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The Keckley Report

For Community Hospitals, 2020 is a Make or Break Year

By January 6, 2020March 1st, 2023No Comments

A new study published last week is likely to compound matters facing U.S. hospitals. It adds to a growing list of issues facing hospitals this year.
Issue: The Rationale for Hospital Consolidation
In this New England of Journal study, the Harvard researchers compared 246 hospitals that consolidated to 1986 in a control group tracking their performance on four widely accepted quality measures for three years prior and four years after their transactions. They found “Hospital acquisition by another hospital or hospital system was associated with modestly worse patient experiences and no significant changes in readmission or mortality rates. Effects on process measures of quality were inconclusive.”

In its reporting about this study, the Wall Street Journal’s Melanie Evans put the findings in a broader context: “The question of impact has become increasingly pressing as hospital deal making soared in the past decade. Hospitals announced 90 deals in 2018, a dip from the recent high of 117 transactions the prior year, but up 80% from 50 deals in 2009…Prior studies have found higher prices follow mergers. Prices increased 6% after nearby hospitals merged…Another 2017 study found acquisitions raised prices 6% to 7% when competitors became rivals in new markets as deals expanded their geographic footprint….Prices in the $1 trillion hospital sector face heightened scrutiny amid rising health-care costs and reports of aggressive billing practices. Anticompetitive risks from hospital merger-and-acquisition activity are also raising alarms in Washington.”

Any way these results are spun, the impact is the same: regardless of the financial or strategic rationale for consolidation among hospitals, the promise that costs will go down and quality will go up is suspect. That puts hospitals on the defensive at a pivotal time when the political environment is toxic, health costs are increasing and consumer concern about affordability at a tipping point.

But it’s not the only issue hospitals face this year. The others are:
Issue: Growing Tensions with Large Insurers
The sources of growing tension between the two are these:

1-Aggressive contracting by insurers: in addition to conventional utilization and medical management procedures, insurers are adding new restrictions on specialty drug purchases, new penalties for hospitals that treat emergency room patients for non-emergent care, expanded use of reference prices in setting hospitals payments, more narrow networks and expanded the use of high-deductible plans to lower premiums for enrollees (exposing hospitals to additional collection issues and sometimes discouraging enrollees to seek timely care).

2-Encroachment into health delivery: most major insurers now own/operate their own clinics, urgent care facilities, diagnostic facilities, surgery centers and more.

The firewall between hospitals and insurers has been breached. The natural tension between insurers and hospitals is sure to intensify this year and beyond.
Issue: Economic Relationships with Physicians
Physicians are highly paid professionals who value clinical autonomy, patient respect and income security. The average physician produces $2.4 million in revenues for the hospitals they use and up to $4 million in some specialties. But their take-home pay has not grown as fast as hospital revenues and, in some specialties, it’s actually shrunk.

They’re adapting: most (80%) say they have learned to cope with changes in the healthcare environment but many (44%) say they’re burnout and depression is a growing problem. (One physician commits suicide every day (40/100,000)—triple the rate (12.3/100,000) in the general population). And almost half (47.4%) are now employed in hospitals, insurance companies or medical groups—an increase of 63% in three years.

For hospitals, the issue is this: the economics of medical practice are driving physicians to consider all options including private equity-backed independent groups or direct employment by insurers like Optum. Compensation is an issue: factors beyond productivity are increasingly as incentives for clinical and financial performance, shared ownership and managerial effectiveness factor in.
Issue: Federal Policies that Lower Payments and Increase Operating Costs in Hospitals
A plethora of regulatory changes expected this year will alter the financial landscape for hospitals:

  • Price transparency: The executive order requiring hospitals to post prices, underlying costs and contractual obligations to insurers for 300 “shoppable services” takes effect in 12 months barring a pending legal challenge by several hospital associations.

  • Medicare Alternative Payment Models: CMS begins its Primary Care First program in 26 regions this month with the likely goal that primary care capitation or share savings models will result in lower Medicare spending for unnecessary hospital use and improved health. Changes to the Medicare Shared Savings Program and Bundled Payments are also likely to increase saving for Medicare by requiring providers to assume greater financial risks.

  • Medicare Advantage: Sponsors of Medicare Advantage plans will have greater flexibility to add supplemental benefits that have the potential to lower hospital utilization while improving health.

  • Data Privacy, Security and Interoperability: Hospitals are obligated to adopt and integrate certified electronic health records that accommodate interoperability and protect PHI. A tall order that’s technically challenging and expensive.

  • Surprise Medical Bills: legislation addressing surprise medical bills is likely to pass in the first half of 2020—a blow to hospital revenues for many operators.

  • Stark Law Changes: The Stark Law has been used to restrict private inurement and other financial relationships between hospitals and physicians is likely. Relaxation of the law means hospitals will need to revisit contractual relationships with their physicians at a time when burnout and discontent among practitioners is high.

  • DSH Payment Cuts: Scheduled cuts in Disproportionate Share Hospital funding per the ACA are delayed through 2020 but long-term, it’s unknown representing a potential cut of $4 billion/year cut in hospital payments.

  • Drug Price Constraints: whether Congress will act, or default to state actions, is unknown. Thus far, drug manufacturers have successfully withstood pressure to lower prices or otherwise concede to policies that could hurt their bottom lines.

  • 340B Qualification: Congress will continue to debate the merits of the drug industry’s claim that 340B hospital drug discounts have been extended inappropriately to many ineligible hospitals.

