American Hospitals is the fourth in a series of documentaries produced by the Unfinished Business Foundation, founded by Richard Master, CEO of MCS Industries Inc., who took a deep dive into the economics of the U.S. health-care system after his company was hit year after year with double-digit health insurance rate increases.
Master teamed up with filmmaker Vincent Mondillo to produce Fix It: Healthcare at the Tipping Point; Big Pharma: Market Failure; Big Money Agenda: Democracy on the Brink, and now, American Hospitals.
A provocative look at the cost and inequities of American Hospitals, often more motivated by money and power than in providing for the health needs of individuals and the communities they were founded to serve. From the filmmakers behind the hit documentaries Fix It: Healthcare at the Tipping Point, Big Money Agenda, and Big Pharma.
Learn more and find out where to see the latest film at fixithealthcare.com/events
Editor’s Note: This is Part 2 of a multi-part series on healthcare revolution. This article builds on Part 1, which you can read here.
Based on a 23-year career as a solo-practicing rheumatologist, internist and geriatrician, followed by 18 years as president and CEO of a 715-bed, two-hospital healthcare system, I recently shared thoughts about the current stressed healthcare system including profit margin squeeze, patient’s needs and suggested options of subdividing care into acute, urgent, and elective facilities. The bottom-line quote from the Mayo Brothers, “The Patient’s Needs Come First,” is my declaration to use prevention as the way to focus our attention to those we serve.
Recognizing and Addressing the Challenge
Patients’ healthy life expectancy should be the focus of the healthcare industry, communities, employers and governments. People live longer, happier and healthier lives when productivity improves and costs decrease.
The U.S. life expectancy at birth is at the lowest level since 1996. The 0.9-year drop in life expectancy in 2021 and the 1.8-year drop in 2020 were the biggest two-year declines in life expectancy since 1921-1923. The current decline — 77.0 to 76.1 years — demands a change, whether welcome or not. [1]
Our nation’s metrics are embarrassing compared to other countries. Consider just one. “Average life expectancy in Costa Rica has steadily increased from 55 years in 1950 to 81 years today — far outpacing the U.S. Even more notable: the country has achieved this success while spending far less than the U.S. as a share of income which is already lower than ours.” [2] This Central American country is about the size of West Virginia and has a vast and sparsely populated terrain in addition to a few cities. Older adults, even in rural areas in Costa Rica, do well compared to our nation. Opportunities abound to learn from others. [3]
Physicians, Non-Physician Caregivers and Community Responses
Incumbents never welcome disruption. Currently, volume drives the U.S. health payment system. Profitability is proportional to the number of sick-care encounters. The more visits to a physician or hospital parallels greater demand for pharmaceuticals and devices/implants. Higher volume translates into increased insurance premiums the following year, of which the insurance company receives a percentage.
Prevention is not top of mind and redirecting patients to focused factories would be anathema for local hospitals and physicians — both groups are volume dependent.
Offloading outpatient care to lower-cost caregivers — Walmart, CVS, Walgreens, and others — cuts into the work and profit of primary care physicians in independent and health-system-owned group practices. The same with telemedicine. Nurse practitioners and physician assistants, under the supervision of a physician, can bill Medicare at 85% of a physician’s fee with modest restrictions. This positions them to both help and compete with primary care physicians. [4] New entrants — companies and non-physician caregivers — will lower overall costs. That’s a good thing unless you are the traditional medical office or primary care physician being replaced.
Communities have pride in their local healthcare system, especially since it is typically the largest or second largest employer in town. Rethinking where to find urgent or elective care that would require some travel would be a complete mindset change, like the change in shopping after big box stores and online shopping matured. Some communities with abundant resources may support under-utilized healthcare (and retail) facilities but keeping afloat without adequate volume is challenging.
