Saving America's Hospitals: Raising Prices Isn't the Answer—Four Pathways to Sustainable Transformation
Dr. Robert Pearl, former CEO of Kaiser Permanente, is conducting a series of studies titled “Saving American Hospitals.” He has found that U.S. hospitals are facing increasingly difficult circumstances and has proposed a range of solutions to improve their performance. VCBeat (WeChat ID: vcbeat) has compiled the relevant reports.
Dr. Robert Pearl, former CEO of Kaiser Permanente
Community hospitals have become the backbone of healthcare delivery in the United States. By the mid-20th century, the U.S. had approximately 6,000 inpatient facilities distributed across the country, often serving as economic pillars within their respective communities.
These local hospitals not only offer high-paying positions, but their boards of directors are often composed of influential officials, which has brought considerable convenience to the local population for a time.
However, in recent years, American hospitals that were once universally acclaimed are now facing significant challenges. Due to inefficient operations and declining utilization rates, a growing number of hospitals are experiencing financial distress and waning influence.
The Institute of Medicine (IOM) estimates that 44.5% of all financial waste in U.S. healthcare stems from inefficient and unnecessary care services. Operationally, most community hospitals handle high patient volumes but achieve limited progress, making redesign an urgent imperative.
As managed care plans, pharmaceutical companies, and new types of healthcare providers gain market influence at the expense of the hospital industry, panic has begun to set in. These changes have driven mergers between hospitals; unfortunately, this appears more like a desperate transaction than a long-term growth strategy.
Mergers and acquisitions between companies are typically driven by two objectives. The first is to create a more efficient organization; mergers can help companies eliminate redundancies and strengthen innovation, thereby enabling them to offer high-quality products or services at lower prices. The second objective is to establish negotiating leverage, thereby allowing for price increases.
The merger between Dignity Health and Catholic Health Initiatives (CHI) at the end of 2017 was driven by the second objective.
The deal is expected to close in the second half of 2018, at which point these hospitals will form one of the largest nonprofit health systems in the United States, comprising 139 hospitals across 28 states with total revenues of $28.4 billion.
According to the published joint press release, this merger is “a rare opportunity to expand each organization’s best hospitals while providing high-quality, cost-effective care.”
The merger of Dignity and CHI may indeed present an opportunity to improve quality and reduce costs, but it remains uncertain whether the two financially distressed hospital systems can achieve these objectives by joining forces.
In fiscal year 2017, Dignity Health reported an operating loss of $66.8 million, a deterioration from the previous year. Meanwhile, CHI’s operating loss increased from $371.4 million in 2016 to $585.2 million last year.
Any MBA student or most CEOs working outside the healthcare industry would propose the same M&A strategy when faced with such financial data: (1) close or merge underperforming hospitals; (2) eliminate duplicate clinical services; (3) reduce administrative overhead.
Dignity and CHI appear to be taking precisely the opposite approach. According to the San Francisco Chronicle, the healthcare system currently has no plans to close any hospitals. The newspaper inferred that neither of the two healthcare systems, which together employ 159,000 people, has plans for layoffs. Furthermore, the merged entity will retain co-CEOs, a move typically regarded as a political expediency with little practical operational benefit.
The merger between Dignity and CHI is unlikely to improve efficiency through integration; rather, it will likely serve to increase prices during negotiations with insurers. This outcome is not uncommon.
Three days before the announcement of the transaction between Dignity and CHI, Aurora Health Care, Wisconsin’s largest health system, agreed to merge its operations with Advocate Health Care Network, Illinois’ largest health system. The merger will create the tenth-largest nonprofit health system in the United States.
A week later, The Wall Street Journal reported that Ascension Health and Providence St. Joseph Health were in negotiations to establish the largest hospital chain in the United States, which is expected to cover 191 hospitals across 27 states, with an annual revenue of $44.8 billion.
To date, these future healthcare systems appear reluctant to make the tough decisions necessary to improve operational performance.
Hospital CEOs believe that expanding clinical services and raising prices are far easier than reducing the number of hospitals or requiring physicians to adopt more effective practices. Moreover, it is clear that no CEO is willing to close their own hospital.
Therefore, hospitals seek ways to purchase expensive equipment and perform more complex surgeries, ultimately driving up prices.
Raising hospital prices through mergers and acquisitions is not a new practice. As early as 2016, a study in California found that Dignity Health’s prices were 25% higher than those of other hospitals in the state ($4,000 more per admitted patient), a result of Dignity Health leveraging its market power to demand higher rates.
In November last year, a California Superior Court judge ruled that Sutter Health, one of the beneficiaries of a 1996 merger, had intentionally destroyed evidence alleging that the healthcare system inflated prices and abused its market dominance.
U.S. hospitals have long charged fees in whatever manner they chose. But today, buyers—including the government and major employers—are growing increasingly impatient. They are weary of exorbitant costs, particularly for services that could be delivered more efficiently elsewhere.
Independent ambulatory surgery centers are now able to provide same-day surgical services at lower prices than local hospitals. Meanwhile, more patients are being referred to walk-in clinics located in pharmacies rather than visiting local emergency departments.
To achieve effective treatment, inpatient emergency care requires rapid, high-quality services that facilitate timely patient discharge. Evidence suggests that the sooner patients return home to recover, the faster their recovery; however, this necessitates continuous monitoring and tracking of patients' health status. Treating physicians must make real-time adjustments to care plans, with a focus on preventive screening, early disease detection, and improved management of chronic conditions.
