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The Keckley Report

Headwinds facing Not for Profit Hospital Systems are Mounting: What’s Next? (Corrected Edition)

By June 5, 2023No Comments

Correction: An earlier version incorrectly referenced a Texas deal between Houston Methodist and Baylor Scott and White.  News about deals is sensitive and unnecessarily disruptive to reputable organizations like these. I sourced this news from a reputable deal advisor: it was inaccurate. My apology!

Congressional Republicans and the White House spared Main Street USA the pain of defaulting on the national debt last week. No surprise.

Also not surprising: another not-for-profit-mega deal was announced:

  • St. Louis, MO-based BJC HealthCare and Kansas City, MO-based Saint Luke’s Health System announced their plan to form a $9.5B revenue, 28-hospital system with facilities in Missouri, Kansas, and Illinois.

This follows recent announcements by four other NFP systems seeking the benefits of larger scale:

  • Gundersen Health System & Bellin Health (Nov 2022): 11 hospitals, combined ’22 revenue of $2.425B
  • Froedtert Health & ThedaCare (Apr 2023 LOI): 18 hospitals, combined ’22 revenues of $4.6B

And all these moves are happening in an increasingly dicey environment for large, not-for-profit hospital system operators:

  • Increased negative media attention to not-for-profit business practices that, to critics, appear inconsistent with a “NFP” organization’s mission and an inadequate trade for tax exemptions each receives.
  • Decreased demand for inpatient services—the core business for most NFP hospital operations. Though respected sources (Strata, Kaufman Hall, Deloitte, IBIS et al) disagree somewhat on the magnitude and pace of the decline, all forecast decreased demand for traditional hospital inpatient services even after accounting for an increasingly aging population, a declining birthrate, higher acuity in certain inpatient populations (i.e. behavioral health, ortho-neuro et al) and hospital-at-home services.
  • Increased hostility between national insurers and hospitals over price transparency and operating costs.
  • Increased employer, regulator and consumer concern about the inadequacy of hospital responsiveness to affordability in healthcare.
  • And heightened antitrust scrutiny by the FTC which has targeted hospital consolidation as a root cause of higher health costs and fewer choices for consumers. This view is shared by the majorities of both parties in the House of Representatives.

In response, Boards and management in these organizations assert…

  • Health Insurers—especially investor-owned national plans—enjoy unfettered access to capital to fund opportunistic encroachment into the delivery of care vis a vis employment of physicians, expansion of outpatient services and more.
  • Private equity funds enjoy unfettered opportunities to invest for short-term profits for their limited partners while planning exits from local communities in 6 years or less.
  • The payment system for hospitals is fundamentally flawed: it allows for underpayments by Medicaid and Medicare to be offset by secret deals between health insurers and hospitals. It perpetuates firewalls between social services and care delivery systems, physical and behavioral health and others despite evidence of value otherwise. It requires hospitals to be the social safety net in every community regardless of local, state or federal funding to offset these costs.

These reactions are understandable. But self-reflection is also necessary. To those outside the hospital world, lack of hospital price transparency is an excuse. Every hospital bill is a surprise medical bill. Supporting the community safety net is an insignificant but manageable obligation for those with tax exemption status.  Advocacy efforts to protect against 340B cuts and site-neutral payment policies are about grabbing/keeping extra revenue for the hospital. What is means to be a “not-for-profit” anything in healthcare is misleading since moneyball is what all seem to play. And short of government-run hospitals, many think price controls might be the answer.

My take:

The headwinds facing large not-for-profit hospitals systems are strong. They cannot be countered by contrarian messaging alone.

What’s next for most is a new wave of operating cost reductions even as pre-pandemic volumes are restored because the future is not a repeat of the past. Being bigger without operating smarter and differently is a recipe for failure.

What’s necessary is a reset for the entire US health system in which not-for-profit systems play a vital role. That discussion should be led by leaders of the largest NFP systems with the full endorsements of their boards and support of large employers, physicians and public health leaders in their communities.

Everything must be on the table: funding, community benefits, tax exemption, executive compensation, governance, administrative costs, affordability, social services, coverage et al. And mechanisms for inaction and delays disallowed.

It’s a unique opportunity for not-for-profit hospitals. It can’t wait.



Re: CVS footprint: “There is No healthcare company in the ecosystem that has the breadth of CVS—whether that’s the retail footprint, the pharmacies, or the Aetna health plan business.

