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The Keckley Report

The Old Hospital Playbook should be Thrown Out

By February 15, 2021March 1st, 2023No Comments

The pandemic has compromised the long-term sustainability of hospitals. Insurers are coming through stronger. Ditto for drug manufacturers and their distributors and retailers. But hospitals have lost ground: the old playbook used by most hospitals simply isn’t working anymore.

Per Kaufman Hall, median hospital operating margins closed 2020 at 0.3%, not including federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funding and 2.7% if included. That’s down 56% vs.2019. At the same time, total expense per adjusted discharge and labor expense per adjusted discharge both increased 14.4% and non-labor expense per adjusted discharge increased 14.2%. Per Chartis, 453 rural hospitals are in danger of closing and most (77%) have 33 days or less of cash on hand. Per Deloitte, by 2030, revenue from inpatient services will decline 35% and demand for inpatient beds will shrink by 44%. That’s an unsustainable trajectory for hospitals requiring that the boards and management in the acute sector’s 6090 U.S. hospitals take a fresh look at their strategies.

Before the pandemic, the old playbook worked reasonably well for hospitals, especially those big-enough or located in communities that were growing. Cost-cutting, outsourcing, cash management and clinical portfolio re-positioning were staples. Dabbling in population health and low-risk alternative payment programs were incremental initiatives. Use of cash reserves to invest in start-ups to create non-operating income “below the line” was standard fare, whether not-for-profit on investor owned. Inpatient utilization declines were offset by higher outpatient utilization and higher charges. Managing collaborative relationships with physicians was essential to referrals and revenues, and boards of directors were almost always supportive of the CEO’s vision and strategy. It worked: hospital spending increased to $1.2 trillion, or 31% of total spending. Despite a decrease in hospital utilization, spending on hospital care grew 32% on a per capita basis between 2008 and 2017 is forecast to grow 5.7% per year from 2020 to 2027. The steady decline of inpatient surgery (40%) since 1981 was handily offset by a 400% increase in outpatient surgeries. And bigger systems fared even better: between 2012 and 2018, revenue growth for the 10 largest systems increased 82% vs. 45% for the rest resulting in their control of 24% of total patient revenues across the entire health system.

But it’s unlikely this playbook will work post-pandemic: here’s why:

Fiscal Pressures on States and Federal Debt Coupled with Employer Pushback will Negatively Impact Hospital Margins

Debt obligations by the federal government ($28 trillion) coupled with a 6.4% revenue shortfall in states last year means lower Medicare and Medicaid reimbursement to hospitals. And cost-shifting to the commercially insured market is no longer in the playbook: large, self-insured employers are contracting more aggressively and their business lobby in DC is intent on thwarting efforts by lawmakers to raise their payroll taxes to fund the projected $758 shortfall in the Medicare Hospital Trust Fund. Employers are increasingly unwilling to bail out hospitals: they’re unwilling to pay 55%-122% more than Medicare pays for the same services and their consultants, armed with data, are advocating aggressive hospital cost containment strategies. The old playbook presumed hospitals are able to cost shift government reimbursement shortfalls to employers to make ends meet; it’s not in the new playbook.

Consumer Backlash

Out of pocket payments from consumers to hospitals have increased above inflation and household income, especially in markets where hospitals enjoy limited competition In 2015, consumer out of pocket payments represented 29.7% of hospital payments; last year, they contributed 35.9%—that’s a 21% increase that hits low- and middle-income households hardest. Employers are intent to pass-through their hospital price increases to their employees vis a vis incentives to use “high value” hospitals, price-shopping tools, reference pricing for big-ticket acute services and higher deductibles. Consumers blame hospitals for surprise medical bills, lack of price transparency and wastefulness. Consumers do not understand their hospital bills, sticker shock is standard fare and more than a third has an unpaid hospital bill. While hospitals revel in their revenue cycle success and control of bad debt, ill-will with consumers is mounting. The trust and respect earned by frontline caregivers in the pandemic is unlikely to offset growing contempt for the business practices in hospitals.

