Back to the Future for Hospitals?

For hospital boards and management, their affiliated and employed physicians, employees and suppliers, these are uncertain times. But that’s not new.

In the 1980’s, as the Prospective Payment System was being rolled out to replace cost-plus reimbursement, pundits proclaimed their demise.

In the 1990’s, as health maintenance organizations and capitation gained traction, the same pundits called them dinosaurs.

As the new century approached and Y2K readiness posed an ominous threat, hospitals were deemed incapable of operating in the information age.

As the Affordable Care Act took center stage in 2010, dire warnings shook the industry. The transition to value-based payments and alternative models of care seemed daunting.

And as Repeal and Replace now takes the spotlight, the chorus of doom is growing louder.

I began my healthcare career as a teen at Erlanger Medical Center in Chattanooga in the good-ole days of cost-plus reimbursement, 4 beds per thousand as the capacity target and in an era when 45% of all dollars spent in healthcare went to hospitals. Outpatient care and chronic disease management were in early stage development and precision medicine, artificial intelligence and data driven healthcare were abstract concepts reserved for academics. A diagnosis of cancer was a death sentence and hospitals were keen to build out their programs in women’s health, cardiology and orthopedics. Neurologic disorders such as Parkinson’s and Alzheimer’s, gerontology, intensivists, and genomics were barely on the radar. Primary care was delivered through family physicians, pediatricians and general internists practicing in solo or small group settings.  Medical error was studied, quality of care was presumed, and every community had its own hospital. There were 7200 in those days.

Futurists then, as now, warned that an aging population, cost pressures and specialization meant few would survive. They cautioned about the need to demonstrate value in local communities. They encouraged capital investments in focus factories, outpatient facilities and programs. They heralded the centricity of physicians to care coordination and burgeoning advances in medical innovation. And most said hospitals face extinction unless they make radical changes in their strategies and investments.

Last week, I spent several hours reviewing these proclamations dating back to the eighties. I found myself reading about the same issues and challenges facing hospitals today: a regulatory climate that’s dynamic, increased demands by physicians, love-hate relationships with insurers, competition from well capitalized non-traditional niche players, public concerns about costs and quality, growing dependence on Medicare, Medicaid, CHIP and DSH funding and clinical innovations sparked by new technologies, science and analytics. They’re not new challenges for hospitals.

What’s new for hospitals is the pace and the politics.

Pace: The number of novel drug approvals has steadily increased: 203 since passage of the ACA and most officially designated as “breakthroughs.” The numbers of physicians employed by hospitals has grown from house specialties (radiology, anesthesiology, pathology and emergency medicine) and fulltime faculty in academic medicine to more than 40% of all U.S. practicing physicians representing every specialty. The rate of multi-hospital affiliations has accelerated from one in eight to three of four. Listings showcasing high performing hospitals have expanded from CMS Hospital Compare and US News to 20 unique services that rate and rank their effectiveness. The technologies used to diagnose and treat have exploded, buoyed by access to capital from private investors and attractive incentives that induce their use. Medical error, the leading cause of death in the U.S., is in the spotlight accounting for 251,000 deaths and a trillion in added cost. And one in eight consumers is receiving care from alternative providers while avoiding conventional techniques of delivery.

Politics: The politics of healthcare is also unique. Back in the day, hospitals, physicians, drug and device manufacturers played co-dependent roles with manageable turf battles. Politicians were interested observers and regulators watched for misdeeds. But as cost controls became prominent themes and managed care took hold, food fights broke out. Inter-sector friction became a staple: insurers vs. hospitals, insurers vs. drug companies, hospitals vs. insurers, physicians vs. everyone else and so on. And intramural competition within sectors grabbed headlines: primary care clinicians vs. specialists, investor-owned hospitals vs. not for profits, biotech vs. traditional drug makers, and more. Along the way, the federal government has expanded its role to industry change agent, flexing its muscles via sweeping reforms, budgetary constriction and compliance risk expansion. Congress, state legislators and governors can’t dodge healthcare these days: it’s arguably the most complicated, least understood, most competitive industry policymakers and politicians confront today. All agree it needs to change; none agree on how, when and how much it will cost. That reality confronts hospital leaders every day.

What are the takeaways for hospitals?

·       First, don’t panic. Granted margins are shrinking and uncertainty about Repeal and Replace is understandable, but hospitals are resilient. Hospitals offer their communities tangible value. Hospitals have a noble purpose. That will not change.

·       Second, don’t fear change. Hospitals are in the business of health management; they’re no longer in the facility-management industry. Their future will be defined by the value they create in care coordination from cradle to grave, not the buildings they build. They’ll be the integrators of financing and delivery, organizers of preventive, acute and post-acute services and the bridge between social determinants and care delivery.

·       Third, don’t skimp on leadership. The pace is quickening. The politics is messy. Leaders of health systems that aspire to thrive must be open-minded and capable arbiters of unique and sometimes conflicting views. They must be equipped with the analytic tools and supported by industry-savvy boards that have their backs. They must recruit talent to their C suites and boards with new skillsets and competencies.

·       Fourth, monitor markets. The competition that did in Blockbuster was Netflix and Redbox. The video rental industry’s 15,000 U.S. sites are a bygone era. The competition that did in Borders was not Barnes and Noble, it was Amazon. And the competition that threatens most hospitals is not the hospital across town, it’s the delivery system in the region that delivers a wider range or programs and services with a stronger value proposition for consumers, employers and lenders/investors. 

·       Fifth, focus on execution. The punch list for every hospital includes cost reduction, physician performance and clinical effectiveness. In each of these, the low hanging fruit has been addressed. The next actions will be tougher: outsourcing, affiliations, centralization of programs, deployment of capital in homes and work places, digital solutions, retail health, alternative therapies and much more.

·       Sixth, don’t hide. Messaging for hospitals needs clarity and focus, Advocacy at local, state and national levels is imperative. Data about how services are priced, capital is spent, optimal outcomes are achieved, errors are remedied, adherence to evidence-based practice is managed, alternative health is integrated, social determinants considered and enterprise value is defined are in the public domain. Hospitals must operate in the reality that data-inspired public scrutiny is the new normal.

For hospitals, it’s back to the future. Hospital expenditures are $1.1 trillion today; they’ll be $1.8 trillion in 10 years, but less than 25% of total spending. For those that adapt to the faster pace and unsteady politics, the road ahead is a bit bumpy but no less purposeful than ever before.

Paul

P.S. Today, the President will meet with Republican Governors to discuss their views on Repeal and Replace. Medicaid block grants will be high on the agenda, with GOP governors in expansion states calling for continuation of funding as well as high risk pools ($12.5 billion annually) to address assurances about coverage for the 133 million Americans with pre-existing conditions. Tomorrow, the President will deliver his first State of the Union address (technically an address to a joint session of Congress) where healthcare reform will be a prominent topic. The politics of healthcare will be on full display this week.