Further driving patients away from U.S. hospitals are insurance giants such as United and Humana, which have begun aggressively acquiring medical groups, diagnostic facilities, home healthcare clinics, and other forms of care services.
Hospital self-disaggregation will be the only way to reduce cost structures. This requires hospital CEOs to employ more effective methods to deliver higher-quality care, serving more patients with fewer staff and less hospital space and equipment.
Few organizations in any industry welcome mergers and layoffs, but being split apart by another party would be even more painful for hospitals. Unless CEOs embrace strategies focused on operational efficiency, their bottom lines will continue to suffer as patients seek more convenient and affordable healthcare services elsewhere.
Hospitals are pursuing higher quality, faster access, and lower costs; in fact, this is a necessary step to ensure their long-term viability.
Nationwide, Medicare HMO patients average 1.6 hospital inpatient days per year. As the former CEO of the nation’s largest medical group, Robert Pearl helped Kaiser Permanente reduce this figure to 0.7 days per year, less than half the national average.
In 2014, the U.S. Centers for Disease Control and Prevention (CDC) reported an average emergency department wait time of 30 minutes and an average treatment time of 90 minutes. The solution proposed by Robert Pearl can help hospitals significantly reduce wait times and treatment delays, while also lowering costs and risks borne by patients.
Dr. Robert Pearl believes that the U.S. healthcare system needs transformation. What patients need and want are the 4 C’s of healthcare transformation: cost, clinical excellence, coordination, and compassion.
He stated, “What we need is a new revolution, one that will transform the economic structure and technology.” For U.S. hospitals to regain their momentum, they must undergo transformations in the following areas.
1. Resource Integration
The healthcare system must foster collaboration to benefit patients, rather than operating in silos. Healthcare delivery requires not only horizontal integration across departments but also vertical integration of primary, specialty, and diagnostic care services.
As the former CEO of Kaiser, Robert Pearl is not only well-positioned to demonstrate the benefits of integrated service systems to the industry but also capable of providing tangible support for this proposal. Leveraging economies of scale and an increased emphasis on preventive services, growing collaborations may help reduce the number of hospital beds and redundant community hospitals, thereby cutting costs.
For instance, wasted time in operating rooms is a primary driver of soaring hospital costs and deteriorating patient conditions. By assigning responsibilities separately to shift-based teams and inpatient teams, residents can maximize time utilization. Shift-based teams dedicate their entire time to caring for hospitalized patients, thereby accelerating the processes of assessment, treatment, and discharge.
Assigning certain resident physicians to specialize in admissions yields two time-saving benefits. First, when hospitalist teams consult with emergency department physicians, they can accurately determine whether patients are better suited for specialized care or home medical equipment.
For patients requiring hospitalization, hospitals can initiate precise care in the emergency department, rather than waiting an hour or longer to transfer them to inpatient wards.
2. Adjust Hospital Structure
Helping patients maintain their health is not only better for hospitals but also more cost-effective. According to Pearl, the structure of the U.S. healthcare industry is fragmented along specialized lines rather than being fully integrated, leading to poor communication within the sector and concerning conditions for patients.
“The fee-for-service” model not only spurs unnecessary use of medical resources but also rewards medical errors and complications.
He believes that the operational model of the healthcare industry has become obsolete. The fee-for-service structure resembles the payment systems used by fragmented British providers in the 19th century, while paper-and-pencil record-keeping represents an outdated approach from the last century. Therefore, what the U.S. healthcare system needs is a new operational model and industry structure.
For example, patient care coordinators are typically registered nurses or social workers who coordinate care for hospital patients and facilitate their transfer to skilled nursing facilities or home health agencies.
Coordinators have been shown to help accelerate patient recovery and reduce readmissions. However, this role requires substantial investment. For hospitals reimbursed under a fee-for-service model, reduced utilization may lead to financial challenges. In contrast, for hospitals operating under prepaid reimbursement models, reducing costs associated with unnecessary medical resource utilization is inherently worthwhile.
3. Technological Upgrades
The development of emerging technologies, such as artificial intelligence, can provide significant inspiration and support to the healthcare and nursing industry. This sector requires advanced technologies to underpin comprehensive medical record systems, ensure patient access to medical information, and facilitate the delivery of nursing services through mobile and video technologies.
Delivering the highest quality nursing care is impossible without 21st-century IT systems. Data can bridge the gap between misconceptions and medical reality. Supported by vast amounts of data, physicians’ burdens can be appropriately alleviated, and healthcare outcomes can be improved.
4. Return Leadership to Physicians
Physicians need more leadership training. Dr. Pearl believes that doctors will not take the next step until they understand the “why,” and that trust is essential.
Leaders who hope to inspire employee trust must be willing to take risks. Leaders need to provide an inspiring vision, detail expected behaviors, present context and data, and engage in authentic communication with their peers.
Although community hospitals remain the backbone of the U.S. healthcare industry, proactive planning is a prudent strategy for the entire healthcare system. Beneath the seemingly calm surface of the healthcare sector, confronting financial distress and operational challenges is a prerequisite for driving change.
References:
http://aansneurosurgeon.org/departments/think-getting-good-health-care-usually-wrong/
https://www.forbes.com/sites/robertpearl/2018/01/16/hospitals/#54d298f34b03
http://ymm.yale.edu/autumn2017/people/alumni/317751/
https://www.forbes.com/sites/robertpearl/2018/01/30/saving-americas-hospitals-2/#184908aa241c