Is Magnet status beginning to lose its attraction?

https://mailchi.mp/8f3f698b8612/the-weekly-gist-january-27-2023?e=d1e747d2d8

As hospitals and health system leaders continue to grapple with persistently high nursing vacancy rates and severe staffing challenges, and face growing pressure to cut costs, we’re beginning to hear serious—if paradoxical—consideration being given to sharpening the axe, with an eye on a long-standing sacred cow: “Magnet” status.

For years, leading systems have invested significant time and resources to earn Magnet status, a designation of nursing quality granted by the American Nursing Association through its American Nurses’ Credentialing Center. Applying for—and then renewing—the designation can cost millions of dollars and involve significant process changes and staff time. In return, participants can market themselves as “Magnet hospitals”, presumably garnering additional patient business and giving them a leg up in recruiting high-quality nurses. At a time of severe nursing shortage, you might expect interest in earning or maintaining Magnet status to be spiking.
 
But that’s not what we’re hearing. “It’s just too expensive,” shared one system CEO recently. “We haven’t really seen it move the needle on volume, and our Magnet-designated facilities are just as stretched as the non-Magnet ones, with equally low morale.” Plus, at a time when the ability to pursue flexible staffing models is at a premium, keeping up with Magnet standards is increasingly handcuffing some hospitals looking to evaluate alternative staffing solutions.

“We can achieve all of the benefits of Magnet without having to jump through their hoops on process and data collection,” a system chief nursing officer told us. “We’re working on our own, internally-branded alternative to Magnet—something our own staff comes up with, rather than something artificially imposed from an outside organization.” 

Ironically, this may be another area—like the battle against contract labor—in which systems now find themselves aligned with nursing unions, which have long opposed the Magnet program as just a marketing gimmick. There’s no question that programs like Magnet have helped increase the visibility of nursing as a driver of quality care. But given the current economic environment, it’ll be interesting to see how much hospitals are willing to continue to invest to maintain the designation.

U.S. healthcare: A conglomerate of monopolies

The Taylor Swift ticketing debacle of 2022 left thousands of frustrated ‘Swifties’ without a chance to see their favorite artist in concert. And it also highlighted the trouble that arises when companies like Ticketmaster gain monopolistic control.

In any industry, market consolidation limits competition, choice and access to goods and services, all of which drive up prices.

But there’s another—often overlooked—consequence.

Market leaders that grow too powerful become complacent. And, when that happens, innovation dies. Healthcare offers a prime example.

And industry of monopolies

De facto monopolies abound in almost every healthcare sector: Hospitals and health systems, drug and device manufacturers, and doctors backed by private equity. The result is that U.S. healthcare has become a conglomerate of monopolies.  

For two decades, this intense concentration of power has inflicted harm on patients, communities and the health of the nation. For most of the 21st century, medical costs have risen faster than overall inflation, America’s life expectancy (and overall health) has stagnated, and the pace of innovation has slowed to a crawl.

 This article, the first in a series about the ominous and omnipresent monopolies of healthcare, focuses on how merged hospitals and powerful health systems have raised the price, lowered the quality and decreased the convenience of American medicine.

Future articles will look at drug companies who wield unfettered pricing power, coalitions of specialist physicians who gain monopolistic leverage, and the payers (businesses, insurers and the government) who tolerate market consolidation. The series will conclude with a look at who stands the best chance of shattering this conglomerate of monopolies and bringing innovation back to healthcare.

How hospitals consolidate power

The hospital industry is now home to a pair of seemingly contradictory trends. On one hand, economic losses in recent years have resulted in record rates of hospital (and hospital service) closures. On the other hand, the overall market size, value and revenue of U.S. hospitals are growing.

This is no incongruity. It’s what happens when hospitals and health systems merge and eliminate competition in communities.  

Today, the 40 largest health systems own 2,073 hospitals, roughly one-third of all emergency and acute-care facilities in the United States. The top 10 health systems own a sixth of all hospitals and combine for $226.7 billion in net patient revenues.

Though the Federal Trade Commission and the Antitrust Division of the DOJ are charged with enforcing antitrust laws in healthcare markets and preventing anticompetitive conduct, legal loopholes and intense lobbying continue to spur hospital consolidation. Rarely are hospital M&A requests denied or even challenged.

The ills of hospital consolidation

The rapid and recent increase in hospital consolidation has left hundreds of communities with only one option for inpatient care.

But the lack of choice is only one of the downsides.

Hospital administrators know that state and federal statutes require insurers and self-funded businesses to provide hospital care within 15 miles of (or 30 minutes from) a member’s home or work. And they understand that insurers must accept their pricing demands if they want to sell policies in these consolidated markets. As a result, studies confirm that hospital prices and profits are higher in uncompetitive geographies.

