The Challenges Hospitals Face

Gregory J. Mertz, MBA


January 01, 2018

The hospital is a city that never sleeps. In the middle of the night, nurses hurry down the fluorescent-lit halls, bleary-eyed visitors look for coffee from a vending machine, and clinical staff trade jokes in the emergency department.

This constant activity is necessary, but it often goes on without much regard for anyone's circadian rhythms.

"They woke me up and took my vitals at 4:30 AM, then woke me up again at 6:00 AM to change the trash can," said a former patient. "And then the trash guy stood outside the door having a conversation for another 5 minutes."[1]

A World of Constant Oversight

Hospitals are very complicated structures that are under constant oversight. Physicians in private practice are sometimes astonished by the amount of monitoring that goes on in a hospital. In addition to frequent inspections and data requests by the Joint Commission, Centers for Medicare & Medicaid Services (CMS), and other regulatory bodies, hospitals do a great deal of internal monitoring of quality, safety, and patient experience.

Medicare Oversight Programs

CMS operates three pay-for-performance programs that adjust Medicare payments to hospitals according to their performance on various quality measurements.

Hospital Value-Based Purchasing Program. Starting in 2012, this program reduces Medicare payments for all hospitals and redistributes the funds to hospitals according to their performance. Measures started with adherence to treatment guidelines and results of patient experience surveys, and then added such outcomes as mortality rates.

Hospital Readmission Reduction Program. Since 2012, this program penalizes hospitals for readmitting a patient within 30 days of a previous discharge. It covers patients admitted for heart attacks, heart failure, pneumonia, chronic lung disease, hip or knee replacements, or coronary artery bypass graft surgery. Hospitals can lose up to 3% of payments for high readmission rates.

Hospitals can lose up to 3% of payments for high readmission rates.

Hospital-Acquired Condition Reduction Program. Beginning in 2014, hospitals have been closely monitored for their incidence of healthcare-associated infections and other potentially avoidable complications. In 2017, after the third year of a new federal program, 769 hospitals lost part of their Medicare reimbursements for having high levels of potentially avoidable complications.[2]

Information from these programs is posted on CMS' Hospital Compare website. On the basis of up to 57 measures, each hospital is given a rating of one to five stars.

Hospitals have not performed well on patient experience metrics on Hospital Compare. In the 2015 Hospital Compare report, 60% of hospitals received three or fewer stars on patient experience, and only 7% received five stars.[1]

The Pros and Cons of Each Hospital Size

Physicians' concept of hospitals can be traced back to their early years as residents in a large teaching hospital. These institutions, especially large academic medical centers (AMCs), are often the model for many physicians of what a hospital ought to be.

AMCs can be very exciting places for clinicians. They are the foci of research and highly specialized care. Patients with serious illnesses are constantly transported there, and a panoply of highly specialized equipment can be used.

However, relatively few physicians end up working in AMCs. Most of them work in large to medium-sized community hospitals, either as employed physicians or physicians on staff. At times, they may get nostalgic for the constant challenges of the AMC.

Large and Small Hospitals

Large hospitals hold more importance than their numbers would suggest. In a 2012 survey, only 14% of hospitals had 400 or more beds, and yet they accounted for 36% of total US hospital beds.[3]

Large hospitals hold more importance than their numbers would suggest.

In the case of small hospitals, that statistic is turned on its head. Whereas 39% of all hospitals had fewer than 100 beds, these hospitals accounted for only 13% of total beds, the survey found.

Flaws of Large Hospitals

Large hospitals, including most AMCs, are a magnet for patients with unusual diagnoses and host a great deal of advanced technology. But they tend to be less efficient than hospitals with 200-300 beds, according to a 2017 meta-analysis.[4]

In many cases, mid-sized hospitals offer a wide spectrum of services that can rival those of large hospitals in many areas. Mid-sized hospitals can also take advantage of economies of scale, and they don't have large bureaucracies.

Large hospitals have many layers of administration, and they may not have the warmth and friendliness of smaller institutions. These hospitals tend to have lower patient satisfaction scores, according to a 2016 study. Scores were lower there owing to patients' perceptions of hospital cleanliness, receipt of help on time, and doctor communication.[5]

Getting Lost

Patients often see large hospitals as very confusing places. These hospitals are often older, urban facilities where multiple additions have been tacked on over the years, resulting in a difficult labyrinth of hallways that makes it hard for patients and visitors to get around.

To aid lost visitors, large hospitals have installed directional signs at intersections, multicolored lines on the floor, and other wayfinding aids. Some have introduced interactive maps and even digital directions. These aids reduced the number of lost visitors by 60% at one large hospital.[6]

Flaws of Small Hospitals

Small, rural hospitals are at the other end of the size spectrum. Many of these hospitals have financial problems owing to limited numbers of patients, inability to provide a wide spectrum of services, and weak negotiating leverage with commercial payers.

They also have a lot of trouble recruiting and retaining physicians. For reasons of both lifestyle and income, doctors prefer to work in urban and suburban settings.