CVS also bought the largest home-based health risk assessment company, Signify. What we’ve heard when talking to Signify is that a meaningful portion of people they’re going to health -risk assess have chronic illnesses and need a doctor.

We look at our addressable market being moderate-to-lower-income older adults, so blue-collar workers and down to those in some of the most challenging neighborhoods in big and mid-sized cities. When you look at our addressable market, it is 30 million Medicare beneficiaries. To care for those people, we would need 10,000 Oak Street centers…

Our approach is not to buy a big multispecialty group. To be extreme, we’ll never have a hospital at Oak Street because there are more hospital beds in this country than we need. Same thing around imaging centers. That’s not what we’re going to try to do.”

Lauren Berryman interview with Oak Street CEO Mike Pykosz “Q&A: Oak Street Health CEO on growth plans after CVS Health deal” Modern Healthcare June 2, 2023

Re: global birthrate decline: “In the roughly 250 years since the Industrial Revolution the world’s population, like its wealth, has exploded. Before the end of this century, however, the number of people on the planet could shrink for the first time since the Black Death. The root cause is not a surge in deaths, but a slump in births…

In 2000 the world’s fertility rate was 2.7 births per woman, comfortably above the “replacement rate” of 2.1, at which a population is stable. Today it is 2.3 and falling. The largest 15 countries by GDP all have a fertility rate below the replacement rate. That includes America and much of the rich world, but also China and India, neither of which is rich but which together account for more than a third of the global population.

The result is that in much of the world the patter of tiny feet is being drowned out by the clatter of walking sticks…”

Global fertility has collapsed, with profound economic consequences Economist June 1, 2023

Re: administrative costs in healthcare: “The Health Affairs report analyzed seven separate studies of healthcare’s administrative costs published between 2003 and 2021. These studies found administrative expenditures ranged between 15% to 30% of total U.S. healthcare expenditure.

The variation of these results is quite wide and leaves abundant room for error. It speaks to the alarming lack of clarity regarding healthcare’s administrative costs. Providers and payers account for much of their administrative activities within ongoing operations in ways that are difficult to isolate. Opaque accounting makes insightful analysis difficult to achieve.

According to the Centers for Medicare and Medicaid Services (CMS), U.S. healthcare expenditure in 2021 was $4.3 trillion, representing 18.3% of the total U.S. economy. Using these gross numbers, that means healthcare’s administrative expenses ranged between $645 billion (15% of total) and $1.29 trillion (30% of total). “

The Role of Administrative Waste in Excess US Health Spending Health Affairs October 6, 2022 Findings from The Literature, care administration than comparable countries.

Re: site-neutral payments by Medicare: “Congress is currently considering proposals that would remove these payment differences. One notable proposal considered by the House Committee on Energy and Commerce would reduce Medicare payments to HOPDs and ASCs for services that are most commonly delivered in a lower-cost setting (e.g., if a service is most frequently delivered in a physician’s office, then it would be paid at the Physician Fee Schedule rate). This proposal mirrors an approach discussed in June 2022 by the Medicare Payment Advisory Commission.

This policy would generate substantial savings for the federal government, raising the question of how to use these funds. Policymakers may wish to return some of these savings to affected providers. We harbor doubts that this would be the best use of these funds. In general, savings should be directed to where they will generate the most value—whether that be priorities within health care, priorities in other domains, or deficit reduction. “

Benedic Ippolito, Matthew Fiedler, and Adler Weighing policy options for returning savings from site-neutral payment reforms to hospitals May 26, 2023 USC-Brookings Schaeffer on Health Policy

Re: Birthrate: “The provisional number of births for the United States in 2022 was 3,661,220, a nonsignificant decline from 2021. The general fertility rate was 56.1 births per 1,000 women aged 15–44,
down less than 1% from 2021. The total fertility rate was 1,665.0 births per 1,000 women in 2022, essentially unchanged from 2021. “

Births: Provisional Data for 2022 CDC June 2023

Re: SPACs: “At their peak, SPACs accounted for 70% of all IPOs. But now, the market has dried up and shares of companies that did SPAC deals have crashed…The SPAC boom cost investors billions. Insiders in the companies that went public were on the other side of the trade. Executives and early investors in companies that went public via special-purpose acquisition companies sold shares worth $22 billion through well-timed trades, profiting before share prices collapsed.Companies that went public this way have lost more than $100 billion in market value. At least 12 have filed for bankruptcy and more than 100 are running low on cash, battered by higher interest rates and rising costs.”

