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By Kenneth Kaufman
One of the COVID pandemic’s most bitter lessons has been the complete inadequacy and dysfunction of the U.S. public health system, if the word “system” can even be applied. Prior to COVID, these shortcomings were hiding in plain sight. Now, they are evident to all and exacerbated as the nation struggles to protect the health of its citizens in the face of a pandemic entering its third year. At the outset of the pandemic, research showed a $4.5 billion funding shortfall to provide what authors of a study in The Milbank Quarterly called “a minimum standard of foundational public health capabilities.” Further, more than 85% of public health funding comes from state and local sources, leading to significant variation by geography. For example, states including New York, New Hampshire, and Montana spend more than $129 per person to public health, while states including Nevada, Missouri, and Indiana spend less than $59. This geographic variation in funding indicates a significant inequity in the types and levels of public health services. Certainly, the existing public health infrastructure did not protect historically vulnerable populations from the effects of COVID, with Hispanic and Black individuals at least twice as likely to die from COVID as whites and almost three times as likely to be hospitalized, according to a Kaiser Family Foundation analysis of CDC data. Public health agencies also suffer from chronic understaffing. In the decade prior to COVID, state public health agencies lost 16% of their full-time positions, and county and city public health agencies lost 20% of their positions in the past 15 years. The result has been an inadequate, unequitable, and fragmented collection of services that, when COVID hit, was unable to deliver what the country desperately needed: prompt, consistent, and widespread testing and vaccination; effective contact tracing; and clear communication with the public about healthy practices. The politicization of health has made a bad situation worse. As of September 2021, 26 states passed laws that limited public health powers, and 303 state and local public health department leaders resigned, retired, or had been fired. Hospitals have always been the organizations that truly matter when it comes to healthcare delivery. And now, highlighted by COVID, hospitals have become the organizations that truly matter when it comes to public health. Consider some of the core services of public health, as defined by the CDC:
Perhaps more important than economic incentive has been the mission incentive of not-for-profit providers. Almost universally, not-for-profit hospitals and health systems articulate a mission to improve the health and wellbeing of communities. Increasingly, this mission has led hospitals into the challenging public health arena. The COVID crisis has taken these new health system responsibilities to a different level. Health systems were instrumental in developing and administering COVID tests, tracing COVID’s path, educating communities about the virus and how to avoid it, and providing front-line care for the huge swath of Americans affected by the virus. Moving forward, hospitals will be asked by communities all over the country to be the organizations that deal with a broader set of national problems related to the wellbeing of patients and communities—problems that COVID has made much worse, problems that the public sector has never been able to solve. With this new set of responsibilities comes an entirely new set of strategic, operational, and financial implications for hospitals and health systems. Meeting these challenges will require a new level of health system ideas, a new level of health system aggressiveness, and a new level of health system ambition. More than ever, health systems will need to have to address social determinants of health; access and analyze data about health conditions, reimagine access to preventive care, develop care models tailored to specific populations. The costs will be enormous, and the need for intellectual capital considerable. America is looking to someone or something to take on what is now a paramount set of national healthcare problems. It is up to the hospital sector to bring its charitable mission, its resources, and its passion to bear on this awesome responsibility. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success!
