What’s the state of the hospital industry in the US today? What are the top three themes, concerns and opportunities that are occupying CEO and executives’ minds?

Lynda Mischel

Senior Managing Director, Consulting

Melissa Kwiatkowski

Senior Vice President, Provider and Payer Services

What’s the state of the hospital industry in the US today? What are the top three themes, concerns and opportunities that are occupying CEO and executives’ minds?

Depressed revenue, increased costs in labor. Not necessarily decreases in volume, but decreases in revenue. So some of it is that volume is steady, but revenue is decreased. Rates have decreased. Volumes are continuing to move from the inpatient to the outpatient setting. And so depending on, of course how you count volume, inpatient volume is down, outpatient volume is up leading to overall reduction in total revenue, along with the significant increases in labor costs, post COVID.

Ignoring labor costs for a second, focusing on payer mix and reimbursement rates, the vast majority of healthcare volume remains fee for service.

Are we seeing a weakening in commercial mix and waiting and an increase in Medicaid, Medicare? Is that a concern? Are we seeing the effects of migration out of the northeast away from the West Coast? Also in some cases, bringing volume to systems and in other cases weakening their volumes depending on their geography?

I think it’s more than geographical relocation, which of course there is geographical relocation from the north to the south. But what we’re seeing a great deal of and health system executives around the country are very concerned about is the significant differences between the haves and the have nots. And so large consolidated health systems who have the opportunity to move resources around their system to capitalize on higher volume, higher profitability, patient mix, case mix really, is what we think of that as case mix, continues to take volume away from smaller community, x-urban and rural institutions.

Also, historical urban institutions as larger consolidated systems have the capability to reach out to patient populations with increased payer mix on an outpatient basis. So as they’re capturing larger swaths of patients for things like oncology services, which are highly profitable, cardiac services, which are highly profitable, very, very little of which needs inpatient care anymore, the historical smaller community-based institutions are losing that revenue as well. And so the country across the systems are really suffering from a larger and larger divide between the haves and have nots.

Are the haves also able to migrate into outpatient care more easily?

They have lots more capital available to them, both through operational dollars and access to capital markets so that they can move into new markets with relative ease. They have the resources to really understand the market that they’re moving into and develop the right services for that market. And so what is left in smaller community-based hospitals are the sickest of the people who really need inpatient care and don’t have the opportunity or can’t really travel. And system executives are more and more concerned about this. Even the haves, because of course sooner or later what happens as these institutions close, those populations that are more difficult to care for and less profitable in many ways are going to have to seek care in institutions, and that’s going to depress their margins.

And so the struggles are more easily met by very well capitalized systems that can restructure themselves on the fly, and move towards lower cost of care settings. Rationalized footprint, reassigning headcount/clinical staff towards specialties that are performing well versus those that are not. And those systems that move very slowly if they move at all struggle with the changing headwinds.

What are some of the best opportunities that health systems and hospitals across the country are excited by today?

They’re excited about solving for the workforce challenges that they have had, specifically in the arena of nursing. I can quote some recent statistics from a nursing shortage and that hospitals are getting very creative in having individuals work to the top of their license, having duties assigned that traditionally had been delivered by registered nurses, licensed nurses, physician assistants. There was a recent study that stated that 30% of the nursing workforce surveyed will be leaving the clinical setting by the end of 2023. That is significant and unheard of. Those nurses that were surveyed were across every clinical setting, both inpatient, which would include your intensive care, your emergency departments, as well as working in a physician office. The vast majority of that 30% that will be leaving, were in that inpatient setting. Turnover rates for nurses have increased almost 10%. The average turnover rate in nursing in 2020 was around 18%. That’s a very high turnover rate for any profession. In 2021, the turnover rate for nurses post COVID was 27%. So hospitals are excited about solving for this problem. They are partnering with education, both middle school, high school, colleges. They’re opening their own nursing schools as well as medical schools to solve for this problem because at a minimum, it takes two years to educate a nurse. So there’s not going to be this massive influx of nurses, and the shortage is here today. So to avert compromising patient care, when you are canceling cases in an OR because you can’t find a scrub nurse, there is direct correlation with the revenue for that hospital. So they are excited about solving for that problem through creative ways of finding healthcare individuals to deliver that care.

One can imagine how focusing on the problem will yield better results versus presuming that nurse supply is stable, which is the paradigm we were in, which is no longer the case. Some of those solutions seem a bit more long-term than others. Investing in your own school sounds like a multi-year endeavor, but elevating nurses towards top of their license sounds like it could be done pretty near term. Focusing on more PAs and MAs and just more efficient systems in general to create more capacity.

