Third Gen Hospitals: New Systems of Health

The origin of hospitals dates back 2500 years to the facilities built by the ancient Greeks to serve their God of health, Asclepius, and to the third century B.C. Roman Basilias that housed healers who practiced their trade. From these beginnings, facilities devoted to identifying and treating diseases by healers migrated to Europe and then to North America where our first hospital, Pennsylvania Hospital, opened its doors in 1751.

From these roots, the role of a hospital as a gathering place for health professionals focused on diagnosing and treating disease is unchanged. But how health is defined, how disease is diagnosed and treated, and how healing professionals engage with patients and with peers has changed dramatically. As a result, First and Second Gen hospitals have much in common. Third Gen hospitals in the U.S. are unlikely to resemble their predecessors.

First Gen Hospitals (circa 1947-2000): Thanks to legislation (Hill Burton Act, 1947) that funded hospital construction in every community and the introduction of Medicare and Medicaid programs (1965), 7200 hospitals were built in the U.S. These First Gen Hospitals were the anchors in their healthcare communities. They afforded employment to many, served as magnets for physicians, and anchored the community’s economy. The science of healing was advancing as techniques for surgery improved and medication therapy became a mainstay. Hospital administrators focused on recruiting relationships, community support, and appropriating capital for a widening array of inpatient services. As RBRVS payments evolved and as investor-owned hospitals became prominent, competition for admissions became the prime determinant of success.

First Gen hospitals enjoyed the Field of Dreams era for hospitals in the U.S.: when we built them, they came. Specialization took front seat to preventive and primary care. Four beds per thousand was the norm. But the costs associated became problematic to employers and insurers who launched HMOs and capitated models to constrain runaway spending. By 2000, the shortcomings of capitation had run their course. Competitive pressures shrank the First Gen hospitals ranks to 6200 including 1200 owned by private investors.

Second Gen Hospitals: (circa 2000-2015) First Gen hospitals transitioned to Second Gen because the economics of running a hospital changed. Explosive growth in clinical innovation coupled with a vexing medical inflation prompted Medicare, employers and insurers to clamp down on hospitals. They criticized lack of transparency, variable quality and safety, and cost shifting as intrinsic flaws.

Federal legislation is largely responsible for the tepid conditions faced by Second Gen hospitals as they navigated through the first post Y2K decade:  the Medicare Modernization Act (2006) introduced managed care in Medicare and a new spotlight on prescription drugs, the American Recovery and Reconstruction Act (2009) funded Medicaid expansion and forced meaningful use of electronic health records, and the Patient Protection and Affordable Care Act (2010) altered incentives for hospitals from volume to value. Quickly, hospital executives pivoted to efficiency and growth. Affiliations and consolidation accelerated as multi-hospital system operators played larger roles. Outsourcing and group purchasing arrangements became more sophisticated and the aggregation of physicians into clinically integrated networks became imperatives.

Second Gen hospitals developed accountable care organizations, public report cards and an array of outpatient services to compete. ‘Bending the cost curve’ became job one and avoidance of penalties for poor clinical performance and avoidable errors an intense focus. In the U.S. today, 5627 hospitals, including 4926 community hospitals, have survived but what’s next?

Third Gen Hospitals

Third Gen hospitals are significantly different than their ancestors. Unlike First Gen and Second Gen hospitals that defined their opportunities and challenges through the lens of third party reimbursements and federal regulation, Third Gen hospitals think outside the box. Their responses are framed around emerging opportunities in a consistently expanding healthcare market.  While regulatory compliance remains a constant, it is redefinition of this market that defines their strategies.  And they calculate their efforts around six realities:

Changing Demand for Health Services: 10,000 elderly age into Medicare daily. Shortages in primary care services are driving alternative venues like retail clinics and televisits. Millennials and employers are demanding programs for well-being along with specialized services for those who are sick. They want a coordinated blend of alternative and traditional medicine, physical and mental health, technologies that equip them to participate actively in their care and instant information about the costs they’ll shoulder in every transaction with their hospitals and caregivers. Third Gen hospitals embrace an expanding definition of health that goes well beyond sick care services for patients. And they don’t see Medicare as a financially unattractive market.

Explosive Clinical Innovation: Medical science is expanding exponentially. More than 80 randomized control trials are published daily and precision medicine has a firm footing in cancer treatment. For Third Gen hospitals, personalized health delivered through team-based models is central to their operating model. The results of these efforts—total costs of care, user experiences, outcomes and avoidable errors–are the basis for competing against other Third Gen players in their region. Armed with cost and outcome data that’s readily accessible, and powerful tools for self-care navigation, payers and consumers will find “what works best” for their healthcare far beyond their local communities.

Tighter Access to Capital: Third Gen hospitals need capital to expand their services across a wider array of retail, community and digital services closer to homes, schools and workplaces. But the capital markets are wary: bond ratings for the acute sector have plummeted, and private investment in healthcare is betting on other sectors that disrupt the status quo. Third Gen hospitals that operate with scale and scope advantages will be credit worthy; the rest will be starved for capital. And deployment to inpatient programs will be balanced against investments in household services, clinical enterprise developments and retail services.

Health Insurance Integration:  Recent announcements by Aetna and Anthem about their partnerships with reputable health systems like Texas Health Resources, Inova and others reflect the convergence of financing and delivery of care in our system of care. Consumers and employers trust providers more than insurers but have issues with both. Incentives to manage both cost and quality are firmly embedded in the Affordable Care Act’s momentum toward alternative payment programs, and they’re unlikely to change. What will change is the activities of Third Gen hospitals to sponsor plans targeting Medicare, Medicaid, employers and individuals. In some markets, Third Gen hospitals will go it alone; in others they’ll partner with private insurers. And in all, they’ll invest heavily in technology-enabled care management to drive enrollment in their direction.

Expansion of Clinical Leadership: First and Second Gen hospitals appropriately focused considerable effort in recruiting physicians and building clinically integrated networks around them. Physicians were in the C suite, but in roles limited to clinical impact—credentialing, care planning, quality and safety surveillance, and so on. Third Gen hospitals will be led by teams of clinicians with acumen in both finance and delivery. And the roles of health coaches, nutritionists, dentists, mental health, pharmacists, and nurse professionals more directly involved in business and clinical decisions.

Operating a Retail Business: For Third Gen hospitals, a sixth force is perhaps the most daunting—operating the enterprise in a retail model. As employers force employees into high deductible plan or exist coverage arrangements altogether, healthcare spending by Millennials and Boomers will become central to Third Gen hospital finances. Most will integrate alternative health, over the counter products and personalized diagnostics into their clinical operations. All will re-deploy capital from bricks and clicks. All will leverage digital health in every program and service so as to connect consumers to their healthcare organization of choice. And at the core of the organization’s culture is recognition that serve individuals, not patients, who have choices and want to be engaged. Branding will matter more than ever.

For Third Gen hospitals, the imperatives for change are market-driven. Unlike First and Second Gen hospitals that navigated around regulatory changes, Third Gen hospitals adapt to markets. They are not paralyzed by regulatory constraints, shared risk arrangements nor timid about deploying capital outside traditional hospital services. And they see the scale and scope of their operations well beyond third-party reimbursement.

Third Gen hospitals are systems of health that serve regions. They define health. They treat the sick and the well. They’re the future.