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By Kenneth Kaufman
For a very long time, hospitals have been organized around three principles that inform the way they run their organizations, and how they conduct themselves in the management suite and the board room. The first principle is the desire to maintain organizational control. This principle has come about in large part because the clinical enterprise is inherently risky. Therefore, leaders do not want to be in a position where they don't have control of the clinical enterprise. That principle has extended beyond specifically clinical matters to all aspects of operation. Maintaining organizational control has come to mean minimizing organizational risk. The second principle, which goes along with the first, is to minimize enterprise risk. Hospitals have always been very risk-averse organizations. Over time, as different concepts have been introduced, organizations have had to be talked into doing things that allowed more risk, and that could result in better financial results from that risk or better strategic results from that risk. The third principle is maintaining operational flexibility. Management teams and boards don't want to get caught in a box when difficult or bad things start to happen. This has to do with the public and reputational notion of running a hospital. Management and boards want to have the operational flexibility to take the actions necessary to resolve any situation that could harm the reputation of the organization. These three principles are all well and good, but they have to be maintained and enforced. And it is expensive to maintain control, minimize risk, and maintain maximum operating flexibility. In general, leaders may believe that these very high levels of healthcare cost come from the way provider organizations are run. But that’s not true. Leaders make decisions every day in which they actually pay to allow those three principles to be in full flight. Let’s look at a metaphor for this situation. If an organization is focused on maintaining control and eliminating to the greatest extent possible the externalities that limit control and increase risk, then when it comes time to finance, that organization will tend to look toward a 30-year fixed-rate transaction, because that transaction eliminates the risks of externalities. However, if an organization wants to lower the costs of that transaction, the organization would do a variable-rate transaction or use certain hedging strategies. But getting those lower costs invites in the externalities of the world—the kind of externalities we saw in 2008 and 2009. So management teams and boards that don’t want to bring in those externalities look toward a 30-year fixed rate transaction at a higher cost. This is a metaphor for all the other operating decisions that a hospital makes. If an organization’s approach is to eliminate risk to the degree possible, and the leaders apply that approach to all their decisions, then the organization can purchase that increased control and minimized risk. But those decisions will result in higher costs. We have recognized for many years that not-for-profit healthcare is expensive. There is a fundamental philosophical reason for that situation. Organizations are trying to maximize the principles of maintaining control, minimizing risk, and maximizing flexibility, and they are paying up to do that. There are hundreds of examples of situations in which organizations have to decide: Do we enforce these three principles? Or do we back off these three principles in order to reduce the overall costs of running the organization? However, if we continue to proceed on this operating philosophy, we will continue to have the high operating costs that are directly correlated with that operating philosophy. If we want to get to a healthcare system that has a different operating cost point, then we have to rethink these operating principles. Also, these operating principles create a perspective in which the needs of the organization are given a higher priority than the consumer’s needs. That’s the opposite of what a company like Amazon does. Amazon’s mantra is, first figure out what the consumer needs, and then figure out what Amazon does. When you insist on organizational control and low enterprise risk, the decisions that are being made in the board room are being made on behalf of the organization, and never really on behalf of the consumer. And that’'s a very unfortunate competitive place to be right now. This is just not the way the American economic model works anymore. The dominant model is the way that Apple, Microsoft, and Amazon behave every day. And in the past year, the dominance of that model has dramatically accelerated. Now, in order for healthcare organizations to take advantage of certain critical opportunities, they are going to have to accept less control, to take more risk, and to reduce their operating flexibility. In particular, that will be necessary in order to reduce cost materially. We’ve picked almost all the low-hanging fruit when it comes to costs, but costs are still too high. And that’s because now we have to attack the operating principles in order to reduce costs more. Next, hospitals will need to take a truly consumer-first attitude. Research shows that what consumers really care about is how they feel as they walk away from the interaction. Not how they felt when they first got there. Not how they felt while the transaction was happening. It's how they feel about the last mile. This has not been an area of focus for healthcare organizations. That last mile may be smooth from the hospital’s perspective, but is the consumer truly happy when the encounter