Conditions change and with the importance of health and well-being, patients’ mindsets can evolve to include some travel for urgent and elective care. For its 1.1 million employees, Walmart and other large national employers instituted a Centers of Excellence Program that directs patients with non-acute episodic needs to health institutions that treat them cost-effectively with positive outcomes.
Patients and a companion have 100% of the cost for surgery plus travel expenses for certain spine, cardiac, organ transplants, hip/knee replacements, weight loss surgery and fertility. Walmart also offers a record review for cancer care at a handful of selected healthcare systems across the nation. [5] Since cancer care requires both an accurate diagnosis and usually prolonged treatment, the selected health system develop protocols for a patient that are implemented conveniently for the sufferer.
Rural healthcare is already struggling financially and faces greater threat. Small rural hospitals are failing. Addressing the three levels of medical need with a centralized system might serve patients better than every community trying to be everything to everyone.
Cities with duplicative and redundant services could provide better centralized care more efficiently for a wider geographic area. Changing the “pride in ownership” will require more pain, namely financial pressure, but the reward for patients will be better objective outcomes. Coopetition will facilitate the transformation.
Something has got to give. With increased transparency, patients have never been better informed, and they are already seeking specialized care with better outcomes. Transportation and virtual audio/visual communication is easier than ever before, accelerating change for complex patients.
Healthcare System Evolution
In my opinion, the local hospital of the future will be an ED, OR and ICU with a birthing center attached. A regional medical center will be within driving distance for urgent and elective care. Highly specialized national centers will serve as focus factories for sophisticated medical and surgical care, each serving patients from larger geographic areas, even from across the nation. Cancer surgery, joint replacements, open heart surgery, and other major non-emergency care and surgery at these focus factories will deliver higher quality more efficiently. As noted in Part 1, outcomes are objectively better at institutions focused on a limited number of conditions. [6]
Although this plan might sound exotic, other nations around the world already benefit with specialized, nonredundant hospitals. [7] And global competition is real. The U.S. won’t dominate high-end specialty care like it did in the 1900s. By the end of this century it will be a tripolar world shared between the U.S., China and India. Redistributing resources in America from less efficient healthcare to education, infrastructure, environment, and other worthwhile endeavors will help everyone. [8]
Outpatient care will continue the migration to virtual. Online shopping initially seemed exotic, but now packages arrive daily delivered to homes by a fleet of small vans. And as much as one pines for the old days with a personal intimate relationship with a caregiver, the power of quick access to accurate care will overcome nostalgia. Dr. Marcus Welby will be a distant memory. Consider the profound change from working five days a week in a physical office to the current geographically agnostic 24/7 virtual business community. Formerly successful commercial real estate owners are repurposing their now half-empty buildings.
When will the economics mandate a change? With a slower evolution, the existing systems have a chance to accommodate. A rapid and severe economic downturn is more likely to stimulate a quicker move. Costs matter, particularly as resources become more limited.
Medically self-insured employers like Walmart are already leading the way. Change is happening with younger patients sorting themselves out by going to walk-in clinics in big box chain stores and older folks seeking specialized care from major national systems. As outcomes improve and receive wider recognition, these positive changes will accelerate, creating a “flywheel effect.”
The End Game
Like it or not, sooner or later as a patient or provider we will transform. Understanding the need to change along with better outcomes for patients, who everyone is trying to serve, should improve provider satisfaction.
Subsequently, costs will drop, productivity will increase, and precious resources redirect to preventing illness and improving quality of life. Helping everyone live a longer, happier, and healthier life is an achievable goal. Healthcare systems can and should lead the transformation.
Running a health system recently has proven to be a very hard job. Mounting losses in the face of higher operating expenses, softer than expected volumes, deferred capex, and strained C-suite succession planning are just a few of the immediate issues with which CEOs and boards must deal.
But frankly, none of those are the biggest strategic issue facing health systems. The biggest strategic issue is the reorganization of the American healthcare landscape into an ambulatory care business that emphasizes competing for covered lives at scale in lower cost and convenient settings of care. This shift in business model has significant ramifications, if you own and operate acute care hospitals.