Tom McGinty,, Shane Shifflett and Amrith RamkumarCompany Insiders Made Billions Before SPAC Bust Executives and early investors sold shares worth $22 billion” May 30, 2023


Study: Association Between Health-Related Social Needs and Hospital Utilization: Marginal effects of Health-Related Social Needs (HRSNs) on rates of utilization, per 1000 Medicare Advantage enrollees with Type 2 diabetes: Note: each of the 5 impacts unnecessary/avoidable use of hospital services:

Health-Related Social Need Avoidable hospitalization Emergency department visit Inpatient encounter 30-day Inpatient readmission
Food insecurity 17.1 84.6 30.4 8.2
Financial strain 4.6 40.0 6.8 2.3
Loneliness 3.9 173.0 −6.3 −4.5
Unreliable transportation 13.5 244.6 41.8 1.0
Housing insecurity 6.3 55.4 16.1 10.2

JAMA Network Open, Association of Health-Related Social Needs with Quality and Utilization Outcomes in a Medicare Advantage Population with Diabetes, April 21, 2023


Study: MD vs, DO care: Researchers used a 20% random sample of Medicare fee-for-service beneficiaries who were hospitalized from 2016 to 2019 and treated by an MD or DO hospitalist.  Of 329,510 Medicare admissions, 77% received care from allopathic physicians, and 23% received care from osteopathic physicians.

“Quality and cost of care were similar between allopathic (MD) and osteopathic (DO) physicians who care for older patients in hospital settings, according to a retrospective observational study.”

Miyawaki et al “Comparison of Hospital Outcomes for Patients Treated by Allopathic Versus Osteopathic Hospitalists: An Observational Study Annals of Internal Medicine May 30, 2023


Federal Reserve April Report: The Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index (excluding food and energy), rose 4.7% in the 12 months through April. According to new calculations by the White House Council of Economic Advisors, “wage-sensitive” sectors accounted for 1.9% (41% of annual core inflation in April).

Labor Department Report: The May employment report, released Friday, marked the 14th straight month that more jobs were created than economists expected. Highlights: The U.S. economy has created more than 4 million new jobs in the past 12 months. The average U.S. employee now makes $33.44 per hour, a raise of more than 17.5% since pre-pandemic.

CBO: increasing work requirement for SNAP adds enrollees: Under the debt ceiling provision, the age cap will be increased to 54 after 2025 adding 78,000 eligible users monthly: “While the new work requirements will save the government $6.5 billion between 2023 and 2033, the new exemptions will cost the government $6.8 billion over the same period. Overall, the cost of SNAP will rise by 0.2%, or $2.1 billion, over the decade.”

Challenger, Gray Christmas May Report: Healthcare/products, which includes hospitals and medical products manufacturers, announced the fourth-most job cuts behind technology retail and financial among 30 industries and sectors measured in the first five months of 2023:

  • Healthcare/products announced 33,085 job cuts in the first five months of 2023, up 81% from the 18,301 announced in the sector in the same period of 2022.
  • In the first five months of this year, companies announced plans to cut 417,500 jobs, up 315%from the 100,694 cuts announced in the same period last year. It is the highest total for the first five months of the year since 2020.

May 2023 Layoffs Jump on Tech, Retail, Auto; YTD Hiring Lowest Since 2016 June 1, 2023

Prescription Drugs

Prescription Drug Expenditures in 2022

Sector 2022 expenditures
($ in millions)
Percent of total expenditures
Retail pharmacies 265,965 42.0%
Mail-order pharmacies 180,673 28.5%
Clinics 116,906 18.5%
Nonfederal hospitals 37,220 5.9%
Long-term care 16,690 2.6%
Home healthcare 9,823 1.6%
Federal facilities 2,631 0.4%
Staff-model HMOs 2,334 0.4%
Other 1,253 0.2%

American Journal of Health System Pharmacy, National trends in prescription drug expenditures and projections for 2023, April 24, 2023


Mercer: Major employer benefits changes unlikely: Mercer surveyed 721 employers of all sizes. Key findings: “Health benefit cost per employee rose 3.2% on average in 2022 – but an average increase of 5.4% is expected for 2023. It is likely that benefit cost growth will continue to accelerate as multi-year health plan contracts are renewed and begin to reflect inflation-driven cost increases.” The average per-employee cost of health insurance rose by 3.2% in 2022, only about half the rate of general inflation at 6.5%.