These elevated prices negatively impact the pocketbooks of patients and force local governments (which must balance their budgets) to redirect funds toward hospitals and away from local police, schools and infrastructure projects.

Perhaps most concerning of all is the lack of quality improvement following hospital consolidation. Contrary to what administrators claim, clinical outcomes for patients are no better in consolidated locations than in competitive ones—despite significantly higher costs.

How hospitals could innovate (and why they don’t)

Hospital care in the United States accounts for more than 30% of total medical expenses (about $1.5 trillion). Even though fewer patients are being admitted each year, these costs continue to rise at a feverish pace.

If our nation wants to improve medical outcomes and make healthcare more affordable, a great place to start would be to innovate care-delivery in our country’s hospitals.

To illuminate what’s possible, below are three practical innovations that would simultaneously improve clinical outcomes and lower costs. And yet, despite the massive benefits for patients, few hospital-system administrators appear willing to embrace these changes.

Innovation 1: Leveraging economies of scale

In most industries, bigger is better because size equals cost savings. This advantage is known as economies of scale.

Ostensibly, when bigger hospitals acquire smaller ones, they gain negotiating power—along with plenty of opportunities to eliminate redundancies. These factors could and should result in lower prices for medical care.

Instead, when hospitals merge, the inefficiencies of both the acquirer and the acquired usually persist. Rather than closing small, ineffective clinical services, the newly expanded hospital system keeps them open. That’s because hospital administrators prefer to raise prices and keep people happy rather than undergo the painstaking process of becoming more efficient.

The result isn’t just higher healthcare costs, but also missed opportunities to improve quality.

Following M&A, health systems continue to schedule orthopedic, cardiac and neurosurgical procedures across multiple low-volume hospitals. They’d be better off creating centers of excellence and doing all total joint replacements, heart surgeries and neurosurgical procedures in a single hospital or placing each of the three specialties in a different one. Doing so would increase the case volumes for surgeons and operative teams in that specialty, augmenting their experience and expertise—leading to better outcomes for patients.

But hospital administrators bristle at the idea, fearing pushback from communities where these services close.   

Innovation 2: Switching to a seven-day hospital

When patients are admitted on a Friday night, rather than a Monday or Tuesday night, they spend on average an extra day in the hospital.

This delay occurs because hospitals cut back services on weekends and, therefore, frequently postpone non-emergent procedures until Monday. For patients, this extra day in the hospital is costly, inconvenient and risky. The longer the patient stays admitted, the greater the odds of experiencing a hospital acquired infection, medical error or complications from underlying disease.

It would be possible for physicians and staff to spread the work over seven days, thus eliminating delays in care. By having the necessary, qualified staff present seven days a week, inpatients could get essential, but non-emergent treatments on weekends without delay. They could also receive sophisticated diagnostic tests and undergo procedures soon after admission, every day of the week. As a result, patients would get better sooner with fewer total inpatient days and far lower costs.  

Hospital administrators don’t make the change because they worry it would upset the doctors and nurses who prefer to work weekdays, not weekends.

Innovation 3: Bringing hospitals into homes

During Covid-19, hospitals quickly ran out of staffed beds. Patients were sent home on intravenous medications with monitoring devices and brief nurse visits when needed.

Clinical outcomes were equivalent to (and often better than) the current inpatient care and costs were markedly less.

Building on this success, hospitals could expand this approach with readily available technologies.

Whereas doctors and nurses today check on hospitalized patients intermittently, a team of clinicians set up in centralized location could monitor hundreds of patients (in their homes) around the clock.

By sending patients home with devices that continuously measure blood pressure, pulse and blood oxygenation—along with digital scales that can calibrate fluctuations in a patient’s weight, indicating either dehydration or excess fluid retention—patients can recuperate from the comforts of home. And when family members have questions or concerns, they can obtain assistance and advice through video.

Despite dozens of advantages, use of the “hospital at home” model is receding now that Covid-19 has waned.

That’s because hospital CEOs and CFOs are paid to fill beds in their brick-and-mortar facilities. And so, unless their facilities are full, they prefer that doctors and nurses treat patients in a hospital bed rather than in people’s own homes.

Opportunities for hospital innovations abound. These three are just a few of many changes that could transform medical care. Instead of taking advantage of them, hospital administrators continue to construct expensive new buildings, add beds and raise prices.

Consumer prices fell in December as inflation continues to cool

U.S. consumers got a reprieve from soaring costs in December: the Consumer Price Index declined on a monthly basis, the first drop since last summer as falling prices for items including gasoline and used cars dragged the overall index down.

