How Hospital Closures Can Be Avoided

By Kevin Fleming

It seems that every other week we read about another hospital closure. In fact, the current pace is 30 – closures per year, according to an analysis conducted by Morgan Stanley as reported by Bloomberg News in August. The analysis, led by Vikram Malhotra, studied data from about 6,000 U.S. private and public hospitals. It concluded that 8% are at risk of closing and another 10% are considered “weak”. In follow up commentary, Mr. Malhotra said that shutdowns are likely to increase for the coming 12 to 18 months. Therefore, nearly 1000 U.S. Hospitals are at risk of closure or forced consolidation in the near future.

This observation is supported by research conducted by the Health Resources & Services Administration who in October reported that “Hospitals located in rural areas have been closing their doors more frequently and at higher rates than urban facilities in recent years – and a pattern of increasing financial distress suggests that more are likely to falter.”

The scenario, according to the HRSA, is particularly bleak for some smaller community and critical access hospitals, whose financial woes include leaking roofs, antiquated power supplies and aging clinical equipment. These financial stressors may be in addition to insufficient patient populations, high rates of uninsured patients, dwindling cash flow and physician shortages. In short, many of these hospitals’ markets don’t generate enough volume and/or revenue to sustain a hospital that’s capable of meeting its operating costs, industry regulations and rising patient expectations.

This list must be expanded to include rising patient bad debt – which affects all hospitals in the country. Patients now bear personal responsibility for an average of 35% of the healthcare industry’s revenue, representing its third-largest revenue source behind only government and commercial payers, and growing much faster than any payer segment by far. Patient collections vary considerably from place to place, but can often amount to pennies on the dollar relative to the aggregate value of a hospital’s patient receivables. For a hospital struggling to keep the lights on, the performance of their patient-pay portfolio can be the difference between surviving and failing.

Bloomberg reports that, along with patient bad debt contributing to high negative margins, and a lack of negotiating power, these providers’ operating margins are threatened by technological improvements that attract patients elsewhere, allowing them to get more surgeries and imaging done outside the hospital. These competitive threats are exacerbated by the growth of retail providers (CVS/Aetna) and, potentially, employer-sponsored initiatives like Apple’s and Amazon’s; and other disruptors on the competitive horizon.

The plight of these providers is the product of simple demand/supply economics in an environment where the demand (driven by demographic, technological, economic and social change) has evolved and supply has failed to keep pace. But there are ways for hospitals to overcome these challenges. One is through reinvention, which may also include the second strategy – consolidation.

We addressed consolidation specifically in a previous article titled Mergers and Acquisitions in Healthcare – Don’t Forget About the Patient. In it, we pointed out that the most important strategic outcome of a merger is market competitiveness – becoming the provider of choice for patients and prospective patients in the market(s) a provider serves. All other deal attributes (reduced costs, expanded capabilities, etc.) must lead to that end. In many instances, an acquired or acquiring health system or hospital is looking to a merger as a way to reinvent itself. But whether they merge or not, the mandate for change (reinvention) is inescapable.

The Innovation Imperative – Staying Relevant in a Changing Marketplace

Reinvention means shifting or diversifying away from the traditional inpatient hospital model to models that more effectively reduce costs and can often improve care. In a Wall Street Journal article titled “What the Hospitals of the Future Look Like”, these models are listed to include “investing in outpatient clinics, same-day surgery centers, free-standing emergency rooms and micro-hospitals which offer as few as eight beds for overnight stays. They are setting up programs that monitor people 24/7 in their own homes. And they are turning to digital technology to treat and keep tabs on patients remotely from a high-tech hub.”

The Journal goes on to point out that “patient preferences for how they get care and a national focus on more prevention and wellness are also driving the new models.” The following themes, excerpted from the Journal article, are identified as the principles driving reinvention in healthcare.

  • Help Patients at Home – where hospital-level care for some conditions can be provided for 30% – 50% less than inpatient care with fewer complications, lower mortality rates and higher patient satisfaction.
  • Build (or convert to) smaller facilities – To offer services where it doesn’t make sense to build or operate a hospital, systems are building free-standing emergency rooms and micro-hospitals, commonly called neighborhood hospitals.
  • Find new uses for old hospitals – Repurposing existing facilities, collaborating as appropriate to deliver specialized services, such as Mount Sinai’s acquisition of the Continuum network of hospitals, where they are now “focused on converting the facilities to centers for specialty care, while continuing to ensure that each hospital can handle emergencies and other community needs”.
  • Reach out to those at risk – Identifying and communicating with groups who can benefit from programs designed to improve health and avoid hospitalization, such as Geisinger Health System’s population health strategy to connect with diabetics.
  • Help from afar (telemedicine) – The ability for specialists to deliver care from a central location to patients who may be in widely dispersed intensive care units. Last year alone, HCA Healthcare provided 115,000 telehealth consults.
  • Make hospitals more efficient – Leveraging data analytics to improve care of the sickest patients and operating efficiencies. Such as UC Health in Colorado who uses Operating Room usage data to optimize OR time and reduce waste, thereby controlling costs.

Implied in most of these themes is the importance of the patient experience in an increasingly consumer-driven marketplace. “Patient Experience” (PX) as a professional discipline and organizational strategy recognizes every dimension of care – the clinical and the financial. So, we are amending the list above to include the following:

  • Empower patients with upfront pricing transparency so they can make informed care and provider decisions.
  • Eliminate or reduce financial obstacles to care by offering a variety of affordability options, including payment plans and financing.
  • Serve patients on demand with a secure digital channel and interactive communications that are personalized to each patient’s preferences and behavior.
  • Provide patients with digitally-enabled, consolidated billing that is easy to understand and act on.
  • Recognize potential patient financial distress with proactive outreach to resolve barriers to care and payment.
  • Improve staff and caregiver experiences with data-driven, evidence-based workflows that reduce waste, improve customer service and minimize financially-related disputes.

From the patient experience perspective, reinvention of the financial dimension of care can have profound near- and long-term impacts on patient choice and provider financial performance.

One of the first things a consumer of healthcare considers before seeking care is cost. Providers that offer pre-procedure pricing transparency earn a reputation for delivering financially-friendly access to care. As such, they have a compelling market advantage – with patients, payers, and employers. Additionally, PX-driven patient financial engagement enhances a patient’s overall care experience, improving patient satisfaction and stimulating patient referrals.

A PX orientation to patients’ financial experiences is essential for health systems and hospitals, regardless of the health of their balance sheets. At-risk hospitals and health systems that are looking to improve their chances for survival must start by evaluating the economic realities and forward-looking trends in the markets they serve. Then consider changes, however radical they may seem, to remain relevant and economically viable. The providers who survive, indeed thrive, will be those who win patient loyalty by meeting and exceeding patient expectations in every dimension of care.

kevin fleming loyale healthcare




Kevin Fleming is the CEO of Loyale Healthcare.

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