hospitals and small clinics alike to make the most appropriate decisions for their patients, physicians and clinics.

    We’re already seeing examples of this community-structured health care design being successfully instituted in cities across the country. A consortium of partners in Oregon, including Oregon Health Care Quality Corporation (Q Corp) have been working on a project to measure and report the total cost of care and resource use across Oregon for private payers. They issued their first total cost of care and resource use report in 2015 and in late September of this year presented their work at the National Affordability Summit hosted by the Network for Regional Healthcare Improvement. They have plans to release information on cost of care to the public. Without a doubt, the attempt to assess the “true” cost of healthcare in the US will be riled with inconsistences, nevertheless this is the information that is needed if we are to successfully reduce unnecessary spending. This process would be more feasible and applicable if it is narrowed, or better yet ‘customized’ to the community level. And this is what we are seeing in Oregon where some primary care practices have begun using the information from Q Corp reports to factor costs of care into their referrals and treatment plans.

    We’ve seen another example in Oklahoma. In 2012 MyHealth was selected by the Comprehensive Primary Care initiative to support the creation of an expert team to leverage data from the payers and teach practices on how to provide higher quality, cost efficient care. Clinical data and claims were used to risk-stratify patients; identify gaps in care; and engage employers, insurers, and providers to work together to review the quality and cost of care. All practices shared their cost and performance data, which created a culture of collaboration and a focus on outcomes. As a result of improved care coordination, all-cause hospital admissions dropped significantly, with a savings of 7 percent in year one and 4.7 percent in year two. This saved Medicare $10.8 million over two years and earned more than $500,000 in shared savings payments for the practices. In addition to the cost savings, payers reported significantly improved use of preventive care services with each participating payer reporting improvement in several quality indicators.

    Admittedly the coordination this required was not insignificant, however it was far from radical and very much doable, without the need to look outside of the current healthcare system. These innovators were able to leverage shared data, shared community aims, and multistakeholder engagement to make major impacts on healthcare spending and service.
    The key is having the right data, leadership and partnerships (which would include healthcare administrators) to come together to strategize on the most efficient and effective ways to provide quality service while reducing wasteful expenditures and debilitating processes.

    Shifting the impetus to make adjustments to improve the current catastrophe of healthcare spending to a regional or community level holds more promise than the circular debates taking place in Congress. We can no longer afford to wait for the newest bronze or silver package, or Obamacare2.0. If we want affordable healthcare, we have to drill in on the true drivers of cost. A community level approach to analyzing and managing health care spend will get us one step closer to producing the promising results we need.

  2. Your problem here is that might cost (real costs) just 1/3 of what it costs to take care of healthy patients at a surgicenter than what it costs to take care of sick patients at a hospital. You also have, as is currently happening, surgicenters pushing to do bigger cases without really good data to support it. (OK, there are small studies. Interested parties are publishing data based upon a few hundred patients. Not nearly enough power to be meaningful. Also, these studies are largely being done at larger surgicenters where the lines between hospital and surgicenter are less clear.) I would be careful about trying to push everything into surgicenters lest you get what you want.

    Barry- Depends a lot upon the procedure. I haven’t really seen any good studies on this. Even procedures where people just assume everyone can be done at a surgicenter have exceptions. Take cataracts. Just a 15 minute procedure done under local, right? Now what if that is a mentally challenged (actually combative) patient who is very large with other co-existing illnesses? That is not happening under local and may require the assets offered by a hospital, or at least a larger surgicenter.


  3. In my experience some time ago, in a battle between 2 regional hospitals and a proposed orthopedic ambulatory surgery center (asc) the asc was going to charge 1/2 what the hospitals charged. Interestingly, the Blues who were dominant supported the hospitals!…so I tried to mobilize the corporate employers to weigh in favor of letting the asc open to drive cost reduction.