National Survey of Employer-Sponsored Health Plans Mercer

Evernorth Report: 22% of People With a Behavioral Health Condition Account for 41% of Spend: From the Evernorth Health Research Institute:

  • About 87% of those with a behavioral health condition also have one or more medical conditions.
  • The prevalence of behavioral health conditions rose by 4% from 2021 to 2022.
  • The “personas” of behavioral health patients:
    • Willing engagers, who receive behavioral health treatment from a behavioral health provider (33% of patients)
    • Self-directed seekers, who receive behavioral health treatment from a medical provider (18% of patients)
    • Complex copers, who receive treatment for a physical health condition, but their behavioral health condition surfaces frequently (10% of patients)
    • Silent sufferers, who receive treatment for a physical health condition and their behavioral health condition surfaces only one time in a medical setting. This group also includes those who have not been diagnosed with a behavioral health condition (39% of patients)

“Report: Putting Behavioral Health Top of Mind” Evernorth Health Research Institute May 31, 2023


STAT study: Blues plans profitable in 2022: “Publicly traded health insurers were not the only ones in the industry that continued to amass large windfalls in 2022. Many nonprofit and private Blue Cross Blue Shield companies ended last year with sizable gains that added to their mountainous cash reserves, according to a STAT analysis of financial filings…STAT looked at the 2022 statutory financial statements of 10 Blues companies: the affiliates in Alabama, Arizona, Florida, Massachusetts, Michigan, Minnesota, North Carolina, and Tennessee, as well as Premera Blue Cross (the Blues in Washington and Alaska) and Health Care Service Corp. (the Blues in Illinois, Montana, New Mexico, Oklahoma, and Texas). Many of the companies filed their documents with insurance regulators at the end of May.

8 of the 10 Blues ended 2022 with a net profit. And one of those companies tallied a gain almost solely because of a gift from Uncle Sam. BCBS of North Carolina recorded $204 million of profit last year. However, it would have broken even if it weren’t for a $203 million federal tax refund, according to audited financial statements.

The Blues are extremely familiar with tax breaks. Collectively, BCBS plans avoid paying $400 million of federal taxes each year due to a specific exemption written into the tax code. The insurers also benefited from tax law changes that Republicans signed into law in 2017. STAT found last year that 12 Blues insurers had not paid any federal taxes between 2018 and 2021.

Most of the Blues turned a profit with the basic practice of raising premiums and paying out fewer medical claims.”

Bob Herman “How Blue Cross Blue Shield insurers ratcheted up profits in 2022” STATNews June 5, 2023

JD Power Survey: Members’ satisfaction with commercial health plans declines: Based on JDP survey of 32,000 members:

  • Overall satisfaction with their commercial health plans fell 13 points year over year. The decline was driven by dissatisfaction with customer service, which fell by 33 points. But beneficiaries were also unhappy with coverage and benefits, which declined by 20 points; provider choice, which fell by 16 points; and information and communication, which also dropped by 16 points.
  • Satisfaction was particularly low among members of Generation Y (born between 1977 and 1994) and Generation Z (born between 1995 and 2004). Sicker members also reported they were less likely to receive care coordination services from their health plans.
  • 36% of respondents who rated their health as “poor/fair” said their plan helped coordinate care, while 43% of those in “very good/excellent” health said their insurer had helped with care coordination. 17% of beneficiaries in “poor/fair” health were assigned a case manager.
  • Average Net Promoter Scores for new health plan members was 6 while the average for established members was 25.

JD Power 2023 U.S. Commercial Member Health Plan Study

Systematic Review: Association between insurance coverage and post-partum outcomes: Researchers analyzed 28 studies. Findings: “Approximately half of postpartum individuals in the US do not receive any routine postpartum health care. Currently, federal Medicaid coverage for pregnant individuals lapses after the last day of the month in which the 60th postpartum day occurs, which limits longer-term postpartum care….

An association between more comprehensive insurance and greater attendance at postpartum visits was observed in some studies based on a moderate strength of evidence; for other types of postpartum health care outcomes, the strength of evidence for association with insurance coverage improvement was low.”

Saldanha “Health Insurance Coverage and Postpartum Outcomes in the USA Systematic Review” JAMA Network Open June 2, 2023;6(6):e2316536. doi:10.1001/jamanetworkopen.2023.16536