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The Keckley Report

Are Community Hospitals Obsolete?

By January 29, 2018March 1st, 2023One Comment

It’s a serious question. Just about every trend of late seems to suggest the days are numbered for many, if not most. At a minimum, major changes are necessary for hospitals large and small if the evolution of the sector results in new life.


·         The core business for hospitals, inpatient care, is shrinking. In the last decade, admissions dropped 12% to 104/1000; acute bed capacity decreased 11% to 2.4/1000, and though average length of stay increased slightly (2%), one is four hospitals faces operating losses in its inpatient activity. Thus, hospital consolidation is at fever pitch, big names in the investor-owned hospital sector like Community Health System and Tenet are selling some hospitals, and bond rating agencies are sour on the sector.

·         Competition in hospital outpatient services is under intensifying. Per the Health Cost Containment Institute’s data also released last week, inpatient spending was up 4.1% in 2016 vs. 6.2% for outpatient. Hospitals have made up for shortfalls in inpatient reimbursement by charging more in outpatient. That’s changing: Medicare, Medicaid and commercial insurers are cutting their rates and price comparison tools like MDSave and others are proliferating. Complicating matters for hospitals, private investors are funding independent diagnostic imaging, labs, urgent care, ambulatory surgery, freestanding emergency rooms and other outpatient programs driving competition up and margins down.

·         Clinical innovations are driving hospital costs up more than they’re reimbursed. The annual increases in costs for drugs, technologies and devices used in hospitals have been higher than their reimbursement by payers. And out-of-pocket payments by patients fall short in making up the gap. That’s the rationale by a quartet of not-for-profit health systems led by Intermountain to begin manufacturing generics themselves as a not-for-profit endeavor. It’s a last resort but no doubt the first of many like it.

·         Hospitals are odd-man out in the recent mega-deals. The highly-touted deals involving CVS-Aetna, Humana-Kindred, and Optum-Davita Medical Group are widely seen as the tipping point for a revolution in technology-enabled, direct to consumer, price transparent, convenient delivery of healthcare. They’re viewed as the harbinger of things to come, with speculation about the roles Amazon, Apple and others might play in coming years. Hospitals have been noticeably absent major roles in these deals.

·         And the regulatory climate for hospitals is harsh. Potential cuts to the 340B drug discount program will hurt one in three. Quality reporting requirements are burdensome; participation is shared savings programs encouraged by Medicare and others have had mixed results, and the elimination of the individual mandate in the Tax Cuts and Jobs Act earlier this month means 4 million fewer insured and increased uncompensated care for most hospitals. And that’ only part of the regulatory labyrinth through hospitals meander. Other sectors in healthcare are nowhere near as tightly controlled as hospitals: it’s an uneven playing field. Will regulators require CVS, Optum, Humana and other disruptors to manage emergency rooms and accept all comers? Will their retail clinics be required to treat individuals irrespective of their abilities to pay?

Hospitals in the U.S. have been around since Ben Franklin founded Pennsylvania Hospital in 1751 with roots dating back to the Roman Empire. In the 14th to 17th centuries, they operated as almshouses for the sick and indigent under the care of religious orders. In 18th century Europe, their missions expanded to be hubs for science, clinical innovation and education.

Today, there 4840 community hospitals, down from 7156 in 1975: 2849 of these operate as not for profit, 1035 are investor owned, and 956 are operated by state/local governments. Rural classification is given to 1835 of these with 3015 deemed urban.  The majority are affiliated in some way with a multi-hospital system or network: complete independence is a rarity. And 159 hospitals shut their doors last year.

Hospitals are resilient. The majority have done reasonably well in recent years, thanks to the decrease in the ranks of the uninsured from 16% in 2010 to 10% last year. Per the AHA 2018 Hospital Statistics report released last week, from 2015 to 2016, total operating profits for all hospitals declined 2.5% to 7.7% of revenues while uncompensated care increased 9.5%. Moody’s Investor Service 2017 analysis of 150 systems found hospitals’ median operating margins fell from 3.4% in FY 2015 to 2.7% in FY 2016 primarily the result of the widening gap between expenses (+7.5%) and revenues (+6.6%).

It hasn’t been easy street. The CEO’s plate was full with Affordable Care Act, False Claims Act, physician employment, cyber-security, meaningful use, shared savings programs, insurer negotiations, sequester cuts and mandatory reporting to Medicare dominating a busy agenda. But in markets where the population was growing, employers were supportive, insurers collaborative, physicians engaged and the public’s trust strong, hospitals were able to power through. Becoming obsolete was not a concern.

But 2018 could be different.