Correct. So the word ‘excited about’ versus ‘must solve for’, expanding revenue stream, right? So looking for creative ways, non-traditional ways for hospitals. And we recently had this discussion and we’ll continue it tomorrow, during our CEO interview series, are hospitals going to leverage real estate investments. Are hospitals going to partner with non-traditional partners out there in the marketplace? Mergers and acquisitions as we have seen with massive mergers that were non geographically related. You have health systems in North Carolina partnering with health systems in Michigan, taking away that geographic boundary of integration through leveraging technology, telemedicine, telehealth.

So you’re talking about strategic partnerships. It does sound like that’s an area of low hanging fruit for a lot of hospitals and health systems across the country. Investing more time and effort in surfacing and developing strategic partnerships, not just with other systems, but maybe with the employers, the local community. What are some of the more interesting partnerships that you’ve seen? You mentioned hospital to hospital, system to system. What else have you seen that’s caught your eye?

Recently I’ve seen hospital direct to employer, direct to large labor organizations to become their provider of choice, cutting out a middleman, cutting out the insurer. It’s risky potentially from the standpoint of administratively the potential burden, but if you’ve identified a good partner, if an employer has identified a good partner as far as cost and quality, we’re beginning to see emerging partnerships of direct to employer relationships.

It’s part of hospitals and systems taking full advantage of their intellectual property. I think a lot of them haven’t necessarily appreciated how valuable their brand, their reputation for delivering excellence in the marketplace really is. And so an outreach to other large institutions with a promise of improving care and improving performance is probably time well spent. I also think a lot of systems don’t appreciate how valuable their brands are national and local. And so brand partnership opportunities become available, licensing opportunities become available. And so some of these systems have more assets than they’re used to thinking of.

The investment that Kaiser just made in Geisinger I think is actually a really interesting investment, because Kaiser is really making an investment in value-based care. And so Kaiser, of course, the oldest health system in a capitated model in the country, probably in the world, has decided that its model for value-based care for what we now call value-based care, what they have always called capitation is that there are a select number of hospitals across the country who are particularly good at a capitated model, that would benefit from Kaiser’s infrastructure and learning in their overall model and study.

               And so interestingly, Kaiser has tried a similar venture in the early nineties, where they partnered with hospitals all over the country to manage Kaiser-capitated patients. It was by and large a failure. And their perspective about why it was a failure is that most hospitals can’t do both fee for service medicine and capitated medicine well, and so they had an army of people in independent hospitals trying to manage Kaiser-capitated patients, which did not go as well as they hoped. And so in markets where they don’t have hospitals, they currently mostly have a fee for service model.

               So what they’ve decided is that they are going to find like-minded institutions across the country and partner with them and try to bring their payer strategy to those markets, and be competitive in those markets and drive more Kaiser patients into capitated models and therefore into hospitals that really have an expertise in capitation. Geisinger, which is in a relatively rural part of Pennsylvania, had prior to their current CEO, an extremely innovative CEO, who changed the hospital’s thinking about how to get paid completely and changed their ability to contract in their market, much because their market is pretty small. And so they have a capitation model at Geisinger.

               About 15 years ago, Geisinger tried to do what Kaiser is now doing, and bought up several hospitals that they thought were very like-minded in West Virginia, in South Jersey. I think the third was Connecticut. And because Geisinger didn’t really have the weight of the capital, or its own insurance plan like Kaiser does, those relationships did not ultimately farewell. But Kaiser is not only developing a health system strategy, they are also developing a payer strategy to go along with these hospitals that they think of as like-minded. It sounds like Geisinger is the first of a series of institutions that Kaiser is planning to purchase. Or partner with.

So does this remind you of sort of an advocate atrium successful partnership in value-based care with a focused effort and outcome? Is this an example of some health systems? You said the winners and the losers, some health systems successfully migrating towards risk-based capitated reimbursement models, whereas others haven’t? Do you see a very clear divide between A and B? Why have some made the successful transition where others have not?

So I would say that the institutions that have done the best in a value-based model, Kaiser has always had a value-based model. Intermountain, which is in the central west part of the country, Utah, Colorado, Banner Health in Arizona. Part of the reason that they have done so well in value-based care is that they have had very good relationships with the payers in their community, and together have built value-based programs that are both successful for payers and their hospital institutions.

Do they also dominate their communities?

They all dominate their communities.

Part of the opportunity is defined by how much market share you have.


And if really you are the sole provider of care, then you can control cost in your network a lot more easily than one of several major health systems who’s seeing significant patient attrition from one year to the next provider attrition, and who’s seeing a very complex continuum of care in any one case. You’ve got different systems, different providers, different practices providing elements of care to any one patient, not all of which are part of the same network. And so really the only group that controls that is the payer, health systems struggle to control that. They may try building interesting portals, but they can’t actually force the outcome?

