The Future of Demand for Hospitals

A Strategic Perspective

Part One of ERDMAN’s Two-Part Series on How Planning for Hospitals Will Change in Coming Years

Background

Historically, demand forecasting for hospitals has been relatively predictable, based on the demography in a community, its population growth and historic mortality rates. However, in light of recent dynamics influencing the healthcare industry, this straightforward approach is no longer sufficient. In our view, four factors are reshaping demand for hospital services and prompting leadership to reassess their forecasts:

• Clinical innovation: The scale and scope of hospital services is expanding as clinical advances—technologies, therapies, methods of care—alter the diagnosis and treatment of acute care needs and expand demand for outpatient services.
• Payment models: Private insurers, Medicare, Medicaid and large employers are aggressively negotiating hospital payments based on total costs of care and preferentially contracting with those that provide the lowest cost and best outcomes. This shift from volume to value requires hospitals to deploy services across virtual and physical settings based on efficiency optimization and enhanced clinical outcomes.
• Physician employment: According to Physicians Advocacy Institute, the number of physician practices owned by hospitals/health systems rose 86% between 2012 and 2015.1 As a result, in 2015, 38% of physicians were hospital-employed. This spike in employment adds a new layer to the operational and financial complexity of hospital planning but also enhances opportunities in coordinated care management and population health.
• Competition: Hospitals are increasingly faced with not only local competition but nontraditional or out-of-market competitors. Some employers and insurers are contracting for certain high-cost services with reputable, non-local health systems that offer package deals on pricing and guaranteed safety and quality. Investors are funding micro-hospitals, freestanding outpatient and urgent care centers, and management programs for patient populations that reduce local demand. Furthermore, hospital consolidation has resulted in super-regional health systems that compete across multiple markets as they expand the scale and scope of the services offered.

The Core: Inpatient, Outpatient, and Physician Services

The basic core services offered in America’s 4,900 hospitals and health systems are of three types:

• Acute services that involve a hospital admission.
• Outpatient services provided at diagnostic centers, ambulatory surgery, emergency services, wellness centers, community education facilities, rehabilitation facilities and others.
• Physician services provided by employed and contracted physicians.

The scale and scope of services beyond the core varies widely by organization based on their mission, market characteristics, access to capital and strategic plans. As acute hospitals consolidate, many have added post-acute providers to their portfolios, and approximately 90 also sponsor insurance programs.2 Academic medical centers include specialized facilities to accommodate their clinical research activities and medical education needs. Increasingly, hospitals are leveraging sophisticated digital and virtual health services to expand their organizational reach. And as physicians enter into long-term employment agreements with hospitals, the composition of a hospital’s “medical group” becomes a critical factor in expanding access to their services in physical and virtual settings.

In our view, some hospitals will operate successfully as strong community hospitals and health systems; others will transition to fully integrated systems of health. Demand forecasting for each model is increasingly complicated, and either is an appropriate destination for strategists.

Forecasting Demand for Inpatient Services

For most hospitals, we project admission rates will shrink 25%. However, inpatient acute care will account for 35% of revenues as the population ages and inpatient programs are centralized in high volume locations. The primary factors that must be considered in forecasting inpatient demand are:

• Population Growth: In acute care, overall population growth is a key factor in demand analysis. Population growth varies widely across markets and regions, most notably shifts from rural to urban settings and from the northeast to southeast. The U.S. added more than 2.4 million people from 2015 to 2016, an increase in the estimated total population to 322,762,018.⁴
• Demographic Shifts: The aging of the population, income disparity and ethnicity are primary factors that impact forecasts for inpatient services. In 1950, the population aged 65 and older represented 8.1% of the total U.S. population. That percentage is projected to reach 20.2% by 2050. Aging and population growth are projected to account for 81% of the change in demand between 2010 and
  2020.⁵
• Certificate of Need (CON) Requirements: Currently, 36 states and the District of Columbia control the supply of beds for inpatient care and diagnostic technologies through their CON requirements. There is a push in some states to revisit and even repeal CON laws.⁶
• Clinical Innovation: In most clinical service lines, the setting for care is shifting from inpatient to outpatient settings, from invasive to minimally or non-invasive interventions and in some cases, from management in outpatient settings to in-home and virtual settings. CMS has also revised its inpatient-only list to allow more procedures to be performed in outpatient settings. For example, in 2018, CMS is removing total knee arthroplasty from the inpatient-only list along with five other procedures because surgical techniques have been improved for lower-risk patients.