·         The new administration is committed to deficit reduction, dismantling the Affordable Care Act and promoting federalism pushing more responsibility to states to manage their healthcare systems. Newly confirmed HHS Secretary Alex Azar, a pragmatist with experience in government, has promised to reduce drug costs, tackle the opioid epidemic and expand value-based purchasing programs across the board. There’s no evidence from administration officials that a warm spot is reserved for hospitals, physicians, allied health professionals and public health providers.

·         Funding for safety net and public health programs is evaporating. Demand for services is increasing, especially among the neediest. Medicaid work requirements being sought in 10 states, the growing numbers who live at or near the poverty line, and the budgetary cuts for essential services, like the 1400 community health centers that serve 27 million Americans, are taking a toll on community health. Importantly, for the 43 million living below the poverty line, and million more that struggle to pay medical bills, the healthcare safety net is in jeopardy.

·         The Tax Cuts and Jobs Act is a two-edged sword for hospitals. Capital investing in healthcare, especially for entrepreneurs wishing to carve out profitable niches, is buoyed by the new law. Investor-owned hospitals will also see benefits from lower tax rates while not for profits and public hospitals will see cuts as federal lawmakers seek to close the $1.4 trillion deficit associated with the law. These cuts will impact hospitals large and small, urban and rural, independent and affiliated.

2018 is a new day for hospitals. In Davos last week, the 3000 who gathered under the theme “Creating a Shared Future in a Fractured World” heard bullish forecasts for the year ahead. Economists ticked off their evidence: none of the 45 major world economies experienced a recession in 2017, the Global Dow 150 was up 126%, the Blue Chip 30 was up 31% and the Dow surpassed the 26,000 threshold for the first time ever.

And back home, corporate earnings were buoyed by a recovering economy and positive outlook for 2018. United (Optum)’s report caught healthcare-watchers’ attention: Revenues topped $201.2 billion for the first time increasing +8.8% over 2016. Profits were up 50.5% to $10.6 billion and enrollment in its insurance programs grew 1.9% to 49.5 million members. A good year by any standard.

So, in an industry where big is getting bigger with organizations like United and others knocking it out of the park, it’s hard to imagine how hospitals could play a lesser role. But many may find themselves at the bottom of the healthcare food chain operating as public utilities.

Every hospital manager, trustee and physician leader must be circumspect about what’s ahead. Hospitals are 32% of total healthcare spending today. Two decades ago, they were 45%. So, as we enter 2018, it’s a good time for hospital leaders to step back and consider…

1.       Are conditions in our market relative to population growth, competition, clinical innovation and economics favorable enough to sustain our long-term growth and stability as an acute-centric enterprise? Is our view based on fact or wishful thinking?

2.       Can the public’s trust in our organization for safety, outcomes, efficiency, convenience, affordability, holistic and person-centeredness be verified with hard facts and observable results? Are we prone to believe our own publicity?

3.       If the community’s health is our organization’s highest aim, do our capital, operational and workforce priorities and investments reflect these choices? Are social programs that impact the population’s health, especially those with least access and lowest insurance coverage, integrated or isolated from our acute, outpatient and extended services? Are we a system of health, or a collection of sick-care programs primarily engineered to optimize profitability?

4.       If the future for hospitals is different than their past based on clinical innovation, demand and market constraints, what future state should our organization pursue? What should we NOT do tomorrow that we did yesterday, and how do we make the case to our community?

5.       What’s our response to CVS-Aetna, Humana-Kindred, Optum-Davita and the mega-players that plan to play major roles in healthcare in our market?

It’s hard to estimate how many hospitals will be around in 10 years or beyond. An Intel survey found 57% of consumers doubt they’ll survive long-term. (Intel Corporation Health Strategy & Solutions Group – “Intel Health Innovation Barometer” December 2013).

Hospitals are not protected from market forces. Retail, higher education, community banking, the legal profession, and many others have faced profound changes in which many in their ranks become casualties.

It’s a new day for hospitals. Some will be obsolete. There are no guarantees.


P.S. Dr. Larry Nassar’s conviction for sexual abuse of Olympians and subsequent repudiation of oversight by Michigan State officials has garnered significant media interest. The larger issue is abuse of power: individuals in roles of authority who behave inappropriately while their organization feins no knowledge. It happens in every organization: individuals are granted license to be abusive by organizations that look the other way. Only when these incidents are known is action taken. By then, it’s often too late. The harm is done. The hurt is felt. And for victims, the pain never goes away.

One Comment

  • Terry Nugent says:

    I suspect the future for most community hospitals is being rolled up by academic centers. That is certainly happening in the Chicago market: Northwestern Medicine, Rush , University of Chicago et. al. are extending their tentacles into the outlying suburban insured areas to feed their tertiary care patient pipeline. I think this is actually a good thing, as it brings academic medical center quality to the masses. The downside is cases where the AMC tries to turf people to newly established specialty doctors in outlying areas rather than giving them access to the best practitioners on the home campus.