Physician Frustration

Per Altarum the cumulative growth in overall health care prices from 2005 to 2018 was 29%, but hospital prices increased 36% while prices paid for physician and clinical services grew just 15%. A Health Affairs study last year found that the imbalance between hospital and physician prices cut across both inpatient and outpatient care: between 2007 and 2014, insurer-negotiated hospital prices for all in-patient care grew 42%, while the prices paid to the physicians grew 18 %; insurer-negotiated prices for hospital-based outpatient care grew 25%, while outpatient physician prices grew 6%. The same study found that nearly all of the price increases for six different hospital-based procedures during this period were the result of increased hospital facility fees, which accounted for 92% of the growth in the cost of a cesarean section and 97% of the growth in the cost of a knee replacement. Though hospitals now employ a third of the nation’s physicians, there’s growing tension between hospitals and their employed physicians, and increased options for all physicians vis a vis private equity funded start-ups and roll-ups that promise physicians a bigger piece of the pie.

Regulatory Aggressiveness

The new administration is not inclined to be kind to hospitals: HHS Director-nominee Xavier Becerra is no friend to hospitals. Incoming OMB Director Neera Tanden is a vocal advocate for Medicare for All to curtail profiteering in healthcare. New Senate Committee Chairs for Finance (Wyden), Budget (Sanders), Health Education, Labor and Pensions (Murray), Veterans Affairs (Tester) and Aging (Casey) are protagonists of the acute sector. They’re collectively concerned about hospital and drug prices that contribute to 61% of annual health cost increases, high administrative costs that consume 25% of all health spending, and limited competition for hospital care in 72% of U.S. markets where hospital consolidation has played out over the past decade. So, the regulatory landscape for hospitals seems challenging for the foreseeable future.


Fighting against 340B cuts, site neutral payment policies, price transparency and regulatory constraints limiting the flexibility of hospitals to operate et al are understandable pages from the old playbook. But post-pandemic, they do not adequately address the four key challenges above.

The new playbook requires dedicated resources and fresh strategies to address them. It means specific and purposeful changes to pricing, governance, capital deployment, physician relationships and long-term strategies. It means quantifying affordability, community benefit, value, costs, and quality assuring they’re measured objectively and widely accessible. Its destination is systemness: a connected, fully integrated collection of health services for which the organization assumes full risk for the health, wellbeing and costs competing against the likes of Walmart, Optum, CVS and many others.

The new playbook is not a sequel to the old playbook: it’s completely new.

Some hospitals will stay the course, buy time, dust off the old playbook, and hope for the best.

A few will double-down on their highly specialized clinical programs where they can offer a significant value proposition and assume full risk to deliver it.

Many will implement the new playbook.

And all need to read it.


P.S. A person’s take on the January 6 insurrection in DC and Impeachment trial in the Senate last week is primarily dependent on what they watch and read. Right-leaning sources like Fox, Newsmax, Drudge, One America, New York Post, and others present one view and the New York Times, CNN, Washington Post, MSNBC, and others a contrasting view. Healthcare has its share of incendiary issues, so lessons can be learned from how media coverage of these events contributed to disinformation and public division. In healthcare, now more than ever, communicating effectively and consistently is key. Understanding and navigating between media filters is essential. And the need for trusted sources urgent. There is no single source of truth in U.S. healthcare. Like the partisanship on display in adjudicating the insurrection and impeachment, our sectarian divisions impair needed transformation of the health system.