That’s right.

What is the penalty for leaving a Mount Sinai hospital halfway through your treatment program? and opting for physical therapy with NewYork-Presbyterian? Whereas if you’re in a geography where that’s given that a patient is really going to stay within the network, you can really push forward, push ahead with value-based care offerings.

That’s right. The other thing that they all have in common is that although they do teaching, they don’t do academics. So they are not supporting the infrastructure of medical school. That allows them a little more freedom in terms. And also it also encourages them to think of themselves differently. They think of themselves as very high-quality community health systems concentrating in clinical care, whereas academic institutions think of themselves as research institutions who also do clinical care. And that’s a very different mindset in the kind of innovation you are willing to invest in.

How do you also differentiate between for-profit and non-profit health systems across the country?

Well, so in the for-profit world, there’s also the haves and the have nots, and there’s the institutions or companies like HCA, that have invested heavily in multi-institutional markets, where they can own enough market share to have enough power in the market to get reasonable rates and good relationships with physicians. Many of the for-profit hospital chains are now in secondary and tertiary markets, where they purchased smaller hospitals that have sort of become in the have-not group. So you saw this happen at CHS, where they had all 100 smart hospitals and a third of them over the time that they were owned by CHS moved from community-based hospitals that served their little exurban community to suburban hospitals now competing with outpatient centers of the major hospital in the city, and lost market share quickly to these outpatient centers and then lost margin and the company overall suffered the consequences of how quickly the market is changing, and the requirement that you really have to have everything that a patient and their family wants, not just be the little community hospital anymore. CHS went from 200 hospitals to 85 in the last 5-7yrs and so some of that, they sold off to even smaller for-profit companies like Prospect and Prime. Some closed and some they sold back into the nonprofit world to dismal performance overall.

And how do you characterize the nonprofit hospital world in terms of performance, tailwinds, headwinds? What is going through senior executive minds in a nonprofit setting, that’s different than what we’ve discussed so far?

I don’t know any hospitals executives who don’t think about their margin every day. And so I think, the one thing that we haven’t really talked about yet is how health system executives think about the changing physician landscape in their communities, and in two ways, really. So the lack of new physician availability, how few physicians are coming into the community, how their relationships with independent physicians are changing and how quickly their relationships with independent physicians are changing, and how they are going to think about competing, or affiliating with independent physicians that all of a sudden have access to capital.

So I’m curious that the migration of nonprofit, for example, behavioral health practices, which historically was the norm to for-profit behavioral health has come with a recognition of a far more aggressive approach towards growth, towards investment, towards expansion, sometimes granted too fast, sometimes granted too expensive, too much debt, but nevertheless, a huge contrast between before and after from migration of mission-based business model to more profit-orientated and performance-orientated from a competitive standpoint. Why isn’t there this huge distinction in the marketplace? Why don’t physicians first and foremost ask; the health system that I’m joining, is it for-profit or is it non-profit? World of difference between the two. Why is it there is a perception that a different type of ownership hasn’t necessarily yielded a very different outcome? Which normally it does. Why are we blending these two categories into one? For-profit, non-profit, no difference.

Really because they behave in the community as if there’s no difference for it. And so the corporatization of the nonprofit health system world has been taking effect over the last call it 40 years, where religious organizations of all kinds ran hospitals, and there were actually nuns who ran Catholic hospitals, who were the caretakers in Catholic hospitals. Advent used to be a religious institution. There were Jewish institutions. And much of that depended on who was on their board and where the philanthropy came from in order to keep these institutions going. As payment became more regular and people had more ability to pay for their own care, with the invent of Medicare and Medicaid, hospitals relied less and less on philanthropy. And so, over the course of 30 or 40 years following, the management of health systems became more and more corporatized, and more and more professionalized so that the financial management of an institution like Mount Sinai, NY Presbyterian, Penn Medicine is almost indistinguishable from the management at an HCA hospital.

So a few things I would throw into the salad ball, one is every hospital and every health system has a degree of mission attached to its identity, whether it want likes to or not. So there’s sort of conformity there to every hospital health system that is a de facto quasi monopoly in its marketplace can behave like one, for better and for worse, whether it’s for profit or not. And so less competition, less performance, no problem from one year to the next is a theme that isn’t necessarily impacted by ownership, right? You can get away with subpar performance because the competition is weak. Then you get away with it. It doesn’t matter whether you’re a for-profit or not. And two, it does sound like the non-profits in corporatizing themselves, have found ways over 50 years to become competitive in markets where they needed to be. And to their credit, sometimes for worse, but often for better, they’ve risen to the occasion, worked on service, service excellence, strong recruitment, and have played the for-profits in the same game of he or she who competes best wins. And all credit to them for doing that. I think it’s a remarkable story when you think about it. How many other industries offer that example?