By the numbers:

The index, which captures price changes across a basket of consumer goods and services, fell 0.1%, following an increase by the same amount in November. Over the past 12 months ending in December, the index is up 6.5%, falling from 7.1% through November.

  • Core CPI, which excludes food and fuel costs, rose by 0.3% last month. Over the last 12 months through December, the index rose 5.7%. In November, those figures were 0.2% and 6%, respectively.

Why it matters:

The hot inflation that persisted through much of last year continues to show signs of receding — offering at least some relief for shoppers, the White House and the Federal Reserve, though some underlying inflation pressure remains.

Where it stands:

The data caps a year in which consumer prices rose rapidly, though the pace of cost increases began to slow in the final months of the year.

  • As consumers shifted spending and supply chains began to heal, price increases for a range of goods have cooled or, in some cases, costs have fallen outright.

Between the lines:

The Federal Reserve, which has been raising interest rates aggressively to tame inflation, is watching the services sector closely, where inflation can be more challenging to stamp out.

  • A sub-index measuring price moves within the services category (excluding housing) accelerated by 0.4%, after two straight months of cooler readings
  • Still, in the 12 months through December, this sub-index is up 7.4% (compared to 7.3% in November).

5 trillion-dollar questions hanging over hospitals

Big questions tend to have no easy answers. Fortunately, few people would say they went into healthcare for its ease.

The following questions about hospitals’ culture, leadership, survival and opportunity come with a trillion-dollar price tag given the importance of hospitals and health systems in the $4.3 trillion U.S. healthcare industry. 

1. How will leaders insist on quality first in a world where it’s increasingly harder to keep trains on time? 

Hospitals and health systems have had no shortage of operational challenges since the COVID-19 pandemic began. These organizations at any given time have been or still are short professionals, personal protective equipment, beds, cribs, blood, helium, contrast dye, infant formula, IV tubing, amoxicillin and more than 100 other drugs. After years of working in these conditions, it is understandable why healthcare professionals may think with a scarcity mindset

This is something strong leaders recognize and will work to shake in 2023, given the known-knowns about the psychology of scarcity. When people feel they lack something, they lose cognitive abilities elsewhere and tend to overvalue immediate benefits at the expense of future ones. Should supply problems persist for two to three more years, hospitals and health systems may near a dangerous intersection where scarcity mindset becomes scarcity culture, hurting patient safety and experience, care quality and outcomes, and employee morale and well-being as a result. 

The year ahead will be a great test and an opportunity for leaders to unapologetically prioritize quality within every meeting, rounding session, budgetary decision, huddle and town hall, and then follow through with actions aligned with quality-first thinking and commentary. Working toward a long-term vision and upholding excellence in the quality of healthcare delivery can be difficult when short-term solutions are available. But leaders who prioritize quality throughout 2023 will shape and improve culture.

2. Who or what will bring medicine past the scope-of-practice fights and turf wars that have persisted for decades? 

It is naive to think these tensions will dissolve completely, but it would be encouraging if in 2023 the industry could begin moving past the all-too-familiar stalemates and fears of “scope creep,” in which physicians oppose expanded scope of practice for non-physician medical professionals. 

Many professions have political squabbles and sticking points that are less palpable to outsiders. Scope-of-practice discord may fall in that category — unless you are in medicine or close to people in the field, it can easily go undetected. But just as it is naive to think physicians and advanced practice providers will reach immediate harmony, so too is it naive to think that aware Americans who watch nightly news segments about healthcare’s labor crisis and face an average wait of 26 days for a medical appointment will have much sympathy for physicians’ staunch resistance to change. 

The U.S. could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, according to the Association of American Medical Colleges. Ideally, 2023 is the year in which stakeholders begin to move past the usual tactics, arguments and protectionist thinking and move toward pragmaticism about physician-led care teams that empower advanced practice providers to care for patients to the extent of the education and training they have. The leaders or organizations who move the needle on this stand to make a name for themselves and earn a chapter or two in the story of American healthcare. 

3. Which employers will win and which will lose in lowering the cost of healthcare? 

Employers have long been incentivized to do two things: keep their workers healthy and spend less money doing it. News of companies’ healthcare ventures can be seen as cutting edge, making it easy to forget the origins of integrated health systems like Oakland, Calif.-based Kaiser Permanente, which dates back to one young surgeon establishing a 12-bed hospital in the height of the Great Depression to treat sick and injured workers building the Colorado River Aqueduct. 

Many large companies have tried and failed, quite publicly, to improve healthcare outcomes while lowering costs. Will 2023 be the year in which at least one Fortune 500 company does not only announce intent to transform workforce healthcare, but instead point to proven results that could make for a scalable strategy? 