  4. Steve2, If you took 100 or 1,000 patients who needed a particular procedure, what percentage would be candidates for the ASC and what percentage would be better off from a safety standpoint having the procedure in a hospital? Also, how much lower is the ASC’s cost per procedure as compared to the hospital’s even assuming the hospital sustains a reasonable load factor or occupancy rate?

    As a taxpayer, I would have no problem paying hospitals more to care for the riskier and more complex patients while patients who can safely go to an ASC go there at a lower reimbursement rate. I suspect that overall total system costs would be lower, perhaps significantly lower, if the ASC’s can safely handle a clear majority of the potential cases. If hospitals wind up with too many OR’s, they can close some of them. Couldn’t they?

  5. “The increase in the number of less costly ambulatory surgical centers is also taking market share away from hospitals. ”

    I work at both surgicenters and hospitals. What is happening is that the healthier patients (usually with better insurance) are going to the surgicenters. Hospitals still have to staff for the sicker patients. In the short term, Medicare and the other insurers are still paying hospitals the same. I am not sure that is sustainable in the long run. If hospitals are going to almost exclusively care for patients that are much more resource intensive, and almost no one who is not, their payments will need to increase. This may eventually result in total costs being lower. I don’t know the outcome here.


  6. Two attributes of our nation’s Population HEALTH probably apply. First, the Medicare-eligible population of citizens is currently in the midst of doubling between 2000 and 2030. Secondly, there is a major shift in the health of midlife white, non-Hispanic citizens. This was dramatically described in a report by the Proceedings National Academy of Sciences, December 8, 2015: RISING MORBIDITY AND MORTALITY IN MIDLIFE AMONG WHITE NON-HISPANIC AMERICANS IN THE 21ST CENTURY by Anne Case and Angus Deaton.
    The PNAS Summary ends as: “Although all education groups saw increases in mortality from suicide and poisonings (from opiates, my edit), those with less education saw the most marked increases. Rising midlife mortality rates of white non-Hispanics were paralleled by increases in midlife morbidity. Self-reported declines in health, mental health, and ability to conduct activities of daily living and increases in chronic pain and inability to work, as well as clinically measured deterioration in liver function, pointing to growing distress in this population. We comment on the potential economic causes and consequences of this deterioration.” As a result, the associated decline in social mobility is profound for the future of children in these families. The report is easily accessible since the PNAS reports are freely available through its open access option. Figure 1 should be posted on your bulletin board at home.

  7. This statement requires some citations/backup. I have never seen anything convincing regarding this statement and would be glad to see some good info.
    “Digital records are proven to improve patient outcomes” The assertion notwithstanding, I remain skeptical.

  8. Hospitals, especially the big systems, have lots of clever ways to bury profits especially by expanding their capacity and buying new state of the art equipment as well as buying up physician practices to get more referral business.

    If their claims of losses or declining profit have any validity, look at their average occupancy rate, payer mix, and average case acuity and compare those metrics to the last several years to see if there is any material deterioration. If occupancy rate is a problem, maybe they need to downsize.

    Pharmaceuticals and medical devices are indeed very profitable businesses. However, insurers will tell your that their medical claims consist of 40% hospital based care, both inpatient and outpatient, 40% for physician fees and clinical services and 20% for prescription drugs. We need to drive as much care out of hospitals as we can without impacting patient safety.

  9. Looking forward to the three potential solutions, if anything like a “solution” can exist in health care.

    This society continues to create sick people then send them down the rabbit hole of health care. Hospitals may not be making money, but Pharma is, and device makers are, and providers are – all while the perpetual motion machine of lavish compensation drives the system onward.

  10. Parkinson’s Law will likely continue to reign supreme, as it has for 50 years since the authorization of Medicare/Medicaid in 1965, augmented by Medicare Part D (onset 2006) and ACA 2010 (onset 2014). We have no means to mitigate the social adversities that dominate the causes of Unstable HEALTH, community by community. Minus inflation and economic growth since 1960, health spending as a portion of our nation’s GDP has increased 5.0% a year, compounded annually. For the first time, our nation’s most recent estimate of life-time longevity actually decreased. Admittedly, teenage pregnancy rates continue to decrease, a marker of social mobility, and homicide death rates have decreased (although steady in the last two years) from more than 9 for 1990-95 to most recently 4.5 per 100,000 citizens in 2015 (last available data).
    With a degree of dismay, I still hope Barry is right.