“Fast Facts on U.S. Hospitals 2021” American Hospital Association

“The potential for rapid consolidation of health systems”; December 10,2020; Deloitte

“Crises Collide The COVID-19 Pandemic and the Stability of the Rural Health Safety Net” The Chartis Group

“States Grappling with Hit to Tax Collections”; Center on Budget and Policy Priorities

“Hospital Markets and the Effects of Consolidation”; February 8, 2021; American Action Forum

Cooper et al “Hospital Prices Grew Substantially Faster Than Physician Prices for Hospital-Based Care In 2007–14”; February 2019; Health Affairs

Robert P. Kocher “Reducing Administrative Waste in the US Health Care System “; February 2, 2021; JAMA Network

“2040: Our Vision for the Future of Health”; Deloitte

David Cutler “Building Health Care Better Means Reining in Costs”; January 28, 2021; JAMA Network

Richard Frank, Tricia Neuman “Addressing the Risk of Medicare Trust Fund Insolvency”; January 26, 2021; JAMA Network

Lopez E, Neuman T, Jacobson G, Levitt L. “How much more than Medicare do private insurers pay? a review of the literature.”; April 15, 2020; KFF


CDC Issues New Guidance for Schools

Last week, the U.S. Centers for Disease Control and Prevention issued new guidelines for schools:

  • Students, teachers, and staff should be required to wear masks at all times and should maintain distances of at least 6 feet from one another as much as possible, with students divided into small groups that don’t mix with one another.

  • Also, essential, proper hand-washing practices, cleaning and maintaining healthy facilities, and working with health departments to use contact tracing, isolation, and quarantine to reduce the risk of transmission once someone has been infected

In President Biden’s proposed $1.9 trillion Covid-19 relief American Rescue Plan, $130 billion is earmarked help K-12 schools provide smaller class sizes, obtain supplies such as masks and disinfectants and improve ventilation.

U.S. Centers for Disease Control and Prevention

Administration Purchases 200M Doses

The White House announced it has authorized purchase of an additional 200 million doses of the Pfizer and Moderna vaccines with the hope that the entire population be vaccinated by July.

The White House


Biden Team Reverses Trump Policies in ACA Court Challenge, Medicaid Work Requirement

Last week, the Biden administration announced reversal of Trump administration policies around 3 issues:

  • Affordable Care Act court challenge: The Biden Justice Department advised the U.S. Supreme Court that it was reversing sides in California v. Texas, the case questioning the constitutionality of the Affordable Care Act (ACA) based on the severability of the individual mandate from the law.

  • Medicaid work requirements: Friday, the Centers for Medicare and Medicaid Services (CMS) informed states of its plans to rescind the prior administration’s work requirement for Medicaid coverage. Ten (10) states had sought the waiver: one (Arkansas) had implemented the policy. Note: Research in Arkansas showed the cost of administering the program exceeded savings from lower Medicaid costs, and adults impacted by the policy had increased health claims and poorer health.

  • Marketplace special enrollment: Today, marketplaces will open their Special Enrollment period that continues until May 15 in an effort to enroll uninsured Americans in health coverage.

Garfield et al “Work Among Medicaid Adults: Implications of Economic Downturn and Work Requirements”; February 11, 2021; KFF

NORC Poll: National Mood

Comparing a national mood change since the November election, NORC pollsters found a 24% increase in those thinking the country is headed in the right direction:

“Generally speaking, would you say things in this country are heading in the…”

  • January 28-February 1, 2021 poll: Right direction: 49%, Wrong Direction:49%, DK/NA:2%

  • October 8-December 2020 poll: Right Direction 25%, Wrong Direction 74%, DK/NA:1%

“The January 2021 AP-NORC Center Poll’; Feb 1, 2021; APNORC

Hospital Systems Create Data Venture

Last week, 14 for-profit and not-for-profit health systems announced they have formed a new, for-profit clinical and analytics venture, Truveta, to be led by former Microsoft exec Terry Myerson. Investors’ delivery systems span 40 states and represent 13% of clinical care provided in the U.S. including the following organizations (with others to be added):

  • AdventHealth (Altamonte Springs, Fla.)