Walmart is doing interesting things. JPMorgan seems to have learned a good deal from the demise of Haven, with Morgan Health now making some important moves. And just as important are the large companies paying attention on the sidelines to learn from others’ mistakes. Health systems with high-performing care teams and little variation in care stand to gain a competitive advantage if they draw employers’ attention for the right reasons. 

4. Who or what will stabilize at-risk hospitals? 

More than 600 rural hospitals — nearly 30 percent of all rural hospitals in the country — are at risk of closing in the near future. Just as concerning is the growing number of inner-city hospitals at increased risk of closure. Both can leave millions in less-affluent communities with reduced access to nearby emergency and critical care facilities. Although hospital closures are not a new problem, 2022 further crystalized a problem no one is eager to confront. 

One way for at-risk hospitals to survive is via mergers and acquisitions, but the Federal Trade Commission is making buying a tougher hurdle to clear for health systems. The COVID-19 public health emergency began to seem like a makeshift hospital subsidy when it was extended after President Joe Biden declared the pandemic over, inviting questions about the need for permanent aid, reimbursement models and flexibilities from the government to hospitals. Recently, a group of lawmakers turned to an agency not usually seen as a watchdog for hospital solvency — HHS — to ask if anything was being done in response to hospital closures or to thwart them. 

Maintaining hospital access in rural and urban settings is a top priority, and the lack of interest and creativity to maintain it is strikingly stark. As a realistic expectation for 2023, it would be encouraging to at least have an injection of energy, innovation and mission-first thinking toward a problem that grows like a snowball, seemingly bigger, faster and more insurmountable year after year.

Look at what Mark Cuban was able to accomplish within one year to democratize prescription drug pricing. Remember how humble and small the origins of that effort were. Recall how he — albeit being a billionaire — has put profit secondary to social mission. There’s no one savior that will curb hospital closures in the U.S., but it would be a good thing if 2023 brought more leadership in problem-solving and matching a big problem with big energy and ideas. 

5. Which hospital and health system CEOs will successfully redefine the role? 

Many of the largest and most prominent health systems in the country saw CEO turnover over the past two years. With that, health systems lost decades of collective industry and institutional knowledge. Their tenure spanned across numerous milestones and headwinds, including input and compliance with the Affordable Care Act, the move from paper to digital records, and major mergers and labor strikes. The retiring CEOs had been top decision-makers as their organizations met the demands of COVID-19 and its consequences. They set the tone and had final say in how forcefully their institutions condemned racism and what actions they took to address health inequities. 

To assume the role of health system CEO now comes with a different job description than it did when outgoing leaders assumed their posts. Many Americans may carry on daily life with little awareness as to who is at the top of their local hospital or health system. The pandemic challenged that status quo, throwing hospital leaders into the limelight as many Americans sought leadership, expertise and local voices to make sense of what could easily feel unsensible. The public saw hospital CEOs’ faces, heard their voices and read their words more within the past two years than ever. 

In 2023, newly named CEOs and incoming leaders will assume greater responsibility in addition to a fragile workforce that may be more susceptible to any slight change in communication, transparency or security. They will need to avoid white-collar ivory towers, and earn reputations as leaders who show up for their people in real, meaningful ways. Healthcare leaders who distance themselves from their workforce will only let the realistic, genuine servant leaders outshine them. In 2023, watch for the latter, emulate them and help up-and-comers get as much exposure to them as possible. 

Health systems’ minimum wage skyrockets

The percentage of healthcare organizations with an internal minimum wage of $15 or higher increased significantly over the last year, according to the “2022 Health Care Staff Compensation Survey” from SullivanCotter.

In 2021, less than 30 percent of healthcare organizations had an internal minimum wage of $15 per hour or more; this year, nearly 70 percent do. Some health systems are increasing the internal minimum wage to stay competitive amid staffing shortages and rising inflation. Others are increasing hourly rates as a result of union negotiations.

Health systems reported large increases in overall staff salaries, wages and benefits this year, and many expect to see increases in 2023 as well.

Here is how the internal minimum wage rates changed over the last year:

1. Less than $10 per hour
2021: 2.9 percent
2022: 2.2 percent

2. $10 per hour
2021: 14.7 percent
2022: 5 percent

3. $11 per hour
2021: 13.7 percent
2022: 3.9 percent

4. $12 per hour
2021: 12.7 percent
2022: 7.8 percent

5. $13 per hour
2021: 12.7 percent
2022: 6.1 percent

6. $14 per hour
2021: 14.7 percent
2022: 5.6 percent

7. $15 per hour
2021: 26.5 percent
2022: 53.9 percent

8. More than $15 per hour
2021: 2 percent
2022: 15.6 percent

The dire state of hospital finances (Part 1: Hospital of the Future series)

About this Episode

The majority of hospitals are predicted to have negative margins in 2022, marking the worst year financially for hospitals since the beginning of the Covid-19 pandemic.

