Hospital Challenges: Inflation and Competition

This video provides an in-depth exploration of the significant financial and operational challenges confronting hospitals in 2023, drawing insights from a Becker's Hospital Review webinar featuring CEOs and CFOs from major health systems and consultants from VMG Health. The speaker, Dr. Eric Bricker, frames these challenges as crucial for anyone involved in healthcare finance, particularly given that hospitals represent the largest source of healthcare costs. The discussion centers on three primary issues: rampant inflation, aggressive margin skimming by competing outpatient facilities, and persistently low patient volumes post-COVID.

The presentation meticulously details the impact of inflation, noting a substantial 16% rise in overall hospital costs for both supplies and labor between 2020 and 2022. A vivid example highlights the pressure on labor costs, where hospitals were forced to pay traveling nurses upwards of $200 per hour, subsequently necessitating wage increases for their permanent staff to prevent attrition. Following this, the video delves into "margin skimming," a strategic maneuver where competing hospital systems establish Ambulatory Surgery Centers (ASCs) and imaging centers in existing territories. These outpatient facilities target high-margin procedures, such as hip and knee replacements (enabled by recent Medicare rule changes that removed them from the inpatient-only list), thereby diverting profitable services away from traditional hospitals. Specific examples include HCA's strategic shift to a 20:1 outpatient facility-to-hospital ratio and the significant EBITDA margins (41%) achieved by ASC divisions like US Surgical Partners (owned by Tenant).

Finally, the video addresses the lingering issue of low patient volumes, with hospital admissions, ER visits, surgeries, and even outpatient visits remaining below pre-COVID levels. In response to these multifaceted challenges, hospitals are pursuing various strategies. Mergers are a common tactic, exemplified by SCL Hospital System joining Intermountain Health, with the latter's vertically integrated model (including its own health insurance, Select Health) presenting a potentially disruptive and more affordable option for employers in new markets. Other responses include relocating main hospital facilities to better serve patient demographics and a stated desire by hospital CEOs to lower costs by "partnering with physicians," acknowledging their limited direct power over physician behavior and overall cost drivers. The speaker concludes by emphasizing the long-term goal of value-based care, which would ideally see outpatient volumes significantly increase while inpatient admissions and ER visits decline, signaling a more efficient and preventive healthcare system.

Key Takeaways:

• Significant Hospital Cost Inflation: Hospitals experienced a 16% increase in overall costs between 2020 and 2022, driven by both supply chain issues and substantial labor cost hikes, particularly due to the need to pay traveling nurses exorbitant rates. This pressure forces hospitals to raise wages for their permanent staff, further impacting financial margins.
• Strategic Shift to Outpatient Facilities: A major threat to traditional hospital profitability is "margin skimming," where competing systems establish Ambulatory Surgery Centers (ASCs) and imaging centers to capture high-margin procedures. This trend is exacerbated by Medicare rule changes that allow more complex surgeries, like hip and knee replacements, to be performed in ASCs.
• High Profitability of ASCs: Outpatient surgery centers demonstrate significantly higher profitability compared to traditional hospitals. For instance, US Surgical Partners (the ASC division of Tenant) boasts a 41% EBITDA, which is four times the typical 6-11% EBITDA of an overall hospital system, highlighting the financial incentive behind this strategic shift.
• Aggressive Outpatient Expansion: Major healthcare players like HCA are dramatically increasing their outpatient footprint, with HCA moving from a 12:1 to a 20:1 ratio of outpatient facilities to hospitals. Ascension is also planning to double its number of ASCs, indicating a widespread industry move towards decentralized care for profitable services.
• Persistent Low Patient Volume: Hospitals continue to struggle with patient volumes below pre-COVID levels across all categories: inpatient admissions (83%), ER visits (91%), surgeries (89%), and even outpatient visits (86%). This reduced volume directly impacts revenue and financial stability.
• Hospital Responses: Mergers and Vertical Integration: To combat financial pressures and competition, hospitals are engaging in mergers. The acquisition of SCL Healthcare by Intermountain Health is a notable example, with Intermountain's vertically integrated model (selling its own health insurance, Select Health) potentially offering more affordable options and disrupting local healthcare markets.
• Limited CEO Control Over Costs: Hospital CEOs express a feeling of limited power in directly controlling hospital costs, often perceiving themselves as "herding cats" due to the complex interplay of board, community, staff, and especially physician behaviors. They suggest that fundamental cost reduction requires changes in physician practices.
• Physician Behavior as a Key Cost Driver: The video highlights the perspective that significant changes in hospital costs are contingent on altering physician behavior. This implies that initiatives targeting physician engagement and practice patterns are crucial for achieving cost efficiencies within the hospital setting.
• Implications for Value-Based Care: The speaker connects the low inpatient/ER volumes and the desire for increased outpatient visits to the principles of value-based care. A truly effective value-based system would ideally see outpatient volumes significantly exceed pre-COVID levels (e.g., 120-150%), while inpatient and ER visits continue to decline, indicating a shift towards preventive and efficient care.
• Market Intelligence for Life Sciences: The challenges faced by hospitals (inflation, margin skimming, mergers) provide critical market intelligence for pharmaceutical, biotech, and medical device companies. Understanding these pressures can inform commercial strategies, product positioning, and sales force deployment, especially as care shifts to outpatient settings and hospital systems consolidate.

Tools/Resources Mentioned:

• Becker's Hospital Review: A prominent website and resource for healthcare industry news, webinars, and information.
• VMG Health: A hospital consulting firm whose consultants contributed insights to the webinar.

Key Concepts:

• Margin Skimming: The practice of competing healthcare providers opening outpatient facilities (like ASCs or imaging centers) to perform high-margin procedures, thereby diverting profitable services and patients away from traditional hospitals.
• Inpatient Only List: A former Medicare list of surgical procedures that could only be performed in an inpatient hospital setting. Changes to this list have enabled more procedures to be done in outpatient facilities.
• Ambulatory Surgery Centers (ASCs): Outpatient facilities where surgical procedures that do not require an overnight stay are performed. They are often more cost-effective and profitable for certain procedures than traditional hospitals.
• Capitated Premium: A payment model where healthcare providers receive a fixed amount per patient per period, regardless of how many services the patient uses. This incentivizes cost control and preventive care.
• Value-Based Care: A healthcare delivery model where providers are paid based on patient health outcomes, rather than the volume of services provided. It aims to improve quality and reduce costs.

Examples/Case Studies:

• Deaconess Health System (Evansville, Indiana): A regional health system whose CEO provided insights on hospital challenges.
• Intermountain Healthcare (Colorado/Utah): A large, integrated health system that acquired SCL Healthcare and operates its own health insurance plan (Select Health).
• Roper St Francis (Charleston, South Carolina): A hospital system whose CEO discussed labor inflation and strategic relocation efforts.
• SCL Hospital System (Colorado, Kansas, Wyoming): A smaller eight-hospital system that merged with Intermountain Health.
• Hospital Corporation of America (HCA): A major for-profit hospital operator cited for its aggressive shift towards increasing its outpatient facility-to-hospital ratio.
• US Surgical Partners (owned by Tenant): An example of a company shifting its focus from traditional hospitals to highly profitable outpatient surgery centers.
• Ascension: A large Catholic health system mentioned for its plans to significantly increase its number of Ambulatory Surgery Centers.
• CHS and UHS: Two other for-profit healthcare companies forming partnerships to expand their ASC networks.