Village MD and Optum are two of the organizations driving the business model shift. They are owned by large publicly traded companies (Walgreens and UnitedHealth Group, respectively). Both Optum and Village MD have had a string of announced major patient care acquisitions over the past few years, none of which is in the acute care space.
The future of American healthcare will likely be dominated by large well-organized and well-run multi-specialty physician groups with a very strong primary care component. These physician service companies will be payer agnostic and focused on value-based care, though will still be prepared to operate in markets where fee-for-service dominates. They will deliver highly coordinated care in lower cost settings than hospital outpatient departments. And these companies will be armed with tools and analytics that permit them to manage the care for populations of patients, in order to deliver both better health outcomes and lower costs.
At the same time this is happening, we are experiencing steady growth in Medicare Advantage. And along with it, a stream of primary care groups who operate purpose-built clinics to take full risk on Medicare Advantage populations. These companies include ChenMed, Cano Health and Oak Street, among others. These organizations use strong culture, training, and analytics to better manage care, significantly reduce utilization, and produce better health outcomes and lower costs.
Public and private equity capital are pouring into the non-acute care sectors, fueling this growth. As of the start of 2022, nearly three quarters of all physicians in the US were employed by either corporate entities (such as private equity, insurance companies, and pharmacy companies), or employed by health systems. And this employment trend has accelerated since the start of the pandemic. The corporate entities, rather than health systems, are driving this increasing trend. Corporate purchases of physician practices increased by 86% from 2019 to 2021.
What can health systems do? To succeed in the future, you must be the nexus of care for the covered lives in your community. But that does not mean the health system must own all the healthcare assets or employ all of the physicians. The health system can be the platform to convene these assets and services in the community. In some respects, it is similar to an Apple iPhone. They are the platform that convenes the apps. Some of those apps are developed and owned by Apple. But many more apps are developed by people outside of Apple, and the iPhone is simply the platform to provide access.
Creating this platform requires a change in mindset. And it requires capital. There are many opportunities for health systems to partner with outside capital providers, such as private equity, to position for the future – from both a capital and a mindset point of view.
The change in mindset, and the access to flexible capital, is necessary as the future becomes more and more about reorganizing into an ambulatory care business that emphasizes competing for covered lives at scale in lower cost and convenient settings of care.
In an Oct. 5, 2022, commentary, Ken Kaufman offers a full-throated and heartfelt defense of non-profit healthcare during a time of significant financial hardship. Ken describes 2022 as “the worst financial year for hospitals in memory.” His concern is legitimate. The foundations of the nonprofit healthcare business model appear to be collapsing. I’ve known and worked with Ken Kaufman for decades. He is the life force behind Kaufman Hall, a premier financial and strategic advisor to nonprofit hospitals and health systems. The American Hospital Association uses Kaufman Hall’s analysis of hospitals’ underlying financial trends to support its plea for Congressional funding. Beyond the red ink, Ken laments the “media free-for-all challenging the tax-exempt status, financial practices, and ostensible market power of not-for-profit hospitals and health systems.” He is referring to three recent investigative reports on nonprofits’ skimpy levels of charity care (Wall Street Journal), aggressive collection tactics (New York Times) and 340B drug purchasing program abuses (New York Times). Ken has never been timid about expressing his opinions. He’s passionate, partisan and proud. His defense of nonprofit healthcare chronicles their selfless care of critically ill patients, the 24/7 demands on their resources and their commitment to treating the uninsured. These “must have clinical services…don’t just magically appear.” Nonprofit healthcare needs “our support and validation in the face of extreme economic conditions and organizational headwinds. ”Given his personality, it’s not surprising that Ken’s strident rhetoric in defending nonprofit healthcare reminds me of the famous “You can’t handle the truth” exchange between Lieutenant Kaffee (Tom Cruise) and Colonel Jessup (Jack Nicholson) from the 1992 movie “A Few Good Men.” Kaffee presses Jessup on whether he ordered a “code red” that led to the death of a soldier under his command. When Kaffee declares he’s entitled to the truth, Jessup erupts,… I have neither the time nor the inclination to explain myself to a man that rises and sleeps under the blanket of the very freedom I provide and then questions the manner in which I provide it. I would rather you say, “thank you” and be on your way. Should American society just say “thank you” to nonprofit healthcare and provide the massive incremental funding required to sustain their current operations?