In Part 1 of Radio Advisory’s Hospital of the Future series, host Rachel (Rae) Woods invites Advisory Board experts Monica WestheadColin Gelbaugh, and Aaron Mauck to discuss why factors like workforce shortages, post-acute financial instability, and growing competition are contributing to this troubling financial landscape and how hospitals are tackling these problems.

Links:

As we emerge from the global pandemic, health care is restructuring. What decisions should you be making, and what do you need to know to make them? Explore the state of the health care industry and its outlook for next year by visiting advisory.com/HealthCare2023.

Here’s how hospitals can chart a path to a sustainable financial future (Part 2: Hospital of the Future series)

Radio Advisory’s Rachel Woods sat down with Optum EVP Dr. Jim Bonnette to discuss the sustainability of modern-day hospitals and why scaling down might be the best strategy for a stable future.

Read a lightly edited excerpt from the interview below and download the episode for the full conversation.https://player.fireside.fm/v2/HO0EUJAe+Rv1LmkWo?theme=dark

Rachel Woods: When I talk about hospitals of the future, I think it’s very easy for folks to think about something that feels very futuristic, the Jetsons, Star Trek, pick your example here. But you have a very different take when it comes to the hospital, the future, and it’s one that’s perhaps a lot more streamlined than even the hospitals that we have today. Why is that your take?

Jim Bonnette: My concern about hospital future is that when people think about the technology side of it, they forget that there’s no technology that I can name that has lowered health care costs that’s been implemented in a hospital. Everything I can think of has increased costs and I don’t think that’s sustainable for the future.

And so looking at how hospitals have to function, I think the things that hospitals do that should no longer be in the hospital need to move out and they need to move out now. I think that there are a large number of procedures that could safely and easily be done in a lower cost setting, in an ASC for example, that is still done in hospitals because we still pay for them that way. I’m not sure that’s going to continue.

Woods: And to be honest, we’ve talked about that shift, I think about the outpatient shift. We’ve been talking about that for several years but you just said the change needs to happen now. Why is the impetus for this change very different today than maybe it was two, three, four, five years ago? Why is this change going to be frankly forced upon hospitals in the very near future, if not already?

Bonnette: Part of the explanation is regarding the issues that have been pushed regarding price transparency. So if employers can see the difference between the charges for an ASC and an HOPD department, which are often quite dramatic, they’re going to be looking to say to their brokers, “Well, what’s the network that involves ASCs and not hospitals?” And that data hasn’t been so easily available in the past, and I think economic times are different now.

We’re not in a hyper growth phase, we’re not where the economy’s performing super at the moment and if interest rates keep going up, things are going to slow down more. So I think employers are going to become more sensitized to prices that they haven’t been in the past. Regardless of the requirements under the Consolidated Appropriations Act, which require employers to know the costs, which they didn’t have to know before. They’re just going to more sensitive to price.

Woods: I completely agree with you by the way, that employers are a key catalyst here and we’ve certainly seen a few very active employers and some that are very passive and I too am interested to see what role they play or do they all take much more of an active role.

And I think some people would be surprised that it’s not necessarily consumers themselves that are the big catalyst for change on where they’re going to get care, how they want to receive care. It’s the employers that are going to be making those decisions as purchasers themselves.

Bonnette: I agree and they’re the ultimate payers. For most commercial insurance employers are the ultimate payers, not the insurance companies. And it’s a cost of care share for patients, but the majority of the money comes from the employers. So it’s basically cutting into their profits.

Woods: We are on the same page, but I’m going to be honest, I’m not sure that all of our listeners are right. We’re talking about why these changes could happen soon, but when I have conversations with folks, they still think about a future of a more consolidated hospital, a more outpatient focused practice is something that is coming but is still far enough in the future that there’s some time to prepare for.

I guess my question is what do you say to that pushback? And are there any inflection points that you’re watching for that would really need to hit for this kind of change to hit all hospitals, to be something that we see across the industry?

Bonnette: So when I look at hospitals in general, I don’t see them as much different than they were 20 years ago. We have talked about this movement for a long time, but hospitals are dragging their feet and realistically it’s because they still get paid the same way until we start thinking about how we pay differently or refuse to pay for certain kinds of things in a hospital setting, the inertia is such that they’re going to keep doing it.

Again, I think the push from employers and most likely the brokers are going to force this change sooner rather than later, but that’s still probably between three and five years because there’s so much inertia in health care.

On the other hand, we are hitting sort of an unsustainable phase of cost. The other thing that people don’t talk about very much that I think is important is there’s only so many dollars that are going to health care.

