The Future of Hospitals

In a recent New York Times op-ed, Dr. Ezekiel Emanuel posed the question “Are hospitals obsolete?” and then implied they were, citing declining admissions and growing capabilities to provide increasingly complex care outside the walls of these traditional healthcare facilities. He did admit there would still be some need for hospital services such as intensive care and emergency rooms, and I imagine that if pressed he would include 24/7 operating rooms with stand-ready capacity to take on emergency surgical cases.

Positing that we can do without hospitals may reflect some wishful thinking given that we may soon have to, like it or not, since the unwinding of the traditional healthcare system could be the inevitable, if unintended, consequence of the recent tax law. Because most hospitals receive more than half their revenue from government programs, cuts of the magnitude projected will have a serious impact on their viability. Yet there is little evidence of efforts to analyze and plan for ensuring the right amount of hospital care in any given community. If cuts to Medicare and Medicaid cause hospitals to close, people with private insurance will find it harder to access needed services. Hospitals that don’t close will likely manage the shortfall from public payers by increasing the rates charged for services on the commercial side. Employer health plan sponsors are already familiar with this form of cost shifting, but it seems certain to get worse.

Even in the best of times, hospital financing is a tricky business given low margins (0-5% for most US hospitals) and high capital requirements to keep equipment and the physical plant up to date. Marginal revenue goes to cover the marginal cost of providing services and to make interest payments; capital comes almost exclusively from the bond market. How much hospitals pay for bonds depends on their rating, and organizations such as Standard & Poor’s rate hospitals based on predicted revenue streams. If those are disrupted the cost of capital will increase and so will the cost of care. (As a side note, hospital bonds are generally seen as safe investments and end up in the retirement portfolios of many Americans, and thus an increase in default rates could have troubling financial consequences.)

We can agree that migrating care to less expensive settings would be optimal. But that requires the ability to plan for essential hospital services to be retained at the proper level and for non-hospital-based services to be developed in a time frame that guarantees access to patients through the transition. We also need adequate oversight to assure quality in these new settings and models; while much progress has been made in hospital safety, efforts in other settings have been less robust. New entrants into the healthcare market must be able to connect with each other so that services to an individual patient are integrated to assure safety, efficacy and the efficient care delivery.

It would be great if we had this all worked out and ready to go -- but we don’t. Many of the new “point solutions” flooding into the healthcare marketplace were developed by people with more experience in technology than healthcare. While some are important innovations, some reflect an incomplete understanding of the healthcare ecosystem – we’ve seen that new entrants that are primarily technology plays are less likely to succeed. Of particular concern is the importance of everyone providing services to a patient to have access to all of the patient’s data. Without that, there is a potential for a wild-west scenario that could result in waste, where people are receiving duplicative or ineffective services.

Change is inevitable. We need to prepare for it thoughtfully and take into consideration how it will affect patients, healthcare providers and communities. What we should not do is inappropriately simplify our analysis of the impact of change. Patients will continue to need care and those patients are our parents, spouses, kids, friends and inevitably ourselves.

The views expressed are those of the author and do not necessarily reflect the opinions of Mercer.

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