ends? For a company like Amazon, there is an extraordinary focus on making that last mile better and then better still. The changing American economic model is incredibly fluid right now. It’s highly dependent on technical competency and accumulated intellectual capital. Why has Amazon been so extraordinarily effective during the pandemic? Because they accumulated this extraordinary technical competency and this unbelievable intellectual capital, and then they were able to combine that competency and capital, and roll it out during the pandemic. And that was what consumers wanted. Which is why Amazon’s revenue was up 40% in the first quarter of the pandemic and while performance metrics fell through the floor for businesses using traditional business models, or businesses without the necessary technical competency and intellectual capital. Hospitals don't have the technical competency and accumulated intellectual capital to be truly competitive in the dominant economic model. So hospitals will need to be open and experimental about possible partnerships and joint ventures to get that technical competency and intellectual capital. There are so many strategic needs and opportunities in healthcare now. The need to deliver a better experience to consumers. The need to reduce operating costs. The need to integrate digital health into the care process. It's naive to expect that the average American hospital could do all these things themselves, which means that there are going to be many kinds of joint ventures and partnerships to accomplish these things. But in order to do those partnerships and joint ventures, it’s inevitable that hospitals will have to accept less control and take much more risk, and accept reduced flexibility. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
In the roughly 19 months since the COVID-19 pandemic emerged, America’s hospitals have borne a huge amount of the pressure and accountability for managing the effects of an unknown and unpredictable virus, and more recently for the complex process of disseminating vaccines. Our nation’s hospitals are doing all of this with relatively little public or political credit, and at great expense to overworked staffs and organizational financial health. And now perhaps, if we are fortunate, we may be starting to come out of the worst of COVID. However, for hospital executives and their boards the question is: coming out into what? How will post-COVID America, its economy, and its culture affect the relative strengths of traditional healthcare provider organizations? And, with COVID having greatly accelerated the growth of virtual business models, how will COVID affect basic patient care delivery and the encroachment of non-traditional competitors on that traditional delivery system? In the absence of clear answers to questions such as these, hospitals and health systems need to prepare for many paths to many alternate strategic scenarios. This preparation will require sophisticated analyses and high level discussion at both the management and board levels. The overall strategic considerations are likely to be the most complex and intricate that healthcare providers have wrestled with in contemporary times. To assist with this strategic re-consideration, I offer the following post-pandemic preparation checklist. Costs. Every hospital and health system has come through COVID differently. Depending on the speed and absolute degree of the return of volumes and revenues, the pre-COVID cost structure still in place at many hospitals may require significant reductions. Given the general economic insecurity in towns and cities across America, any such cost reductions will need to be accomplished in a most thoughtful way. Strategic Repositioning. What does the local and regional market now look like? What about new competitors from national companies? What does your health system portfolio now look like? Are there specific assets within the portfolio that have been damaged? Has overall competition changed? Have direct competitors been weakened or become more aggressive? Are non-traditional competitors making moves into your marketplace? Organic Growth. Do opportunities for organic growth remain in your market? How might COVID have created new opportunities? Inorganic Growth. A competitive marketplace damaged by COVID may offer new and real opportunities for inorganic growth. Inorganic growth, however, always requires unusual levels of both preparation and organizational aggressiveness. Partnerships. The post-COVID environment may create and era of transformative partnerships. Last month, 14 large health systems announced a partnership to create a large-scale database to revolutionize disease prevention and treatment. Just a few days ago, Amazon Care, Ascension, and Intermountain Healthcare announced a coalition to promote care in the home through telehealth, digital therapeutics, and provider home visiting. Hospital and health system executives will need to be attentive and alert to such innovative partnership opportunities and their potential competitive impacts. Telehealth. What is the position of telehealth in your market post-COVID? What is your own level of telehealth capability? How will telehealth impact your overall delivery system and possibly the competitive balance in your marketplace? Importantly, what is your organizational point of view relative to the role of telehealth in your post-pandemic delivery system? For some time we may be in an economic, cultural, and clinical condition where we have many more questions than answers about organizational direction in the post-COVID environment. This suggests that any generic roadmap to the future remains unlikely to impossible. Preparation, though, is both possible and essential. Only with precise and well-thought-out strategic and financial assessment and direction can complex healthcare organizations reasonably expect to navigate the post-pandemic fog. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
