How They Can Survive and Thrive

For America’s community hospitals, using the traditional cost-shifting revenue model is the maddening equivalent of simultaneously playing rugby, Australian-rules football, major-league baseball, and cricket—dictated by the rules of multiple third-party payers rather than by rational pricing models.  Success is ultimately dependent on having enough privately insured patients to subsidize the government ones and the uninsured. In most places, this model has allowed hospitals to earn sufficient margins to support ongoing capital replacement and growth while staying abreast of technological advances. But in economically stressed locations lacking critical masses of private payers, many institutions have gone broke (including fourteen in Los Angeles, alone, in one recent year). As pressures on cost-shifting intensify under health reform (See Parts 1 & 2), community hospitals will increasingly adopt new coping strategies to survive. Two in particular, consolidation and integration, have become popular in recent years. Unfortunately, neither will fix the problem.

Hospital consolidation. In the past ten years, there have been 904 merger/acquisition deals involving 1,999 hospitals (there are 5,010 community hospitals nationwide), and the trend is intensifying. Benefits of consolidation can include lower overhead, better management, improved access to capital markets, and, particularly, increased negotiating clout with private insurers. This last point cuts both ways, as 500 insurance company mergers in twelve years have boosted their own negotiating power, yielding 24 states in which only two carriers control 70% of the insurance market (up from 18 last year).

Hospital-Doctor Integration is the mantra du jour for hospital CEOs as they attempt to revive the failed 1990’s vision of hospitals rationalizing the cottage industry that is the American medical system by hiring their own doctors. The big difference this time is that the doctors are the ones asking for the jobs as they find running their own practices to be losing propositions. There is little thus far to suggest the current version will enjoy widespread financial success, although isolated examples will undoubtedly emerge.

The Real Fix. What interests me most about these phenomena is how the reasons given to justify them fail to recognize the elephant in the living room: the impending collapse of the cost-shift business model. Consolidation and integration can be fine ideas (when properly structured and executed), but neither is focused on producing a survivable business model. Getting that will require a laser focus on one thing—the only thing—that can permanently make hospitals financially and competitively invincible: patient value. Value (technically, quality divided by price) is the essential element we demand in everything we buy and consume—except health care. Delivering value is the cornerstone of any efficient, market-based economy. It must become so for America’s hospitals.

The higher a hospital’s demonstrated quality and the lower its price, the more value it delivers to its patients and their third-party payers. Hospitals must effectively measure and manage both. (Note: One of my predictions from health reform is the almost universal adoption of high-deductible health plans by the privately insured, to the full extent allowed by law. That means hospitals, now struggling to collect from relatively few HDHP patients, will have to do it effectively with most patients, while also satisfying growing patient demand for accurate pre-treatment price information.)

Delivering quality means taking seriously not just hospitals’ HealthGrades and Hospital Compare scores, hospital-caused infection rates, patient outcomes, and “never” events (e.g., amputating the wrong leg), but every aspect of medical and customer-service. It means viewing quality not as an immeasurable intangible, but as objectively measured conformance with established standards. It also means not delivering the half of all medical care that contributes nothing to patient well-being.

Delivering competitive prices means developing new pricing models and putting processes and costs under a microscope to do everything better, faster, consistently, and less expensively.  And in measuring costs, I don’t mean using traditional cost-accounting methods that just smear a thick layer of overhead over direct and departmental costs. That approach may produce rows of nice neat numbers, but also such absurdities as $25 aspirin and $200 blanket rentals that are useless for re-designing and managing processes to continually lower costs and improve quality.

If I were still running a health insurance company, here are some of the value-based innovations I would love for hospitals to bring me:

  • Show me you can do joint replacement, coronary bypass, and other routine surgical procedures with better outcomes at half the prices I’m paying now, and you’ll get all my patients. If you don’t, I’ll incentivize them to go to Bangkok or Bangalore for better quality at a tenth the price. (Patients who demand their favorite low quality, high priced hospital can instead join another health plan—while either lasts.)
  • Show me that you can manage my congestive heart failure patients for 40% less (as Duke Medical Center did), and I’ll give you an exclusive contract with guaranteed profitability (Duke lost millions under existing payer rules).
  • Show me that you can help my brittle diabetics maintain healthy blood sugar levels and stay out of your ER and inpatient beds, and I’ll make it profitable for you despite your lower utilization.
  • I live or die by a one-year budget horizon, so don’t ask me to pay for long-term prevention services that cost more than they save. I’ll drive prevention far better with premium rebates to my non-smoking, non-alcohol-abusing, non-obese members who manage their own hypertension, blood sugar, and cholesterol.
  • Show me reduced admissions, shorter lengths of stay, better outcomes, lower readmissions, and zero central-line catheter infections, and I’ll move faster than a Camry with factory-original floormats to drop inferior hospitals and shower you with a big chunk of the savings. I’ll use the rest to slash member premiums, expand market share, and bring you more patients, while earning sufficient profits to fund my growth.
  • Charge my members and me real, clearly posted prices—not chargemaster rates that average 250% of what you actually expect to collect—and I’ll pay you within 24 hours of invoice receipt.  Our billing and collection expenses will become rounding errors, making both of us far more efficient, effective, and competitive.
  • Learn what quality gurus Deming, Juran, and Crosby preached for decades: quality is free. It’s cheaper to produce high-quality care than the mediocre stuff that’s now our shameful, national norm.
  • Do these things and I’ll convert your money-losing Medicaid and Medicare patients into profitable privately insured ones, while getting you out from under CMS’ debilitating lower-of-charges-or-DRG reimbursement rates. Then you can show real prices and real value to everyone—including, unfortunately, my competitors who will flock to you whether you’re in their provider networks or not.
  • In fact, let’s just partner up and form our own local health plan(s) to compete in the insurance exchange, Medicare Advantage, Medicaid HMO, and employer insurance markets. With your value-based medical care and our marketing clout and lower premiums, we’ll be unbeatable.

Can’t find an insurer like me? Then create your own health plan. That’s how Kaiser got started.

All this will require new levels of management skill, discipline, diplomacy, and sophistication on the part of hospital executive teams.  I wish them godspeed. We really are counting on them.