And if you look at the last 10 years, the growth in pharmaceutical spend has to eat into the dollars available for everybody else. So a pharmaceutical spend is growing much faster than anything else, the dollars are going to come out of somebody’s hide and then next logical target is the hospital.

Woods: And we talked last week about how slim hospital margins are, how many of them are actually negative. And what we didn’t mention that is top of mind for me after we just come out of this election is that there’s actually not a lot of appetite for the government to step in and shore up hospitals.

There’s a lot of feeling that they’ve done their due diligence, they stepped in when they needed to at the beginning of the Covid crisis and they shouldn’t need to again. That kind of savior is probably not their outside of very specific circumstances.

Bonnette: I agree. I think it’s highly unlikely that the government is going to step in to rescue hospitals. And part of that comes from the perception about pricing, which I’m sure Congress gets lots of complaints about the prices from hospitals.

And in addition, you’ll notice that the for-profit hospitals don’t have negative margins. They may not be quite as good as they were before, but they’re not negative, which tells me there’s an operational inefficiency in the not for-profit hospitals that doesn’t exist in the for-profits.

Woods: This is where I wanted to go next. So let’s say that a hospital, a health system decides the new path forward is to become smaller, to become cheaper, to become more streamlined, and to decide what specifically needs to happen in the hospital versus elsewhere in our organization.

Maybe I know where you’re going next, but do you have an example of an organization who has had this success already that we can learn from?

Bonnette: Not in the not-for-profit section, no. In the for-profits, yes, because they have already started moving into ambulatory surgery centers. So Tenet has a huge practice of ambulatory surgery centers. It generates high margins.

So, I used to run ambulatory surgery centers in a for-profit system. And so think about ASCs get paid half as much as a hospital for a procedure, and my margin on that business in those ASCs was 40% to 50%. Whereas in the hospital the margin was about 7% and so even though the total dollars were less, my margin was higher because it’s so much more efficient. And the for-profits already recognize this.

Woods: And I’m guessing you’re going to tell me you want to see not-for-profit hospitals make these moves too? Or is there a different move that they should be making?

Bonnette: No, I think they have to. I think there are things beyond just ASCs though, for example, medical patients who can be treated at home should not be in the hospital. Most not-for-profits lose money on every medical admission.

Now, when I worked for a for-profit, I didn’t lose money on every Medicare patient that was a medical patient. We had a 7% margin so it’s doable. Again, it’s efficiency of care delivery and it’s attention to detail, which sometimes in a not-for-profit friends, that just doesn’t happen.

The next health care wars are about costs

All signs point to a crushing surge in health care costs for patients and employers next year — and that means health care industry groups are about to brawl over who pays the price.

Why it matters: The surge could build pressure on Congress to stop ignoring the underlying costs that make care increasingly unaffordable for everyday Americans — and make billions for health care companies.

[This special report kicks off a series to introduce our new, Congress-focused Axios Pro: Health Care, coming Nov. 14.]

  • This year’s Democratic legislation allowing Medicare to negotiate drug prices was a rare case of addressing costs amid intense drug industry lobbying against it. Even so, it was a watered down version of the original proposal.
  • But the drug industry isn’t alone in its willingness to fight to maintain the status quo, and that fight frequently pits one industry group against another.

Where it stands: Even insured Americans are struggling to afford their care, the inevitable result of years of cost-shifting by employers and insurers onto patients through higher premiums, deductibles and other out-of-pocket costs.

  • But employers are now struggling to attract and retain workers, and forcing their employees to shoulder even more costs seems like a less viable option.
  • Tougher economic times make patients more cost-sensitive, putting families in a bind if they get sick.
  • Rising medical debt, increased price transparency and questionable debt collection practices have rubbed some of the good-guy sheen off of hospitals and providers.
  • All of this is coming to a boiling point. The question isn’t whether, but when.

Yes, but: Don’t underestimate Washington’s ability to have a completely underwhelming response to the problem, or one that just kicks the can down the road — or to just not respond at all.

Between the lines: If you look closely, the usual partisan battle lines are changing.

  • The GOP’s criticism of Democrats’ drug pricing law is nothing like the party’s outcry over the Affordable Care Act, and no one seriously thinks the party will make a real attempt to repeal it.
  • One of the most meaningful health reforms passed in recent years was a bipartisan ban on surprise billing, which may provide a more modern template for health care policy fights.
  • Surprise medical bills divided lawmakers into two teams, but it wasn’t Democrats vs. Republicans; it was those who supported the insurer-backed reform plan vs. the hospital and provider-backed one. This fight continues today — in court.