A very interesting short article recently appeared in The New York Times that explored the COVID phenomenon of “languishing.” The author defines languishing as “the collective fog we have endured…trouble concentrating, trouble staying motivated, trouble getting excited about the future.” The author goes on to say that languishing isn’t burnout and is not depression, but instead is a sense of stagnation, a sense of just getting by. As I read the article it occurred to me that not only can individuals languish, but most certainly organizations can languish too. And if any organizations in America deserve to languish, certainly America’s healthcare providers qualify. This notion of a long-standing collective funk introduces an entirely new fiduciary responsibility for hospital boards and CEOs. The past year has been unprecedentedly difficult; every organization, especially hospital providers, is entitled to its moment of languish. But no healthcare organization can afford to languish for long. So how does the board and CEO assure that its collective organization is now moving to a path to get excited about the future. The way forward is to get aggressive about certain business tactics that assure the financial and strategic integrity of your healthcare organization. These tactical steps are as follows: Recalibrate the strategic plan. COVID has changed everything, including finances, demand for medical services, the cultural context within hospitals operate, and the immediate need for healthcare equity and social justice. Given that any hospital’s pre-COVID strategic plan is likely somewhere between partially broken and mostly irrelevant, the first critical step to recovery is to regain control of everything your board and management team needs to know. What does your marketplace now look like? How disrupted is your local demand for services? Is your clinical delivery system still intact? Has your traditional competition changed? Has your organization’s place within the competitive space changed? The questions are endless. But all of the essential questions must be posed and answered within a quantitative analytical framework. And right now, especially, that framework must be technically flawless. Reassess the organization’s financial integrity. The financial questions are going to come fast and furious. Has the basic financial integrity of your organization been damaged? If so, how damaged? How do your pre-COVID and post-COVID operating statements compare? How do your pre-COVID and post-COVID balance sheets compare? Pre-COVID, what was your estimate of capital capacity? What is your revised estimate of capital capacity? If the strategic plan is changing dramatically, are your total financial resources still sufficient to support that post-COVID strategy? Again, there are many more questions than easy answers, and, again, the financial analytics must be impeccable. Rework costs. The third tactical tool necessary to push your organization forward is bringing post-COVID costs in line with post-COVID revenue. I have written on this point previously. Let’s add to the discussion the note that your organization will languish indefinitely if the overall cost structure cannot be brought into line to assure ongoing sufficient profitability and capital capacity. The post-COVID period will demand a new sophistication in establishing a lower overall cost point for your hospital. Four key principles will support this process: recognizing that much of the low hanging costs has already been picked, approaching cost reduction as a continuous process, focusing hard on corporate overhead and shared services costs, and taking a new and fresh look at automation, outsourcing, and offshoring. The last months of the COVID pandemic have been difficult in every way one might characterize difficult. One might say that hospital providers have earned the right for some time to languish. But let’s be candid: the “languish honeymoon” has to end sometime, and from my perspective now would be that time. All hospital boards and associated CEOs need to take a good look at their post-COVID organizations and immediately step forward to assure their organizations’ strategic and financial integrity. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
Every healthcare organization, large or small, depends on an internal gyroscope to assure its organizational stability and maintain its administrative and clinical navigation systems. That healthcare gyroscope is a delicate combination of management, governance, and medical attitudes and processes that keeps all complex healthcare organizations functioning in a way that serves the best interests of its patients and associated communities. The COVID pandemic has impacted every aspect of our society in ways that we immediately understand and in other ways that it may take years and years to comprehend. In this regard, no institution may have been more emotionally and managerially impacted by the pandemic than the American hospital. That healthcare gyroscope in many healthcare providers has likely been knocked on its side and is now uselessly spinning sending the organization off in haphazard directions. In the post-pandemic period healthcare leaders need to locate the most necessary set of strategic and operating plans which will most immediately re-establish that internal healthcare gyroscope. Here are a handful of suggested strategies that may prove most essential.