Exactly. I think it is a remarkable story. And as folks like us have watched it happen and some participated in it happening, it is a remarkable story, and continues through consolidation that we’ve watched for the last two decades, with significant speed in the last decade, as what have historically been extremely regional businesses, particularly in the nonprofit world, have expanded across the country and figured out that yes, they have to compete. That insurance is a state by state thing, but they could figure out how to use their very talented corporate team to manage those complications across the country. It’s a remarkable story.

The majority of US hospitals are still non-profit, the trend is moving away for non-profit to for-profit or not?

No. So the trend is not moving away from nonprofit. The for-profit medical hospital world is pretty stagnant.

Okay, so let’s move into relationships with providers. How is that changing? Where is it heading? What are your thoughts on that last topic?

Like everything else in healthcare, it’s complicated. Now, 70% of all physicians in the country are employed by someone. About half of those employ providers are employed by health systems, and the rest are employed by practices of all kinds, both with corporate or capital partners and without. As physicians also have consolidated and are beginning to consolidate and have access to the kind of capital where they can really compete with health systems in their communities, I think this is a dilemma depending on the market that hospitals are going to begin to have to deal with. Although the historical and current state of healthcare executives, hospital executives have never been in this circumstance before. If independent physicians wanted to be independent in most communities, they’re bringing their business to their hospital anyway, so didn’t really make any difference to a hospital. Community hospital in particular.

               Academics are a whole other category. It’s hard to parse why academic institutions are employed and have very little affiliated relationships, but for most hospitals that are community-based hospitals, who have historically had relationships with independent physicians, they have not been in competitive relationships with these physicians. They have cooperated around how to bring patients into the hospital. They have cooperated around health system investments in services that doctors needed. They’ve built MOBs together.

               They’ve been in a pretty symbiotic relationship. As physicians have gotten larger and larger in both multi-specialty and subspecialty groups, and all of a sudden have the ability to compete head-to-head in particularly the procedural markets. In some markets, this is going to have a drag on health system margin. And as it has a drag on health system margin, we are going to begin to see health system executives try to figure out how to deal with it. So far, we haven’t seen very much of that because a lot of that that’s happened over the last five, seven years was interrupted by COVID.  And health systems got very inwardly facing.

I think you’ve got a few headwinds that are pushing systems into competition mode, and maybe even aggressive competition mode versus more passive symbiosis. One is the leakage of high paying procedures. And the leakage of high revenue generating specialists. The latest exodus is now in cardiologists. The prior exodus was in orthopedic surgeons. What’s next, neurosurgeons? Where does it end?

I think that’s one headwind. I’ll offer a few others. I think a more difficult environment for hospitals, where P&L performance is volatile and weakening, creates a state of fear. That’s only human. And being indifferent to providers and whether they’re independent or not, the stakes rise, and the premium on control intensifies. I’ll give you a third. Hospitals or when I started in healthcare, they faced very little competition for recruiting and acquiring physicians and practices. Whatever they wanted to own, they owned. Over the last 10 to 15 years, that has been reversed dramatically. They tend to have to compete aggressively for these much desired assets. And in many cases, they can’t compete at all. They don’t have a history of paying those types of premiums – and borrowing that kind of money, engaging in that speed of execution. Sometimes you don’t buy something because you just don’t move quickly enough.

Well, nonprofit hospitals are in some ways limited in how they can compete in the open market, in purchase price. Also a big part of purchase price is often not cash, but equity. Which the physicians can’t get.

So the question is what comes next? So if that’s where we’ve been over the last five, 10 years, which is a more difficult environment for hospitals to engage in, smaller practice and independent practice and provider acquisitions, where do we move from here?

I think that’s the million-dollar question. I mean, the other part of that is many employed physicians, hospital-employed physicians are unhappy. They think they get paid unfairly in terms of what their private practice competitors and colleagues make. And as hospital margins constrict, hospitals are going to want to pay physicians even less, not more. And so every health system CEO, rightly or wrongly, believes that physician expense is a drag on their institution. And how to right-size that drag is a significant problem in almost every institution that employs doctors.

And how do they uncouple that, but remain aligned? So how do we get a divorce but still live in the same house? So they don’t want to carry that overhead of the employment of the physician, but certainly they want to remain aligned with that physician practice, sending services through their health system. And that creates opportunities for creative affiliation agreements.

