Hospitals May Be Disappearing In The Era Of Health Care Reform

What first comes to mind when you hear the word “hospital”?

Your reaction may depend on your past experiences. You may feel gratitude for the birth of a child or the treatment of acute appendicitis. You may feel sorrow, remembering a loved one who passed away on a hospital bed.

Regardless of our experiences, many of us assume the closer our hospital is to where we live, the safer and better off we are. But that assumption is wrong. Fewer hospitals with increased volumes would lead to higher quality of care and better clinical outcomes.

Some hospitals were born to fail

In the early 1700s, hospitals provided little medical care. Instead they served as isolation facilities for those with contagious illnesses, as shelters for vagrants and those with mental illness, or as almshouses for the poor. Those who could afford medical care (middle- and upper-class families) received it in their own homes, including surgery.

By the end of the 19th century, medical care was becoming too complex to be delivered in the home. As a result, care shifted to centralized facilities where patients benefited from the latest medical advancements and around-the-clock physician and nursing availability.

A century ago, traveling even moderate distances was incredibly slow and expensive compared to the cost of hospital care. Therefore, building a hospital in every town made sense. Hospitals became a source of great civic pride for community leaders who comprised the governing boards. And so the “community hospital” was born.

Founded by physicians, religious groups and public municipalities, the number of U.S. hospitals grew exponentially from 178 in 1873 to 4,300 in 1909 to 6,000 in 1946. The passage of the Hill-Burton Act in 1946 helped further expand that number to 7,200 by 1970.

With the introduction of the publicly funded Medicare and Medicaid programs in 1966, the number of individuals with health insurance skyrocketed – as did the demand for inpatient services, as did hospital costs.

By the 1990s, high-margin procedures such as heart bypass surgery and total joint replacement were performed in (and advertised by) nearly every hospital. But the demand for inpatient services sharply declined in the 1990s with the introduction of managed care, the expansion of outpatient alternatives, and the mounting costs of a hospital stay. During that decade, some hospitals were forced to merge or shut down.

Since 2000, the number of acute-care hospitals has held steady at around 5,700. However, the push to limit utilization at these high-cost facilities continues while low-volume hospitals across the country are struggling to survive.

Hospitals are facing a strategic inflection point

Last week’s article discussed the “strategic inflections point” as that defining moment in any industry when the rules of the game begin to change. In the era of health care reform, hospitals across this country are now experiencing a time of transition.

The reduction in their volume, revenue and margin threatens their independence and even their existence. Over the past decade, 16 percent of hospitals have consolidated by joining a health system. That trend is accelerating in the context of the Affordable Care Act, also known as Obamacare.

Spending on hospital care represents over 30 percent of total health care costs. That’s the largest of any category and almost twice the total expenditure on physician services. It’s no surprise that health care “payers” – both governmental and commercial health insurers – are trying to contain expenses by limiting the use of these expensive facilities.

Using innovative technology and new surgical approaches, ambulatory surgery centers (ASCs) have taken over many of the high-margin procedures that were once under the exclusive purview of inpatient hospitals. Not only can ASCs perform many surgeries at a lower total cost but since many of them are now owned by physicians, the shift in venue is accelerating.

In response to these pressures, some hospitals are aggressively acquiring physician practices. Their hope is to ensure a steady supply of patients and capture the higher revenues that come with performing procedures under a hospital license. This strategy works today since insurers have historically been reluctant to exclude community doctors and hospitals from their networks. But with insurers moving toward “narrow networks” (more selective networks of doctors and hospitals) this strategy may not work in the future.

Volume, not proximity, produces higher quality at lower costs

Given the industry landscape, it’s easy to see why smaller hospitals are dwindling in number. What’s unexpected, however, is that overall quality may improve as a result.

While distance was a critical barrier to receiving medical care in the past, it matters much less today. Flying first class from California to New York takes only a few hours and costs far less than a three hour stay in a typical ICU. Fewer hospitals create “scale” – a proportionate cost saving through increased production. Already, studies have shown the relationship between higher volume and improved clinical outcomes.

Certainly, there is fear by some that having to drive 20 minutes to a consolidated facility could negatively impact clinical outcomes. But rarely is this the case. In contrast, the added volume allows greater staffing and expanded services 24/7, increasing quality and improving the service experience.

A practical example: Cardiac surgery in Silicon Valley 

Silicon Valley stretches approximately 50 miles from San Jose to San Francisco. Within its boundaries there are 14 hospitals that perform heart surgeries: two academic medical centers, two hospitals that are part of larger health systems and 10 independent community hospitals. Some facilities are located as little as 1 mile apart.

While the operative procedures performed at these facilities are largely the same, their volumes and outcomes vary greatly. The highest-volume facility performed nearly 800 cardiac surgeries in 2011, the last year the State of California released its risk-adjusted data. The lowest performed 57.

Seven of the 14 hospitals performed fewer than 150 heart surgeries and, together, accounted for just 20 percent of the surgeries in Silicon Valley. Not surprisingly, the lower-volume facilities averaged more risk-adjusted deaths. In contrast, the mortality rates for the two highest-volume facilities were about half the hospital average.

Despite averaging less than one surgery a day, the nurses, technicians and other staff at low-volume facilities need to be paid regardless of whether any surgeries are performed.

Pose this problem to a first year MBA student and the solution would be clear: Close the half of the cardiac surgery programs that did the fewest procedures then watch as the volume and experience in the remaining seven increases, leading to higher quality and lower costs. Moving from less than one surgery per day to an average of three would make a noticeable difference. And using just a fraction of the savings, patients could be picked up at their homes, travel by limousine to the designated facilities and receive free hotel rooms for their families.

The benefits of consolidation apply not only to cardiac surgery but to just about every surgical and medical service.

Some fear the increased “market power” of the remaining facilities could lead to higher prices. But increased transparency, reference pricing and availability of centers of excellence programs should mitigate this risk.

Don’t expect hospitals to jump on board quickly

We can predict that the first hospital CEO who suggests closing down a cardiac surgical program will be fired on the spot. The doctors and local community will do everything in their power to stop it from happening.

Consolidating or closing entire hospitals will be even more painful. Regulators would likely intervene. Change will be resisted and delayed.

But if there were fewer hospitals with higher volumes, quality would rise and the overall spend on hospital services would decrease. We should not underestimate how difficult this process will be or how long it may take. But once it is complete, patients will barely miss the old hospital down the street.

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