The healthcare environment has never been static. But change has been incremental and to a great extent predictable. The COVID pandemic has brought new, unpredictable external forces to healthcare that have already begun to affect the nature of healthcare’s competitive dynamic and accelerate the pace of change. To weather this new environment, healthcare organizations need to achieve a new basis of stability. The above four strategies and their associated day-to-day tactics are just the beginning of the post-pandemic re-set for American healthcare providers. But together they can combine to set that organizational gyroscope spinning back toward governance, managerial, and clinical stability. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
America is changing in too many ways to count. The political and cultural ramifications of an increasingly pluralistic population are harder and harder to predict and make overall governance of complex healthcare organizations an increasing challenge. For starters, the definition of healthcare is fast changing, and it now includes not only inpatient and outpatient clinical care but also the broader demands of public health. And that public health definition gets broader and broader every day, and now encompasses the COVID-induced mental health epidemic and the nationwide accelerating gun violence. This widening definition of healthcare is demanding a new board vision of service to its community and a new associated strategic plan that re-sets the next ten years of American healthcare. In the past, the board’s job was relatively straightforward: to monitor and oversee the internal workings of its hospital and health system. That remains a key board role. But in 2021, the business externalities are in ascendancy. No hospital board can set a correct strategic direction without accurately recognizing and reacting to unprecedented external business conditions. These externalities are remarkable and at the least include:
Finally, every board must recognize the power and influence of a fast-changing stakeholder environment. In the recent past, healthcare system stakeholders included the board, management, and doctors—period. But now, the stakeholders that impinge on health system operations and policy include patients, employees, sub-groups of employees, multiple communities, local government, state government, the federal government, political movements, religious influences, other not-for-profit organizations, BIG media, and social media. It all comes together to form an essentially uncontrollable business environment that seems to change by the day and sometimes by the hour. When you add the external business conditions to the long line of activist stakeholders, you get a rather new list of board challenges and responsibilities that include:
It’s hard to be a hospital board in 2021, and it’s not likely to get easier anytime soon. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
After several years of research and development, the automated teller machine made its first appearance in 1967 at a branch of London’s Barclay’s Bank. Two years later, the first U.S. ATM was installed at a branch of the Chemical Bank on Long Island. However, ATMs remained a minimally used curiosity until one bank took a risk and external forces took control. In 1977, Citibank made a big bet on ATMs. (Do any of you New Yorkers remember the slogan, “The Citi that never sleeps”?) Then in January of 1978, New York City was hit with a snowstorm that closed bank branches for days, leading to a double-digit increase in ATM use. After that, other banks hurried to invest in the new technology. Over the next several decades, ATMs proliferated, climbing to a peak of 2 million worldwide. Despite the popularity of ATMs, remote banking would have fallen far short of its potential if progress had stopped there. Today’s smartphone-enabled banking capabilities—budgeting, fraud protection, loan application, funds transfer, and on and on—leave ATMs in the dust when it comes to access, convenience, and tools. In March 2020, healthcare was in roughly the same place with telehealth as banks were in 1977 with ATMs. After years of research and development, telehealth was on the radar of most healthcare provider organizations, but relatively few had extensively deployed the technology. In 2019, Kaufman Hall’s State of Consumerism report found that only 20% of organizations had widely available video visits. Then came COVID-19, and with it a 154% increase in telehealth use at the peak of the pandemic’s first wave. Organizations routinely reported accelerating their telehealth plans by years in order to accommodate the demand from patients not able to see providers in person. However, as with ATMs and banking, telehealth will be a failure if it goes no further than today’s video visits and other routine features. Siddhartha Mukherjee, MD, DPhil, Pulitzer Prize-winning author, and renowned virologist and cancer researcher, made this point forcefully in a presentation at Kaufman Hall’s Healthcare Leadership Conference last month. Mukherjee noted, first, that too often video visits are isolated encounters rather than part of a care plan with measurable goals and steps. Worse still, Mukherjee said, is when a video visit concludes simply by scheduling an in-person visit, essentially making the health system bear the cost of two visits instead of one. But, Mukherjee said, the true failure would be if telehealth does not take advantage of the clinical and cost breakthroughs possible through increasingly advanced technology leading to a fully integrated digital health platform. COVID has been to telehealth what the 1978 New York City blizzard was to ATMs. For banking, ATMs were just a first step in greater efficiency, convenience, and use of technology. The responsibility of healthcare providers now is to keep telehealth momentum going. That means continuing to promote telehealth