I think there may be physicians who want to get divorced. I don’t think there are any hospital executives who want to get divorced. They want to ratchet down how much it costs, but they don’t want to get divorced.

It’s hard to compete in the marketplace in an increasingly competitive marketplace, dramatically more competitive. If you’re competing with a weak hand, not just insufficient acquisition capital funding, but also a legacy of doctors that are unhappy, who can’t wait to tell your new incoming class that they’re going to be unhappy with a management team that’s overwhelmed servicing what exists today, the status quo with inefficiencies with hundreds and thousands of providers that were acquired that didn’t necessarily integrate that well. With systems that are antiquated, with buildings that are antiquated. Our offer is better than the group across the street, even though ignore the fact that the group across the street is offering you equity, growing at 50% per year, generating record compensation for their providers, investing in the latest and the greatest systems. Just ignore all that. Come join us.

And yet, so what you have is you have a rush to size. You have hospital systems trying to get as large as humanly possible, as quickly as possible and find safety in that size. And so that drives some very large hospital partnerships that we’re seeing accelerate. Would you say the market is defined by ever larger systems today at a faster clip than it’s been in the past?

Yes. Greater market share in an ever smaller number of health systems.

Yes. I think that’s right. It’s a little bit defined by what part of the country you’re in, but by and large, I think that’s absolutely right. So when the dust settles and these systems really consolidate fully, what ultimately is their value offering once they’ve restructured themselves well? Once the number of providers, the compensation structures, the providers are optimized. Let’s assume that these systems are functioning well. What are their key differentiators that make them a valid alternative? A preferable alternative?

Stability. There are lots and lots of physicians who are very risk averse. And so the idea that their life and their practice is very predictable, and that they are not bearing any risk related to that. And there’s lots of physicians who are like that. Interestingly, the more women who are coming into the market as physicians, the more risk averse the physician pool gets, which is fascinating, and I don’t think there’s any study about that, but it seems to be the case to me as I’ve watched the physician pool change dramatically over the last 20 years. Female physicians who have to also juggle child raising responsibilities perhaps need more support?

               I think it is also a generational issue, some young physicians are much less interested in an entrepreneurial 80-hour week than their parents were. In many families, being a physician is a family business, but still, a new generation of physicians wants a little more balance in their lives than they experienced from their parents. I think that’s true in this entire next generation, no matter what their parents did, if their parents worked a lot and were successful, their kids want to be successful, but work less.

I think that the sharing of facility and ancillary fees through shared ownership, the upside through shared ownership competes well with higher professional fees earned through HOPD rates. Especially in an environment where HOPD rates are finding less of a gap and more parity with outpatient rates, which is the environment that we’ve been in and are increasingly moving toward.

Increasingly moving toward. Exactly. And so I think for a very large group of physicians that more control over their lives, more access to revenue, that they feel like is based on their generation of work, is going to move them in that direction. And in some markets, it’s going to create a clash between systems and physicians.

There’s a lot of reasons why the competition is fierce. I don’t think risk seeking, risk averse is the defining distinction. And I do think one of these institutions has grown up being able to offer more income, and that was enough. The sales pitch for a new recruit wasn’t that hard. We’ll pay you more. Come join our HOPD rates. Conversation’s over. I do think the systems have expanded beyond that. Is it abnormal for a system to function without its own IPA network and without its own service offering around that IPA network, and all the benefits that come with enforcing that IPA network and that IPA membership? So the systems have expanded their service offering, compensating for weaker HOPD rates. They can compensate with stronger IPA rates.

I do think these systems will be forced to over time, reexamine themselves, redefine the offering, and almost polish away the noise. I think the HOPD rates were partially noise. And I do think once you’re left with a more level playing field. You’ll find that health systems increasingly point everyone’s eyes towards research, academics, true inpatient coordination, referral networks that are strong, community outreach that’s strong, history, legacy, a deep understanding of multi-specialty, which takes decades to really develop.

And the diagnostic specialties where there isn’t procedural income, but are essential to everybody, to all proceduralists and all hospitals. There are this very core group of physicians who are diagnostic in nature, that drive patients and truly drive academics and research.

Interestingly, in a health system, the diagnostic physicians, the ologists, are often better paid than they are in a private practice arena. I don’t know how long that’s going to last, but that is true today. And I think the private practice consolidation has so far been around areas with proceduralists and with primary care doctors who can really activate incentive-based comp and value-based care. The doctors that are sort of in the middle, that are neither. Endocrinologists, rheumatologists, who have not yet figured out where their place in the system is going to be.

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