Truth and Consequences (Download PDF here)The social theorist Thomas Sowell astutely observed, “If you want to help someone, tell them the truth. If you want to help yourself, tell them what they want to hear.” In this commentary, Ken Kaufman is telling nonprofit healthcare exactly what they want to hear. The truth is more nuanced, troubling and inconvenient. Healthcare now consumes 20 percent of the national economy and the American people are sicker than ever. Despite the high healthcare funding levels, the CDC recently reported in U.S. life expectancy dropped almost a full year in 2021. Other wealthy nations experienced increases in life expectancy. Combining 2020 and 2021, the 2.7-year drop in U.S. life expectancy is the largest since the early 1920s. During an interview regarding the September 28, 2022, White House Conference on Hunger, Nutrition and Health, Senator Cory Booker highlighted two facts that capture America’s healthcare dilemma. One in three government dollars funds healthcare expenditure. Half of Americans suffer from diabetes or pre-diabetes.As a nation, we’re chasing our tail by prioritizing treatment over prevention. Particularly in low-income rural and urban communities, there is a breathtaking lack of vital primary care, disease management and mental health services. Instead of preventing disease, our healthcare system has become adept at keeping sick people alive with a diminished life quality. There is plenty of money in the system to amputate a foot but little to manage the diabetes that necessitates the amputation. Despite mission statements to the contrary, nonprofit healthcare follows the money. The only meaningful difference between nonprofit and for-profit healthcare is tax status. Each seeks to maximize treatment revenues by manipulating complex payment formularies and using market leverage to negotiate higher commercial payment rates. According to Grandview Research, the market for revenue cycle management in 2022 is $140.4 billion and forecasted to grow at a 10% annual rate through 2030. By contrast, Ibis World forecasts the U.S. automobile market to grow 2.6% in 2022 to reach $100.9 billion. Unbelievably, in today’s America, processing medical claims is far more lucrative than manufacturing and selling cars and trucks. According to CMS’s National Expenditure Report for 2020, hospitals (31%) and physicians and clinical services (20%) accounted for over half of national healthcare expenditures. This included $175 billion allocated to providers through the CARES Act. Despite the massive waste embedded within healthcare delivery, the CARES Act funding gave providers the illusion that America would continue to fund its profligate and often ineffective operations. It’s not at all surprising that healthcare providers now want, even expect, more emergency funding. Change is hard. Not even during COVID did providers give up their insistence on volume-based payment. Providers did not embrace proven virtual care and hospital-at-home business practices until CMS guaranteed equivalent payment to existing in-hospital/clinic service provision. Even with parity payment and the massive CARES Act funding, there was uneven care access for COVID patients. Particularly in low-income communities, tens of thousands died because they did not receive appropriate care. More of the same approach to healthcare delivery will yield more of the same dismal results. Healthcare providers have had over a decade to advance value-based care (VBC). I define VBC as the right care at the right time in the right place at the right price. Instead of pursuing VBC, providers have doubled-down on volume-driven business models that attract higher-paying commercially-insured patients. Despite the relative ease of migrating service provision to lower-cost settings, providers insist on operating high-cost, centralized delivery models (think hospitals). They want society, writ large, to continue paying premium prices for routine care. It’s time to stop. As a country, we need less healthcare and more health.
