HFMA VIEWS

Scott MacStravic, PhD

Most U.S. Hospitals seem to be bullish on their futures. The country is in a “building boom” of construction – of new facilities emulating resort hotels in affluent suburbs, hospitals in California meeting earthquake protection standards, replacement of old facilities, expansion of over-crowded emergency rooms, etc. Recent blows to competing ambulatory surgery centers include both physician self-referral prohibitions and payment schedules far lower than what hospitals get for the same procedures, easing that competitive pressure.

But there are still many trends that threaten the future of American hospitals, not their very existence, certainly, but at least their growth prospects. These may not amount to much as individual factors, but they may prove to be something like the fabled “death of one thousand cuts” in terms of their combined impact on future volumes and payment levels, and thereby on the ability of hospitals to pay for their capital investments.

Perhaps the biggest threat comes from the wide-ranging efforts -- among employers, insurers, and government funding sources – to reduce the incidence and prevalence of disease through health promotion, risk behaviors and conditions reduction, and chronic disease management (DM). In one example, physicians participating in a CMS DM demonstration reduced Medicare spending on chronic disease by $21 million in the first year of a three-year project, using large physician groups. [R. Abelson “Shift in Health-Cost Focus Is Said to Show Promise” New York Times July 12, 2007 (www.nytimes.com)]

As third-party payers increasingly shift to “value-based purchasing” in their healthcare investments, they will both pare down their spending by selecting the most cost-efficient/effective hospitals and physicians, and force increased transparency so that consumers will do the same. Hospitals that cannot compete in delivering what all payers consider to be the best value will have trouble surviving, much less prospering. Unlike Lake Wobegon, where all hospitals may be above average, those that remain in the necessary half of the distribution that are below average may simply be forced out of business.

Medical tourism is creating multiple “cuts” for U.S. hospitals. First is the estimated $40 billion in revenue that is traveling to countries offering far lower prices, as consumers who share a far higher share of costs look for bargains. Moreover, the number of countries offering bargains is multiplying rapidly, with both Mexico and Canada potential major competitors reachable by car, as well as plane travel. [J. Hall “Canada a Mecca for Medical Tourism?” TheStar.com Oct 13, 2007]

This growing competition is also forcing greater transparency on U.S. hospitals, as foreign hospitals and physicians happily describe their dramatically lower prices, along with competitive quality and accreditation status. Even payers such as employers and insurers are looking at foreign hospital options as ways of reducing their sickness care expenditures. M. Merrill “Conference Touts Medical Tourism as Catalyst for Pricing Transparency” Healthcare IT News Oct 31, 2007 (www.healtcarefinancenews.com)]

Foreign competition -- along with increasing transparency of quality, costs, and pricing – will increase the growing necessity of improving the operations of U.S. hospitals. There have been estimates that hospitals could reduce their costs by 30-50% by operating at levels already achieved by hospitals such as those in the Sacramento, California market, and by hospitals that are part of the Mayo Clinic and Intermountain Healthcare systems. The most obvious way of forcing such improvements is simply to pay hospitals on a basis closer to what is needed to keep such efficient organizations alive, and seeing which can survive. [J. Bauer “The Imperative to Boost Efficiency and Effectiveness” Healthcare IT News Sep 1, 2007 (www.healtarefinancenews.com)]

The continuing growth in pay-for-performance (P4P) programs is another source of survival threats. As greater proportions of hospital revenue become contingent upon improved performance, for physicians as well as hospitals, there will be perverse incentives forcing both significant capital expenditures, such as those needed for information technology and electronic health records, and overall cost reductions in order to qualify for P4P bonuses. C. Means “Physician P4P Programs Should Target Measures, Increase Pay, Study Finds” Healthcare IT News May 14, 2007 (www.healthcarefinancenews.com)]

P4P programs are gradually but steadily increasing the number of performance measures they include, and the proportion that reflect physician and hospital outcomes vs. traditionally demanded process measures. Physician P4P measures will increasingly reflect “efficiency” in managing patients with chronic disease, who are sources of 70-80% of hospitals’ revenue, which will automatically reduce such revenue. Revenue will increasingly be channeled to providers of all kinds who demonstrate both quality and efficiency, rather than merely enjoying popularity and size in local markets. [D. Manos “Physician P4P Is Here to Stay, CMS Says” Healthcare IT News May 9, 2007 (www.healthcarefinancenews.com)]

Already, a rapidly growing number of retail clinics and urgent care centers are eating into hospitals’ ER volume and revenue, a development that will only continue as consumers share a greater amount of “skin in the game” with respect to their cost burden. Primary physicians are increasingly moving to proactive health practices that often dramatically reduce their patients’ use of hospital and ER services, by 30-90% among the constantly growing number of MDVIP practices, for example. (www.mdvip.com/NewCorpWebSite/ValueInPrevention/HealthStatistics.aspx)

As more primary physicians realize the revenue and personal satisfaction potential in proactive health rather than merely traditional sickness practices, the volume of sickness care coming from that source will decrease as well. And as consumers, themselves, finally catch on to the financial consequences of health vs. sickness, there may well be a significant “health epidemic” emerging in the near future, in addition to increasing consumer parsimony about paying for sickness care.

Hospitals are also cannibalizing their own sickness market by increasingly engaging in proactive health management efforts, as part of their community benefit mission, or as a strategy to gain preference among employers and consumers. They are also doing so in order to improve their own employees’ health and productivity/performance, as part of the continuous necessity for controlling their costs and coping with severe labor shortages, predicted to get worse long before they get better.

The combination of all these “cuts” may not have produced much impact yet, but most are just beginning. While it is impossible to predict what the combined effect of all of them might be, it is certainly obvious that the future of sickness care volume and revenue is unlikely to be as rosy as many hospitals seem to be counting on. The combination may not be “death”, but is likely to be a more severely restricted sickness care revenue stream.