Hospital of the Future

Systems of Health: A Strategic Perspective

Hospitals are the centerpiece of health services in every community. However, the future for most hospitals is uncertain. Declining demand for inpatient care is countered by explosive demand for services in outpatient and in-home settings. As hospitals consider their market conditions, competition, resources, and appetite for risk, evolution into one of three destinations is likely:

1. Medical Center
2. Integrated Delivery System
3. Integrated System of Health

Evaluating each systematically with an objective view of the future is necessary to a hospital’s long-term viability.

Trends and Assumptions That Impact Hospitals

In the U.S., demand for healthcare services is exploding as the population ages, but operating margins in hospitals are under pressure as the coronavirus and operating costs take their toll. Five trends have prompted hospitals to reassess their long-term strategies:

1. Declining demand for inpatient services: The core business for most hospitals is inpatient care. Yet, demand for inpatient care has declined 10 percent (from 38.2 million to 35.8 million patient days) over the past decade as clinical innovations expand outpatient and home-based service delivery. Those needing inpatient care today are older, sicker, and more expensive to treat.
2. Increased costs for drugs, supplies, technology, facilities and labor, as well as indirect costs for administration and compliance: Hospital costs are expected to increase 6.8 percent this year, which is the result of inflation in the cost of drugs, technology, facilities, and labor (it was 6.7 percent in 2019). At the same time, reimbursement from Medicare, Medicaid, and private insurers has shrunk, resulting in 2020 operating margins of less than 2 percent, which includes temporary COVID-19 relief funding.
3. Increased enrollment in government insurance programs (Medicare, Medicaid, etc.) that reimburse hospitals at less than their costs: The combined enrollment in Medicare and Medicaid is 127 million (61 million in Medicare and 66.9 million in Medicaid). Both programs are growing, and neither reimburses hospitals at rates that cover their direct and indirect costs. In response, hospitals charge individuals and employers more: per RAND, private payers pay 247 percent of the average Medicare reimbursement rate and up to 400 percent in some markets. All agree this is unsustainable for private payers. There is pressure on hospitals to reduce costs aggressively concurrent with continued government cuts in Medicaid and Medicare reimbursement.
4. Increased consolidation among hospitals to maintain their viability: The horizontal consolidation of hospitals into health systems grew modestly between 2016 and 2018 from 70 percent in 2016 to 72 percent in 2018. Today, 91 percent of hospital beds are in system-affiliated hospitals, which is an increase from 88 percent in 2016. Yet, studies show horizontal consolidation has not resulted in lower hospital costs. The consolidation of hospitals into multihospital systems has changed the competitive landscape for local hospitals, unsettled relationships with local physicians, and prompted aggressive contracting negotiations by insurers.
5. Increased competition from nontraditional providers: The availability of investment capital and attractive market opportunities in healthcare for strategic investors has sparked massive investments by private equity in hospitals, medical practices, and a wide range of delivery programs. Strategic players like United, CVS Aetna, Humana, Walmart, Amazon, and others see the industry as a ‘platform play’ to change how care is delivered and financed. Private equity-backed physician organizations such as ChenMed, Iora, Oak Health, Privia, and others see opportunities to disintermediate physicians from local hospital relationships and capture revenue. Hospitals are at a disadvantage, especially during the pandemic.

Looking forward, eight assumptions about the future must be informed by hard data and immune to unnecessary risks. Hospitals have little margin for error. There is much at stake. With that in mind, hospitals of the future are rethinking their strategies according to the following:

Healthcare will advance despite the pandemic: While vaccines by Pfizer, Moderna, Astra Zeneca, and others will continue being approved and administered, we will continue dealing with the pandemic and its variants for some time.

1. Demand will accelerate for outpatient, office-based, and in-home health services: The aging of the population, the prevalence of chronic disease, and the expanded role of technology-enabled health will sustain long-term volume growth.
2. Federal health policy changes will shift toward access and affordability: Increased insurance coverage for the under-insured and uninsured, increased pressure on drug prices, intensified scrutiny of hospital consolidation, and the declining reimbursement for hospitals and specialists are the likely focus of health policy changes. There will also be a focus on access and affordability in urban, underserved, and minority communities. To further address widespread disparities and public health, pursuing Medicaid expansion is also expected.
3. Competition will intensify: Healthcare is a growth market, which is expected to increase from 18 percent of the GDP today to 21 percent by 2028. Vertically integrated systems will strengthen their relative advantage.
4. Health and wellbeing will be a major emphasis: Consumers are increasingly conscious and responsive to social determinants of their health.
5. Private investors will play a bigger role in financing the capital requirements of the health system: Private investment represents 45 percent of capital in-flow to healthcare. Last year, there were 29 IPOs and 315 private equity deals in health services. For the foreseeable future, private investment in healthcare will grow and its negative impact on local hospital competitiveness will intensify.

Getting Started

Evaluating destinations for hospitals is an ongoing challenge: collecting data, analyzing opportunities and threats, and calculating risks are standard fare. In most organizations, these activities revolve around five key areas:

The Critical Path for Hospitals & Health Systems

Accelerators present in the industry today carry a different weight of influence that is unique to each system and its goals. They must be integrated or mitigated as a system moves through assessment in order to achieve the ideal state or “destination.”