Rural Closings

According to the latest count, 82 rural hospitals have closed since January 2010,[7]and a 2016 report found that 673 rural hospitals were vulnerable to closure.[8]Many rural hospitals have been closing their obstetrics units because they don't have enough patients to break even.[9]

Some rural hospitals, however, do quite well. The hospital consultancy iVantage Health Analytics recently issued a list of 100 rural hospitals that performed well on the company's metrics for clinical outcomes, patient satisfaction, and costs.[10] And unlike large hospitals, these smaller institutions have more nimble management structures.

Financial Challenges for All Sizes

All hospitals have to deal with crushing expenses and an uncertain income stream. This has left them with fairly small operating margins—basically, the difference between revenue and expenses for patient care services.

The median operating margin for all hospitals fell from 3.4% in fiscal year 2015 to 2.7% in fiscal year 2016, according to Moody's Investors Service.[11] Hospitals are now under even greater financial challenges, owing to changes in federal regulations that will be discussed later.

Losing Money

More than one half of hospitals lost money on patient care in 2016, another recent study found.[12] Most of them were able to make up for those losses through other sources, such as investments, gifts, and even parking fees and space rentals, the study found, but this statistic shows just how perilous the financial situation for hospitals is.

The typical hospital has huge expenses that can force it to take on a great deal of debt. In addition to paying salaries for a wide variety of workers—including growing numbers of employed physicians at high salaries—hospitals have to buy expensive equipment ranging from robotic surgery to next-generation electronic health record (EHR) systems.

Hospitals often have no choice but to buy new technology. Clinical technology helps them retain physicians, and EHR technology helps them compile the data they need to monitor safety, physician productivity, and other metrics.

Hospitals often have no choice but to buy new technology.

Mounting debts and less demand for services have forced some hospitals to go out of business. Federal regulations reduced the average length of stay in hospitals, meaning that fewer beds were needed to treat the same number of patients. From 1990 to 2010, the number of US hospitals fell by 6%.[13]

Closing Departments

To stay in the black, some hospitals have been closing money-losing operations. According to a recent compilation of news reports, 18 hospitals closed departments in the first half of 2017 alone.[14] The typical targets for closure were delivery and behavioral health units, but home health, hospice, neurosurgery, and transitional care were also affected.

These department closures are not limited to obscure small hospitals. The 2017 list included prestigious organizations, such as Dartmouth-Hitchcock Medical Center, Mayo Clinic, and the Cleveland Clinic. These large institutions are obviously not going to go out of business, but the point is that they, too, have had to watch their finances.

The Urge to Merge

Small and medium-sized hospitals have sought shelter from financial perils by joining larger systems. Almost two thirds of hospitals (65%) are now part of a system, compared with 58% in 2009, according to the American Hospital Association (AHA).[15]

Hospital mergers and acquisitions have been going on for more than two decades, but the pace has markedly accelerated in recent years. The number of hospital transactions announced in 2015 was 18% higher than in 2014 and 70% higher than in 2010, according to Kaufman, Hall & Associates, a hospital consultancy.[16]

Just in the first quarter of 2017, there was an 8% increase in mergers over the same time a year before, according to a recent report.[17]Lately, not only are individual hospitals joining systems, but systems are trying to merge with each other, as in the case of the recent proposed merger between NorthShore University HealthSystem and Advocate Health Care in the Chicago area.

Economies of Scale

Hospital mergers can make hospitals stronger financially through economies of scale and other efficiencies. A 2017 study commissioned by the AHA found that mergers between 2009 and 2014 reduced annual operating expenses at acquired hospitals by 2.5%.[18]

When a large flagship hospital acquires a hospital, it can consolidate certain services in the smaller hospital, away from the hustle and bustle of the flagship. For example, when Loyola Medical Center, an AMC in the Chicago area, acquired Gottlieb Hospital, a 250-bed facility that had $60 million in debts, Loyola moved most of its obstetrics/gynecology services and part of its orthopedics program to the hospital.[19]

The AHA study said that acquired hospitals could also reap savings on supplies and participation in the system's alternative payment models, such as accountable care organizations (ACOs) and bundled payment demonstrations, both launched by the CMS. The new study also mentioned that doctors could be steered toward clinical protocols, which can save money by standardizing care.

Consolidation can help improve quality as well as cost metrics for hospitals, according to another recent study.[15]Small and medium-sized hospitals that are part of systems perform better than their independent counterparts on seven key metrics, inpatient mortality, 30-day mortality, average length of stay, and operating profit margin.

Concerns About Consolidation

Consolidation can have some negative consequences for the medical profession and for the affordability of hospital care.

Mergers limit doctors' choice of hospitals, for example. When there are several independent hospitals in an area, surgeons can choose where to do their surgeries and have some leverage over scheduling time in operating rooms and the hospital's choice of supplies. Surgeons lose that leverage when there is only one hospital in the area.

Market Power

Consolidated hospitals also gain a great deal of market power over commercial insurers and can force them to increase payments, which many critics think is the main reason hospitals merge. A 2016 report by the Medicare Payment Advisory Commission (MedPAC) cited four different studies showing links between hospitals' market power and higher payments from insurers.[20]

In response to hospitals' growing market power, the Federal Trade Commission (FTC) has been filing antitrust lawsuits against certain hospital mergers. The proposed NorthShore/Advocate merger in the Chicago area was called off in March 2017, after a federal court granted a request by the FTC and the State of Illinois for a preliminary injunction to temporarily halt the merger.[21]

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