  • Advocate Aurora Health (Milwaukee)

  • Baptist Health of Northeast Florida (Jacksonville)

  • Bon Secours Mercy Health (Cincinnati)

  • CommonSpirit Health (Chicago)

  • Hawaii Pacific Health (Honolulu)

  • Henry Ford Health System (Detroit)

  • Memorial Hermann Health System (Houston)

  • Northwell Health (New Hyde Park, N.Y.)

  • Novant Health (Charlotte, N.C.)

  • Providence (Renton, Wash.)

  • Sentara Healthcare (Norfolk, Va.)

  • Tenet Health (Dallas)

  • Trinity Health (Livonia, Mich.)

Anna Wilde Matthews “Major Hospitals Form Company to Capitalize on Their Troves of Health Data”; February 11, 2021; Wall Street Journal

Deloitte: Healthcare Spending Will Hit $8.3T by 2040

According to a new forecast by Deloitte released last week:

  • By 2040, 60% of healthcare spending will go to improving health and well-being.

  • Healthcare spending will reach $8.3 trillion by 2040.

  • As a result of increased adoption of digital health technologies and more direct involvement of consumers, Deloitte predicts a $3.5 trillion difference of freed up healthcare spending or a “well-being dividend”

According to the most recently available data from the Office of the Actuary at the Centers for Medicare& Medicaid Services (CMS), U.S. healthcare spending hit $3.8 trillion in 2019, growing 4.6%

“2040: Our Vision for the Future of Health”; Deloitte

Study: Supplemental Benefits Significant in Medicare Advantage Plans

According to a study released last week by Milliman sponsored by the Medicare-Advantage friendly Better Medicare Alliance:

  • In 2020, the number of health plans offering supplemental benefits grew in 36 out of 41 categories measured, including 15 out of 17 traditional supplemental benefit categories, 4 out of 5 expanded supplemental benefit categories, and 17 out of 19 SSBCI categories. Benefits that are most widely offered in Medicare Advantage include vision (provided by 96% of plans), hearing (93%), fitness (92%), and dental care (87%).

  • In 2021, 57% of Medicare Advantage are providing a meal benefit while 46% offer transportation to and from physician appointments. Nearly a quarter of Medicare Advantage plans provide acupuncture as a covered supplemental benefit.

  • Beneficiaries with diabetes were the most targeted population for supplemental benefits: For 2021, 293 Medicare Advantage plans offer reduced cost-sharing and/or additional benefits to support diabetic beneficiaries in managing their chronic condition in plans with nearly 1.5 million total covered beneficiaries. Behavioral health diagnoses (e.g., anxiety, depression, or substance use disorder) also grew significantly, with 135 Medicare Advantage plans providing reduced cost-sharing and/or additional benefits in 2021, as compared to five plans the year prior. Congestive heart failure and Chronic Obstructive Pulmonary Disease (COPD) also ranked near the top of the most targeted disease groups.

“Overview of Medicare Advantage supplemental healthcare benefits and review of Contract Year 2021 offerings”; February 10, 2021; Milliman

Big Trade Groups Align for Affordable Care Act Expansion

Last Wednesday, a coalition of eight prominent industry groups, including America’s Health Insurance Plans, the American Medical Association, Federation of American Hospitals, American Medical Association, Blue Cross Blue Shield Association, the American Academy of Family Physicians, and the U.S. Chamber of Commerce, released a set of proposals to expand the Affordable Care Act including…

  • an increase in the federal subsidies and premium tax credits to help people afford coverage

  • a three-year re-establishment of the match in federal funding to states to encourage expansion of their Medicaid programs.

  • creation of an insurance affordability fund

  • automatic enrollment assistance and additional funding for outreach and enrollment programs

  • and others

The coalition estimates that 29 million working-age people remain uninsured and believes its proposals could achieve near-universal coverage.

Reed Abelson “Broad Coalition of Health Industry Groups Calls for Obamacare Expansion”; February 10, 2021; New York Times