When I give speeches to healthcare audiences, I typically begin with three yes-or-no questions about U.S. healthcare to establish the foundation for my subsequent observations. Here they are. Question #1: The U.S. spends 20% of its economy on healthcare. The big country with the next highest percentage spend is France at 12%. How many believe we need to spend more than 20% of our economy to provide great healthcare to everyone in the country? No one ever raises their hand. Question #2: The CDC estimates that 90% of healthcare expenditure goes to treat individuals with chronic disease and mental health conditions. How many believe we’re winning the war against chronic disease and mental health conditions? No one ever raises their hand. Question #3: Given the answer to the previous two questions, how many believe the system needs to shift resources from acute and specialty care into health promotion, primary care, chronic disease management and behavioral health? Everyone raises their hands. This short exercise is quite revealing. It demonstrates that healthcare doesn’t have a funding problem. It has a distribution problem. It also demonstrates that providers aren’t adequately addressing our most critical healthcare challenge, exploding chronic disease and mental health conditions. Finally, the industry needs major restructuring.
The real questions about reforming healthcare are less about what to reform and more about how to undertake reform. The increasing media scrutiny that Ken Kaufman references as well as growing consumer frustrations with healthcare service provision, demonstrate that healthcare is losing the battle for America’s hearts and minds.
Markets are unforgiving. The operating losses most nonprofit providers are experiencing reflect a harsh reality. Their current business models are not sustainable. An economic reckoning is underway. The long arc of economics points toward value. As healthcare deconstructs, the nation’s acute care footprint will shrink, hospitals will close and value-based care delivery will advance. The process will be messy.
The devolving healthcare marketplace led me to ask a fourth question recently in Nashville during a keynote speech to the Council of Pharmacy Executives and Suppliers. Here it is. Question #4: As the healthcare system reforms, will that process be evolutionary (reflecting incremental change) or revolutionary (reflecting fundamental change). Two-thirds voted that the change would be revolutionary. That response is just one data point but it reflects why post-COVID healthcare reform is different than the reform efforts that have preceded it. The costs of maintaining status-quo healthcare are simply too high. From a policy perspective, either market-driven healthcare reforms will drive better outcomes at lower costs (that’s my hope) or America will shift to a government-managed healthcare system like those in Germany, France and Japan.
Like Ken Kaufman, I admire frontline healthcare workers and believe we need to make their vital work less burdensome. I also sympathize with health system executives who are struggling to overcome legacy business practices and massive operating deficits. Unfortunately, most are relying on revenue-maximizing playbooks rather than reconfiguring their operations to advance consumerism and value-based care delivery.
Unlike Ken Kaufman, I believe it’s time for some tough love with nonprofit healthcare providers. Payers must tie new incremental funding to concrete movement into value-based care delivery. This was the argument Zeke Emanuel, Merrill Goozner and I made in a two-part commentary (part 1; part 2) in Health Affairs earlier this year. It’s also why the HFMA, where I serve on the Board, has made “cost effectiveness of health (CEoH)” its new operating mantra.
While this truth may be hard, it also is liberating. Freeing nonprofit organizations from their attachment to perverse payment incentives can create the impetus to embrace consumerism and value. Kinder, smarter and affordable care for all Americans will follow.
However cynical it may seem, Machiavelli’s The Prince has long been recognized as a source of insights for anyone trying run a business or gain power in one. A ferocious little treatise of under 100 pages, The Prince was aimed at Lorenzo de’ Medici, the iron-handed Florentine ruler, by an author hoping to regain the proximity to power that he formerly enjoyed.
But modern corporations aren’t principalities ruled by autocrats. They are, in fact, more like republics, their leaders dependent on the support of directors, employees, customers, investors, and one another. That is why, in turning to Machiavelli for management wisdom, we would be well served to leave aside The Prince in favor of another of his works, one that is less known but perhaps more to the point. Don’t be fooled by the academic-sounding title; Discourses on Livy has a great deal to teach us about leadership in any organization resembling a republic. Chances are, that includes your business.