The bottom line: Someone is going to have to pay for the coming cost surge, whether that’s patients, taxpayers, employers or the health care companies profiting off of the system. Each industry group is fighting like hell to make sure it isn’t them.

Inflation Is Squeezing Hospital Margins—What Happens Next?

https://www.healthaffairs.org/content/forefront/inflation-squeezing-hospital-margins-happens-next

Hospitals in the United States are on track for their worst financial year in decades. According to a recent report, median hospital operating margins were cumulatively negative through the first eight months of 2022. For context, in 2020, despite unprecedented losses during the initial months of COVID-19, hospitals still reported median eight-month operating margins of 2 percent—although these were in large part buoyed by federal aid from the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The recent, historically poor financial performance is the result of significant pressures on multiple fronts. Labor shortages and supply-chain disruptions have fueled a dramatic rise in expenses, which, due to the annually fixed nature of payment rates, hospitals have thus far been unable to pass through to payers. At the same time, diminished patient volumes—especially in more profitable service lines—have constrained revenues, and declining markets have generated substantial investment losses.

While it’s tempting to view these challenges as transient shocks, a rapid recovery seems unlikely for a number of reasons. Thus, hospitals will be forced to take aggressive cost-cutting measures to stabilize balance sheets. For some, this will include department or service line closures; for others, closing altogether. As these scenarios unfold, ultimately, the costs will be borne by patients, in one form or another.

Hospitals Face A Difficult Road To Financial Recovery

There are several factors that suggest hospital margins will face continued headwinds in the coming years. First, the primary driver of rising hospital expenses is a shortage of labor—in particular, nursing labor—which will likely worsen in the future. Since the start of the pandemic, hospitals have lost a total of 105,000 employees, and nursing vacancies have more than doubled. In response, hospitals have relied on expensive contract nurses and extended overtime hours, resulting in surging wage costs. While this issue was exacerbated by the pandemic, the national nursing shortage is a decades-old problem that—with a substantial portion of the labor force approaching retirement and an insufficient supply of new nurses to replace them—is projected to reach 450,000 by 2025.

Second, while payment rates will eventually adjust to rising costs, this is likely to occur slowly and unevenly. Medicare rates, which are adjusted annually based on an inflation projection, are already set to undershoot hospital costs. Given that Medicare doesn’t issue retrospective corrections, this underadjustment will become baked into Medicare prices for the foreseeable future, widening the gap between costs and payments.

This leaves commercial payers to make up the difference. Commercial rates are typically negotiated in three- to five-year contract cycles, so hospitals on the early side of a new contract may be forced to wait until renegotiation for more substantial pricing adjustments. “Negotiation is also the operative term here, as payers are under no obligation to offset rising costs. Instead, it is likely that the speed and degree of price adjustments will be dictated by provider market share, leaving smaller hospitals at a further disadvantage. This trend was exemplified during the 2008 financial crisis, in which only the most prestigious hospitals were able to significantly adjust pricing in response to historic investment losses.

Finally, economic uncertainty and the threat of recession will create continued disruptions in patient volumes, particularly with elective procedures. Although health care has historically been referred to as “recession-proof,” the growing prevalence of high-deductible health plans (HDHPs) and more aggressive cost-sharing mechanisms have left patients more exposed to health care costs and more likely to weigh these costs against other household expenditures when budgets get tight. While this consumerist response is not new—research on previous recessions has identified direct correlations between economic strength and surgical volumes—the degree of cost exposure for patients is historically high. Since 2008, enrollment in HDHPs has increased nearly four-fold, now representing 28 percent of all employer-sponsored enrollments. There’s evidence that this exposure is already impacting patient decisions. Recently, one in five adults reported delaying or forgoing treatment in response to general inflation.

Taken together, these factors suggest that the current financial pressures are unlikely to resolve in the short term. As losses mount and cash reserves dwindle, hospitals will ultimately need to cut costs to stem the bleeding—which presents both challenges and opportunities.

Direct And Indirect Consequences For Cost, Quality, And Access To Care

Inevitably, as rising costs become baked into commercial pricing, patients will face dramatic premium hikes. As discussed above, this process is likely to occur slowly over the next few years. In the meantime, the current challenges and the manner in which hospitals respond will have lasting implications on quality and access to care, particularly among the most vulnerable populations.

Likely Effects On Patient Experience And Quality Of Care

Insufficient staffing has already created substantial bottlenecks in outpatient and acute-care facilities, resulting in increased wait times, delayed procedures, and, in extreme cases, hospitals diverting patients altogether. During the Omicron surge, 52 of 62 hospitals in Los Angeles, California, were reportedly diverting patients due to insufficient beds and staffing.