to consumers and clinicians. It means improving the execution and efficiency of current practices. It means advocating for fair payment for telehealth services. And most of all, it means developing, investing in, partnering for, and promulgating sophisticated new digital technology that can bring about major advances in outcomes, convenience, and affordability. COVID has had a devastating impact on the U.S. healthcare system, and we don’t yet know the intensity or duration of that impact. One positive glimmer that has come from COVID is the rapid adoption of telehealth. It is up to healthcare provider organizations to turn that glimmer into the bright light of progress. To fail in that effort would be to add yet another blow to the long list that COVID has delivered. Planning your virtual event? Get in touch with us at the Capitol City Speakers Bureau today to book your healthcare speaker! By Kenneth Kaufman
I have given a number of talks over the past few months, and despite the fact that all of those presentations have been delivered virtually, the question-and-answer sessions have remained interesting and robust. The most frequent question asked has been about possible consolidation of the provider space post-COVID. Most of these questions start from the perspective that another round of significant consolidation is coming. That perspective seems to rest on two key assumptions:
What is clear is that every hospital organization must have a well-held point of view about its own role in the next phase of healthcare mergers, acquisitions, divestitures, and partnerships. That point of view will pivot around three significant strategic questions:
First, COVID has catalyzed a major shift in economic and competitive dynamics. Few organizations of any kind can expect pre-COVID strategy to be unaffected. Hospital and health system executives need to carefully and thoroughly assess their organizations’ capabilities, their competitive environment, and their path forward. Second, as Jim Collins notes, a most important corporate character trait is preparedness and readiness. There is no way to anticipate the pace of post-COVID change. Now is the time to prepare, to be ready, and to consider your organization’s options. Later, in fact, could be too late. Planning your virtual event? Get in touch with us at the Capitol City Speakers Bureau today to book your healthcare speaker! By Kenneth Kaufman
One hallmark of the rapidly changing COVID-19 crisis is that any statement about the situation one day is likely to be incorrect the next day. However, after more than eight months of battling the virus, we have enough data to make several important observations about the state of play that are highly relevant for the strategy—and indeed the very thought processes—of healthcare organizations. When the pandemic hit in the early spring of 2020, the most hopeful scenario was a steady decline in number of new cases, with the virus at very low levels by late summer or early fall. Less hopeful scenarios suggested a series of subsequent surges of gradually decreasing intensity. The reality, of course, has been very different. As of early November, almost every day brings a record high in the number of new cases. The graph on the far left above illustrates the story extremely well: New cases are coming in waves, and the waves are getting larger. As of this writing, the number of daily new COVID-19 cases in the U.S. is more than 50% higher than the number of new cases during the previous spike in mid-July, and it is an increase of more than 200% over the number of new cases in the mid-September trough. As we have learned more about how to treat patients, and as we have identified cases earlier, the number of deaths from COVID has declined since April. However, as shown in the graph at the far right, that number also has been trending higher during October and November. Very concerning for hospital executives is the center graph, showing the number of people hospitalized for COVID each day over the course of the pandemic. As of early November, the number of hospitalized COVID patients is back to very near the peaks we experienced in April and July. And the number has been rising daily. Thus, fighting the virus for most of 2020, we are at the greatest level of uncertainty yet. Far from the temporary pandemic many of us expected, the virus is moving from pandemic to endemic and back to pandemic, with the intensity and duration of the crisis impossible to predict. Further, every hospital and health system is experiencing its own version of the pandemic, with its own short-term and long-term consequences. The ongoing pandemic has challenged our most basic assumptions about organizations and organizational decision making, about organizational strategy, and about the organizational thinking process itself. Let’s summarize these assumptions through a series of questions... 1. In a pandemic of uncertain intensity and duration, what is now the appropriate direction for a complex healthcare organization? 2. In such an environment, how is capable leadership defined, and what does competent management look like? 3. In the fog of one of the worst public health crises in American history, what tasks and strategies must be attended to and which can be left undone? These questions are in no way theoretical, nor are their answers. Rather, these questions and their answers are as real as it gets. Given this state of play, it is not possible, nor is it useful, to define a so-called pandemic roadmap at this time. What is more helpful is to call out a series of strategic observations and identify a series of management thought processes that can act as an organizational gyroscope in times of unprecedented macroeconomic turbulence. Planning your virtual event? Get in touch with us at the Capitol City Speakers Bureau today to book your healthcare speaker! By Kenneth Kaufman
