A New Deal for Hospitals
Another season of health insurance open enrollment is here and we are all about to experience another year of increased premiums. Experts predict painful – but unsurprising – premium increase of 6.4% in 2024 for employer-based plans and 6.0% for plans sold on individual exchanges.
Our nation’s hospitals continue to be a major driving force behind this perennial trend. But despite representing a significant portion of overall healthcare expenditures, our hospitals are struggling financially. Hospitals must evolve into something different; if they do not, they will face extinction.
Since 2019 alone, 167 hospitals in the United States have gone bankrupt and another 273 have merged into other organizations. Many of those shuttered hospitals were in rural areas or served lower income and minority populations.
Should this trend continue, we will collectively suffer the loss of something invaluable. Even as some hospital services are replaced by competitive models, certain contributions have no viable alternative. Hospitals are a source of crucial research, of critical specialized care that can only be delivered at large institutions, and of services like blood stores that must be housed centrally to meet the needs of varied populations.
Hospitals that are able to transform what they are and how they operate can survive and serve the public well. They will still require investments from society in the interim, but that investment will be justified by the public good and eventually represent a windfall to taxpayers.
Three fundamental drivers are contributing to the hospital crisis, none of which can be wholly addressed by market forces:
Payment: Governments and payers are adopting alternative payment models to address rising costs, but these structures threaten hospitals’ revenue drivers without offering them viable paths to evolve.
Hospitals have been central to driving healthcare cost inflation, with CMS’s Office of the Actuary attributing nearly a third of healthcare spending to them in 2021. Reigning in hospital costs is thus an imperative to “bending the cost curve” successfully.
The CMS Innovation Center has evangelized “value-based care” to reduce unnecessary healthcare spending. The latest generation of value-oriented payment models align rewards to total-cost-of-care management: incentivizing healthcare providers to keep people healthy and penalizing them for unnecessary, expensive interventions – like preventable hospitalizations. However, when hospitals adopt value-based payment models, they generally perform worse than physician groups engaged in comparable efforts, undoubtedly because their traditional revenue streams are the very costs value-based models prioritize reducing.
Value-based care is the best policy we have to control costs. And its scope and impact are growing. Hospitals are therefore left without a viable choice: if they pursue value-based payment structures without embracing more comprehensive internal changes, they will trade dollars of utilization for cents in savings returns, harming their bottom line. If they reject value-based models, they will cede revenue to more efficient entrants, also harming their bottom line.
Delivery: Those efficient alternatives are on the rise, rendering care in novel ways and transitioning care traditionally delivered by hospitals elsewhere. The efficiency and comfort of community- or home-based dialysis has sparked a significant policy push to drive greater adoption, catalyzing a shift in sites of service. Increasingly, the rise of centers for outpatient surgery, cancer treatment, diagnostics, advanced imaging, and more compete with many hospital functions.
These forms of specialization will continue to shift more care delivery outside of the hospital. Because these decentralized locations benefit from lower overhead and perform limited procedures, they are generally more efficient.
Virtual services are also changing how we access care. Whether through telemedicine or “remote patient monitoring” (think your Apple Watch’s blood oxygen monitor), virtual care is beneficial to access and health equity, and will become increasingly ubiquitous over the next decade.
Labor: As provider burnout and the aftershocks of Covid continue to challenge our healthcare system, healthcare labor shortages have persisted long after most of us have returned to normal life. Aspects of this trend may be transient, but others predate – and were merely exacerbated by – Covid.
Hospitals feel the pain of these staffing issues more acutely than their more nimble competitors. They end up paying premiums to maintain staffing levels, which result in losses that drive further inflationary pressure on costs (and insurance premiums). Less well-resourced enterprises – like critical access hospitals – cannot withstand even transient losses and are forced to close.
If we accept these trends and believe that hospitals serve irreplaceable societal functions, then what can we do to mitigate the impending disaster?
Hospitals need to do their part by demonstrating commitment to change. This will require embracing advanced value-based care payment models that assign accountability for patients’ total cost of care to the healthcare providers who treat them. That evolution will likely entail greater adoption of novel, virtual care delivery models that will reduce overhead and staffing and burnout issues.
Smaller centralized footprints will also be key to the survival of many hospitals. They should focus on those services that only they can provide, such as acute trauma interventions, treatments with capital-intensive technologies, and the most highly specialized forms of care and research.
Lastly, those hospitals that seek to maintain the broader array of services that they currently render must reorient associated operations to replicate their freestanding counterparts: more efficient, specialized centers with reduced administrative overhead.
Hospitals that demonstrate a commitment to these changes should be rewarded. Some of those rewards will come in the form of value-based payments proportional to the efficiencies generated.
But there will still be shortfalls that will require additional societal investment in the form of direct subsidization. Funded by taxpayers, these grants would ensure the preservation of those invaluable services, research and training that are necessary to preserve the types of advanced care delivery where the American healthcare system excels.
Over time, supporting our nation’s hospitals through these critical transitions will undoubtedly pay dividends on our down payment: if our healthcare system’s largest entities embrace payment models and internal restructuring that align them to obviating – rather than prioritizing – expensive interventions, our nation’s taxpayers will save far more than we invest. These efficiencies will galvanize enterprises, increase productivity, extend longevity, and preserve our vulnerable but essential public trusts – like Medicare, Medicaid and CHIP.
Nevertheless, much as with our nation’s recent investment in transitions to cleaner energy, we must fund a stopgap to divert the inertia of the status quo. We should offer those hospitals that demonstrate commitment to embracing necessary change a new deal.
Photo: AndreyPopov, Getty Images