And this is just a short list of federal policy actions. Invariably, state legislative agenda’s add others i.e. Medicaid funding and eligibility, licensing of healthcare professionals, funding for health programs in schools, prisons and workplaces, insurance coverage for state employees and retirees, regulation of health insurance operators, allowance for health services in retail pharmacies and other retail settings and much more. For example, in California this year, residents will pay a fine if they don’t have health insurance. In Maryland, the state will authorize drug prices increases that exceed 10% and so on.

The cumulative impact of these regulatory changes is continued erosion of hospital margins. In America’s 5262 community hospitals, financial pressures have been mounting: margins have shrunk every year since 2013 and one in four operates at a deficit. Private payers (+6.7%) are paying more because Medicare (+3.7%) and Medicaid (+2.0%) pay less. That frustrates insurers and employers who are subject to cost-shifting by hospitals seeking to recover underpayments by Medicare and Medicaid at their expense.

This issue for hospitals requires constant monitoring of policy changes, targeted advocacy where deemed necessary and ongoing financial analysis to gauge impact. It’s intense.
Issue: The Fate of the Affordable Care Act
The ACA’s future is in limbo. Will it end up in the Supreme Court? How will funding for Medicaid expansion be impacted in the 37 states that expanded their enrollment using federal subsidies? What will happen to the 10 million individuals and small businesses that obtain their health insurance through or the state exchanges? What is the future for the Patient Centered Outcome Research Institute, Center for Medicare and Medicaid Innovation and the 30-plus agencies created by the ACA? And so on.

No doubt, the ACA will be thrown into the political hopper once again. For some, it went too far and others not far enough. But for all, it changed the game.


Consolidation has been sold to community leaders, regulators, insurers and even hospital boards on a promise of lower costs and quality improvements. The Harvard study is the latest to show those promises are often not kept.

Hospitals can legitimately counter that factors impacting their costs and quality are outside their control– like drug prices and technologies that seem to defy price constraints. That’s legitimate but inadequate to rationalize the gaps between promises made and promises kept. 

The issue is not hospital consolidation: the issue is the future of healthcare in our communities: who will provide it, how and at what cost? And who will pay for it.

Community hospitals are an option, but in many populations and communities, other options are more attractive.

That’s the discussion we need to have. That’s where we are. That’s why, in my view, 2020 is a make or break year for community hospitals.


P.S. Next week, The Keckley Report will focus on the facts, myths and future for health and well-being in the U.S. health system. As New Year’s resolutions are made, this report offers a strategic perspective on a topic that’s getting more attention from consumers, policymakers, industry incumbents and upstarts.


Hospital spending:  In 2018, spending for hospital care services increased 4.5% to $1.191.8 trillion or 32.6% of total health spending of $3.649.2 trillion–virtually unchanged from 2010 at 31.7%. (CMS)

Hospital Profitability 2013-2018: % of hospitals with total profit margins above U.S. median: 50.3% in 2018 vs. 51.7% in 2013. (Modern Healthcare Metrics’ IQR Methodology); average Medicare beneficiary loss per admission increased 5% from $1119 in 2016 to $1175 in 2018 (MedPAR)

Hospital Utilization from 2007 to 2018: Total admissions 34,505, 620; Inpatient days declined 6.5% to 152 million; inpatient acute days per 1000 decreased 13.2% to 475/1000, inpatient Bed Capacity declined 1.7% to 721,000 beds, average occupancy 58.7%, down from 61.5%, excess capacity increased 3.7% to 17.3% while average length of stay remained virtually unchanged (4.9 in 07 vs. 4.7).(Modern Healthcare Metrics): inpatient vs. outpatient revenues mix change 2002-2017: inpatient decline from 66% to 52% vs. outpatient increase from 34% to 48% (Kaufman Hall)

Hospital Ownership, Affiliation 2018: Total Community Hospitals 5262–Not for Profit (2968/56%), State/Local Government Owned (972/18%), or Investor Owned/For Profit (1322/25%); 1875/36% are designated as rural and 3494 (66%) are affiliated with a multi-hospital system.
Hospital Quality 2007-2017: Pressure related injuries (sores/ulcers) up 6% to 23/1000 discharges impacting 2.5 million patients at cost of $9.1-11.6 billion/yr; (Agency for Healthcare Research and Quality 2019 Scorecard), 


Beaulieu et al “Changes in Quality of Care after Hospital Mergers and Acquisitions” New England Journal of Medicine, January 2, 2020

Evans “Hospitals Merged. Quality Didn’t Improve. The quality of care at hospitals acquired during a recent wave of deal making got worse or stayed the same, new research found.” Wall Street Journal January 1, 2020

“The State of Healthcare Performance Improvement: Strategy, Technology and Tactics 2019” Kaufman Hall

“Physician Compensation and Productivity Survey” SullivanCotter (28-year trends based on 206,000 clinicians in 250 specialties and 675 hospital affiliations)

“National Health Spending Growth Increases In 2018 Driven By Private Insurance And Medicare Spending” Health Affairs December 5, 2019
“Medscape Physician Lifestyle & Happiness Report 2019”

“Updated Data on Physician Practice Arrangements: For the First Time, Fewer Physicians are Owners Than Employees “American Medical Association May 2019

“2019 Physician Inpatient/Outpatient Revenue Survey” Merritt Hawkins February 25, 2019

“Updated Physician Practice Acquisition Study: National and Regional Changes in Physician Employment 2012-2016” March 2018