  11. The large investments to implement new electronic record systems currently underway at many large hospitals and hospital systems will run their course over the intermediate term and should be a much smaller cost burden than they are now over the longer term.

    There is a long term secular trend that is driving demand for both inpatient and outpatient hospital care lower. Inpatient care is being impacted by less invasive surgical techniques which reduce the length of stay and / or make some procedures formerly done on an inpatient basis now safe to do in an outpatient setting. Better drugs can also speed recovery or eliminate or at least postpone the need for some surgical procedures in the first place. The increase in the number of less costly ambulatory surgical centers is also taking market share away from hospitals. To the extent that Medicare moves toward site neutral payment and other insurers follow suit will put added pressure on hospital revenues. The number of hospital inpatient beds per 1,000 people has been trending down for decades and it’s likely to continue to do so. That’s a good thing, in my opinion, from a long term healthcare system cost perspective.

    As for hospital costs, I say again that I’ve never seen a study comparing the number of hospital employees per licensed or occupied bed in U.S. hospitals to their counterparts in other developed countries. I suspect that our numbers may be materially higher perhaps due, in part, to defensive medicine incorporated into our practice patterns to reflect our more litigious society.

    Finally, it’s interesting to note that health care cost growth slowed since the 2008 financial crisis despite the economic recovery and the current historically low unemployment rate. For fiscal 2017, Medicare spending net of beneficiary premiums rose only 4% adjusted for payment timing differences while the federal share of Medicaid costs grew only 2%. Perhaps the cost problem is on its way to solving itself over the longer term. I think that may be the case.

  12. Using a “What if…?” hypothesis, the most common historical decreases in health care demand have been associated with an economic recession. Since the economic definition of a recession does not currently exist and seems unlikely to occur soon, are there any current circumstances that, in combination, could trigger a recession. Will our Nation’s political unrest and the continuing level of world-wide genocide along with the heightened risk of nuclear accidents, intended or not, bring about a sudden collapse of international trade? Its also not too difficult to imagine a stock market sell-out spree? Remember, recessions occur on average every 8 years. This year, we have passed the 8 year mark since the onset of the most recent recession.
    Putting aside our nation’s high level of health spending as a portion of our national economy and the absence of a stable universal health insurance plan, is there any other structural difference between our nation’s healthcare and the other 34 OECD nation’s? Unlike the other OECD nation’s, we do not have a national strategy to assure that equitably available and ecologically accessible Primary Healthcare for each citizen is regularly assessed and improved locally, community by community.
    Please note that all of the other OECD nations have health spending as a portion or their economy that is 1/3 less per citizen than for the USA. No matter how our nation manages its ‘autonomy’ within the world-wide market-place arenas for its RESOURCES, KNOWLEDGE and HUMAN DIGNITY, we will need to reduce health spending by at least 0.5% less than economic growth annually (using 2016 data, our nation’s excess health spending was @$1 trillion). Reducing health spending would take 10-15 years, with an improved economic growth rate, to accomplish.
    A nationally conceived and locally implemented, paradigm shift will be required to improve our nation’s health care for Basic Healthcare Needs. We have achieved the best level of health care for Complex Healthcare Needs while ignoring a SOCIAL CAPITAL investment in each citizen’s Basic Healthcare Needs. Let us ALL, put aside our vested interests and traditionally conceived views of institutional governance and come together for the Common Good of each citizen’s HEALTH, community by community, AND for our nation’s ‘autonomy’ within the world-wide market-place arenas.
    see https://nationalhealthusa.net/initiative/