Answering Strategic Questions—Part 2
“The past is never dead. It’s not even past.” This famous quotation from William Faulkner seems to some a peculiarly Southern point of view. They agree instead with Henry Ford’s view. “History is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present and the only history that’s worth a tinker’s damn is the history we make today.” People trying to think strategically about their organization and where they need to go must have a deep understanding of how they got to where they are now. I have found many people, though, have not thought about “where are we really and how did we get here?” Instead, they want to focus on their preferred solution to “where do we want to be in the future?”
Hospitals see themselves as the centerpiece, or perhaps the linchpin, of the healthcare system and a major contributor to the health of their communities. Historically, hospitals were places of last resort. Beginning with creation of Medicare in 1965 there was a boom in biomedical technology which promised advances in diagnosis and treatment. We take our high-tech, resource intensive hospital system as “standard,” but it is less than fifty years old. Thirty five years ago Sunday afternoon was a busy day for consults on all those patients who were scheduled for elective surgery on Monday. If the patient was going to have a cholecystectomy, a five day hospitalization was common—it all depended on how long the ileus lasted. The technology then was large, expensive, and required a big infrastructure to keep it up and running. What about now? Most of that technology is portable, cheap, and replaced when it breaks. The patient needing an elective cholecystectomy comes in early in the morning and goes home before supper, and the surgery does not have to be done in a hospital—a surgery center will do.
Financially, things are changing even more rapidly. Teasdale and Schulman estimate hospitals will lose $95 billion in annual revenue because of a shift from private to public insurance and $33 billion due to cost-aversive behaviors by the privately insured. They estimate a 5% reduction in utilization and a shift in operating margin from an average gain of 7.8% to a loss of 1.7%.
“Hospitals in many markets have become highly leveraged businesses, built to thrive on the margins available from commercial health insurers for elective procedures, (rather than primary care.) Many have developed cost structures for clinical services that ignore the “efficient” price of care set by public plans, driving a wedge between hospital costs and public payments.
This model of disproportionately relying on private insurance has evolved gradually over the past twenty years and grown substantially since the Great Recession…
As the financial crisis grows throughout the health care system, policymakers will have to grapple with the question of whether it’s in the public interest to bail out organizations that adopted anticompetitive strategies that put hospitals in this financial position in the first place. It’s hard to imagine creating the conditions for thoughtful policy analysis in the middle of this crisis, but that will be essential to achieving a sustainable health care system in the post-Covid world.”
Note the current financial situation is only 10-15 years old. Hospitals did not have to build grand new buildings and issue debt but chose to do so in competition for elective private insurance revenues. Said another way, hospitals chose to chase the money. Whether they considered the downside risk or not is hard to know as most of those decision makers are long gone. I suspect it seemed easier, and more fun, than trying to drive out costs. But this is no longer the easier path. I expect hospitals will continue being centers for expensive, resource-intensive care, but to survive they must start thinking about what they do as cost-centers, not revenue centers.
If a hospital adopted this single perspective, a series of related strategic questions follow. How much do we need to downsize or re-distribute resources to other forms of care such as long-term or palliative care beds, contagion wards, and so forth? Who should we partner with to head off unnecessary admissions? How to we reduce the cost of care in a way that minimizes “rationing” of needed care? Who do we improve the general level of care in our community without admission to the hospital? How do we engage the parts of our community not currently activated to improve their own and their community’s health? How do we deal with public health, mental health, and addiction treatment resources to link those agencies to the overall mission of improving the health of the community? Answers to these questions, like all politics, is local. But hospitals will have to determine their strengths and weaknesses as they seek new relationships. For some, seeing other players as potential partners rather than vendors may prove especially challenging.
Can the strategic decision be made? Yes, but the leadership will have to admit they do not have all the answers worked out ahead of time. Boards will need to support their leaders in conversations with the community about the need for changes and deciding what those changes need to look like. We desperately need to see the limitations of the medical model for improving health of both individuals and communities.
The operational goal for the foreseeable future must be getting to “break even” on government insurance payments. Reducing leverage will also be essential. Employed physicians must realign their behavior by making cost-reducing decisions such as revising “power plans” to avoid ordering tests not needed for diagnosis and treatments. If a chest X-ray costs $100 to obtain, getting one less per admission in a hospital the size of mine would save $10 million dollars without hurting patient care.
The challenge is to make the strategic decision and start the process. The good news “the way things are now” is really something that had only been true for the past 10-15 years. The well-managed essential hospital functions can be preserved if the tough actions are taken. It is all about mindset. But remember: “the past is never dead. It’s not even past.”
5 July 2020
 Faulkner, William. Requiem for a Nun. (New York: Random House, 1951.) accessed 1 July 2020 at https://en.wikipedia.org/Requiem_for_a_Nun.
 Ford, Henry, 1916. Quoted by Strauss, G. Editorial: Historical Awareness. Comment Magazine, 1 June 2003. Accessed 1 July 2020 at https://www.cardus.ca/comment/article/editorial-historical-awareness/.
 Teasdale B, Schulman KA. Are U. S. Hospitals Still Recession Proof? N Engl J Med, 2020. doi: 10.1056/NEJMp/2018846. Published online 1 July 2020 at nejm.org. and accessed same day.
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