With the end of the Cold War, the U.S. Department of Defense faced a new geo-political reality. The Berlin Wall came down. The Soviet Union was dismantled. Communist regimes fell out of power in many parts of Eastern Europe. The Iron Curtain was lifted. As promising as this new reality was for global politics, it was a problem for the U.S. military. For almost five decades, the military had been structured to provide defense based on the global structure of a Cold War world. Military personnel, capabilities, weaponry, and installations all were informed by the reality of the Cold War. Now that the reality had changed, the U.S. military was structured for a geo-political map that no longer existed. At the broadest level, this structural mismatch resulted in three serious problems. First, the U.S. was not ready for potential new defense needs. Second, the outdated structure was highly inefficient, spending huge amounts of resources on assets that were no longer required. Third, this waste meant that funds were not available to invest in post-Cold War defense. The most significant source of waste was the outdated physical structure of the military—installations that were located in areas that no longer needed military bases, or that needed different types of military facilities. To realign the military’s physical presence with the new reality, the U.S. Department of Defense began a process of base closures that continues today. The process involves a systematic and continuous comparison of military needs with the military’s physical presence, and engages the many groups affected by these decisions. The result has been new rounds of recommended base closures or repurposing initiatives every several years. Recently, a healthcare executive I have worked with for many years pointed out to me how apt base-closure is as an analogy for the situation faced by hospital-based health systems, and as a way to make difficult but positive changes. Over the past 10 years, we have seen a major migration in healthcare demand from inpatient to outpatient settings. Surgeries that 10 years ago were almost exclusively inpatient-based are now routinely performed in outpatient settings. The length of inpatient stays for other procedures and conditions has dramatically reduced. Payment rules increasingly create incentives for care to be performed in outpatient rather than inpatient settings. And advances in telehealth are moving care encounters out of healthcare facilities altogether, and into patients’ homes. Over the past 10 years, MedPAC reports a 43% growth in outpatient visits, compared with a 20% decline in inpatient discharges. The American Hospital Association reports that inpatient and outpatient revenue for hospitals is nearly equal, whereas in 1995, inpatient revenue made up 70% of total operating revenue. Hospitals’ traditional facility footprint simply is no longer aligned with the realities of how healthcare is being delivered today, or how it will be delivered in the future. This misalignment has a similar effect on the U.S. healthcare system as the post-Cold War military base misalignment had on U.S. defense. An enormous amount of healthcare spending goes to facilities that are underused or mis-matched to community healthcare needs, and that waste prevents investment in healthcare resources that can advance the quality, efficiency, and experience of healthcare for a new era. As I wrote last year in the blog post Getting Serious about Costs, hospitals have long struggled to manage their high fixed and operating costs. Traditionally, hospitals have focused their cost-reduction efforts on labor and supplies—high-cost areas that continue to warrant attention. However, the basic mismatch between U.S. healthcare facilities and healthcare needs, and the unsustainability of healthcare spending to the U.S. economy, requires that legacy hospitals and health systems take on costs at a greater magnitude and with more permanence. That means taking a very hard look at the value being provided by each asset of the facility portfolio. Where assets are not contributing sufficiently to the healthcare needs of the community, and not meeting the strategic or financial needs of the organization, some very tough decisions are in order. Repurposing or closing a hospital is one of the most difficult decisions healthcare leaders can make. The decision involves a major change to a trusted community presence. It can bring community outcry, political scrutiny, and unfavorable press. At the least, it involves helping community members transition to a new approach to care. Yet, in an environment that is rapidly transitioning from an inpatient to outpatient focus, some hospitals are no longer serving a relevant purpose in the U.S. healthcare system. A 2018 study identified 13 states in which average hospital occupancy rates for urban hospitals were 50-60%, and 28 states in which average occupancy rates for rural hospitals were 40% or less. These averages mask even greater variation from facility to facility within smaller areas. Dealing with hospitals and other high-cost assets that no longer provide necessary value in the healthcare system of today is among the toughest and most important steps in managing healthcare costs. Today, hospitals are at a “base closing” moment. In order to be competitive and relevant, hospitals will need a structured, continuous process that results in informed decisions about their facility and real estate portfolios. These decisions may be challenging in the short term. However, in the long term, a base-closure approach can improve care, improve the viability of healthcare organizations, and create a healthcare system that is more sustainable, more cost effective, and better able to meet the health needs of our nation. Planning your virtual event? Get in touch with us at the Capitol City Speakers Bureau today to book your healthcare speaker! |
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