The challenges with nursing labor will have direct consequences for clinical quality. Persistent nursing shortages will force hospitals to increase patient loads and expand overtime hours, measures that have been repeatedly linked to longer hospital stays, more clinical errors, and worse patient outcomes. Additionally, the wave of experienced nurses exiting the workforce will accelerate an already growing divide between average nursing experience and the complexity of care they are asked to provide. This trend, referred to as the “Experience-Complexity Gap,” will only worsen in the coming years as a significant portion of the nursing workforce reaches retirement age. In addition to the clinical quality implications, the exodus of experienced nurses—many of whom serve in crucial nurse educator and mentorship roles—also has feedback effects on the training and supply of new nurses.

Staffing impacts on quality of care are not limited to clinical staff. During the initial months of the pandemic, hospitals laid off or furloughed hundreds of thousands of nonclinical staff, a common target for short-term payroll reductions. While these staff do not directly impact patient care (or billed charges), they can have a significant impact on patient experience and satisfaction. Additionally, downsizing support staff can negatively impact physician productivity and time spent with patients, which can have downstream effects on cost and quality of care.

Disproportionate Impacts On Underserved Communities

Reduced access to care will be felt most acutely in rural regions. recent report found that more than 30 percent of rural hospitals were at risk of closure within the next six years, placing the affected communities—statistically older, sicker, and poorer than average—at higher risk for adverse health outcomes. When rural hospitals close, local residents are forced to travel more than 20 miles further to access inpatient or emergency care. For patients with life-threatening conditions, this increased travel has been linked to a 5–10 percent increase in risk of mortality.

Rural closures also have downstream effects that further deteriorate patient use and access to care. Rural hospitals often employ the majority of local physicians, many of whom leave the community when these facilities close. Access to complex specialty care and diagnostic testing is also diminished, as many of these services are provided by vendors or provider groups within hospital facilities. Thus, when rural hospitals close, the surrounding communities lose access to the entire care continuum. As a result, individuals within these communities are more likely to forgo treatment, testing, or routine preventive services, further exacerbating existing health disparities.

In areas not affected by hospital closures, access will be more selectively impacted. After the 2008 financial crisis, the most common cost-shifting response from hospitals was to reduce unprofitable service offerings. Historically, these measures have disproportionately impacted minority and low-income patients, as they tend to include services with high Medicaid populations (for example, psychiatric and addiction care) and crucial services such as obstetrics and trauma care, which are already underprovided in these communities. Since 2020, dozens of hospitals, both urban and rural, have closed or suspended maternity care. Similar to closure of rural hospitals, these closures have downstream effects on local access to physicians or other health services.

Potential For Productive Cost Reduction And The Need For A Measured Policy Response

Despite the doom-and-gloom scenario presented above, the focus on hospital costs is not entirely negative. Cost-cutting measures will inevitably yield efficiencies in a notoriously inefficient industry. Additionally, not all facility closures negatively impact care. While rural facility closures can have dire consequences in health emergencies, studies have found that outcomes for non-urgent conditions remained similar or actually improved.

Historically, attempts to rein in health care spending have focused on the demand side (that is, use) or on negotiated prices. These measures ignore the impact of hospital costs, which have historically outpaced inflation and contributed directly to rising prices. Thus, the current situation presents a brief window of opportunity in which hospital incentives are aligned with the broader policy goals of lowering costs. Capitalizing on this opportunity will require a careful balancing act from policy makers.

In response to the current challenges, the American Hospital Association has already appealed to Congress to extend federal aid programs created in the CARES Act. While this would help to mitigate losses in the short term, it would also undermine any positive gains in cost efficiency. Instead of a broad-spectrum bailout, policy makers should consider a more targeted approach that supports crucial community and rural services without continuing to fund broader health system inefficiencies.

The establishment of Rural Emergency Hospitals beginning in 2023 represents one such approach to eliminating excess costs while preventing negative patient consequences. This rule provides financial incentives for struggling critical access and rural hospitals to convert to standalone emergency departments instead of outright closing. If effective, this policy would ensure that affected communities maintain crucial access to emergency care while reducing overall costs attributed to low-volume, financially unviable services.

Policies can also help promote efficiencies by improving coverage for digital and telehealth services—long touted as potential solutions to rural health care deserts—or easing regulations to encourage more effective use of mid-level providers.

Conclusion

The financial challenges facing hospitals are substantial and likely to persist in the coming years. As a result, health systems will be forced to take drastic measures to reduce costs and stabilize profit margins. The existing challenges and the manner in which hospitals respond will have long-term implications for cost, quality, and access to care, especially within historically underserved communities. As with any crisis, though, they also present an opportunity to address industrywide inefficiencies. By relying on targeted, evidence-based policies, policy makers can mitigate the negative consequences and allow for a more efficient and effective system to emerge.