Published posthumously in 1531, Discourses draws on the ancient Roman historian (among others) to analyze the nature of power in public life. Like The Prince, this is not a handbook for saints. But the author was a brilliant student of human nature, and not one to underestimate the potential of a determined individual. In Discourses, he firmly asserts the importance of an individual founder in establishing or renovating a republic—and by extension, for our purposes, a business. A prudent founder, he writes, “must strive to assume sole authority.”
Yet a single person cannot sustain an enterprise in the long run. That is only possible if the founder’s vision and talents result in an institution supported by stakeholders who can carry the venture into the future. “Kingdoms which depend only upon the exceptional ability of a single man are not long enduring,” Machiavelli writes, “because such talent disappears with the life of the man, and rarely does it happen to be restored in his successor.”
Besides, princes have no monopoly on wisdom. Despite the notorious unpredictability of the mob, the author acknowledged the wisdom of crowds when he asserted that “the multitude is wiser and more constant than a prince.” Machiavelli was also insightful about succession: “After an excellent prince, a weak prince can maintain himself,” he observed with admirable economy in one chapter’s epigraph, “but after a weak prince, no kingdom can be maintained with another weak one.”
Many of the epigraphs are bull’s-eyes of this kind. Take this one, for example: “Whoever wishes to reform a long-established state in a free city should retain at least the appearance of its ancient ways.” This is worth doing even if you make massive changes, because, Machiavelli notes, “men in general live as much by appearances as by realities; indeed, they are often moved more by things as they appear than by things as they really are.”
Honesty may be the best policy, but that is not a maxim ever attributed to Machiavelli. In keeping with the notion that people attend largely to appearances, he says leaders compelled to do something by necessity should consider pretending their course of action was undertaken out of generosity. In another chapter, he argues, “Cunning and deceit will serve a man better than force to rise from a base condition to great fortune.”
Machiavelli, of course, took a hard-headed view of humanity, believing that people act largely out of self-interest, whether to gratify their egos or sate their desire for material wealth, and that, for better or worse, actions tend to be judged by their consequences. Indeed, he was very much what philosophers call a consequentialist, arguing that, in some contexts, bad things must be done to achieve good ends achievable in no other way. This is not to say that law-breaking or other unethical acts are justified—even some of Machiavelli’s contemporaries considered such advice controversial—but every business leader knows that hard decisions must be made, be it the closing of a venerable division or taking a company in a risky new direction, for the long-term good of the enterprise.
Even when advocating something like mercy, Machiavelli did so with consequences in mind. He argued, for example, that failure should not be harshly punished, especially if it arises from ignorance rather than malice. Roman generals, he notes, had difficult and dangerous jobs, and Rome understood that if military leaders had to worry about “examples of Roman commanders who had been crucified or otherwise put to death when they had lost a day’s battles, it would be impossible for that commander, beset by so many suspicions, to make courageous decisions.”
If punishment should not be meted out lightly, neither should rewards be delayed. If you don’t cultivate loyalty and support from others in good times through open-handedness, Machiavelli says, those people certainly won’t have your back when things get rough. Doling out rewards only in the face of tough competition or harsh circumstances will lead subordinates to believe “that they gained this favour not from you but from your adversaries, and since they must fear that after the danger has passed you will take back from them what you have been forced to give them, they will feel no obligation to you whatsoever.”
Republics, in his view, have no choice but to grow, for “it is impossible for a republic to succeed in standing still.” Companies are the same. But acquisitions—whether in battle or by purchase—must be carried out with care, for “conquests made by republics which are not well organized, and which do not proceed according to Roman standards of excellence, bring about their ruin rather than their glorification.”
Finally, Machiavelli was well aware of the risks of advice-giving, so much so that he gave one chapter the title “Of the danger of being prominent in counselling any enterprise, and how that danger increases with the importance of such enterprise.” Consultants, take note. Just don’t let the clients catch you reading Machiavelli.
HENRY KOTULA 