In addition to these four primary determinants of demand, other factors have been shown to impact utilization:

• Third Party Authorization: Third party payer authorization is a secondary but important factor: insurers, Medicare and Medicaid sponsors monitor standards of care appropriate to inpatient utilization. Given heightened transparency about unnecessary care (e.g. the Choosing Wisely campaign and others), and projected health cost increases, it is likely private insurers will toughen their utilization review (UR) protocols to disallow nonevidence-based admissions where a safe option is available.
• Concentration of Specialists: Per the Dartmouth Atlas, a higher density of specialists is associated with higher utilization of inpatient services.7 Recruiting physicians to non-urban areas remains a challenge; therefore, it is likely specialty concentration in metropolitan areas will drive demand from rural and non-urban settings.

Additionally, new models of patient care are chipping away at how hospitals derive substantial demand for their inpatient acute care services. Some examples:

• Micro-Hospitals: Micro-hospitals, currently operating in 19 states, are small-scale, 24-hour accessible inpatient facilities.8 Most are in underserved, urban markets or in rural communities too small to support a full-service facility. Micro-hospitals are less costly to build than large hospitals, have lower overhead costs and qualify to bill for (hospital-level) higher reimbursement rates, making them attractive to investors.
• Emergent Care Services: Traditionally, the hospital emergency room was responsible for 82% of unscheduled hospital admissions.9 But private investors are now operating independent, freestanding ERs and urgent care clinics (UCCs) geared to patient stabilization and deferral from inpatient care. There are 172 independent for-profit ERs operating today and even more independent UCCs, and both are seeing growth.¹⁰
• Digital Health: The ‘hospital at home’ is a care management model that leverages an organization’s digital capabilities to manage patients in their homes, thus avoiding admission. Used primarily for patients’ post-discharge from a hospital and those with manageable chronic conditions, these modalities reduce inpatient care demand substantially.

And while not readily measurable, in certain services lines, like cancer, some health systems have successfully attracted patients from outside their conventional service area. Outmigration to certain provider organizations is a trend likely to impact demand long-term.

Forecasting Demand for Physician Services

Forecasting demand for physician services is more problematic than forecasts for inpatient and outpatient services for two reasons:

1. Physician practice patterns and in-office capabilities vary widely. Laws restricting private inurement and self-referrals are limiting factors and, in many specialties, demand is accommodated by incorporating mid-level professionals. Much of the demand for physician services is mitigated by utilization of alternative health providers (homeopathy, et al) and the use of clinics operated by mid-level practitioners (retail clinics, birthing centers, et al). Therefore, a forecast of demand for physician services is, at best, a barometer of local utilization rates and patient preferences rather than a definitive calculus based on disease prevalence.

2. Accurately calculating supply and demand for physicians based on industry data is problematic. Forecasts by medical societies and public agencies (AAGME, AAMC, et al) do not consider the impact of mid-level practitioners, technologies that enable virtual visits or distance medicine. And these models discount the potential for individuals to self-diagnose, incentives for physicians to optimize outcomes while reducing costs and alternative therapies offered by nontraditional providers.

For these reasons, we believe demand forecasting for physician requires a deep understanding of a market’s unique population dynamics, regulatory constraints and competitive landscape.

ERDMAN’s conclusion is, at a national level, demand for physicians and mid-level professionals will increase as care management shifts to outpatient, home-based and virtual care settings. Shortages in some specialties, such as primary care, women’s health and others, will be mitigated by expanded use of advanced practice nurses, nurse practitioners (NPs) and physician assistants (PAs). Demand for physician services, therefore, must be factored against the supply of mid-level providers and the scope of practice they’re permitted to offer in each state. Consider:

• ERDMAN projects the supply of primary care NPs to increase by 30%, from 55,400 in 2010 to 72,100 in 2020. The supply of primary care PAs is projected to increase by 58%, from 27,700 to 43,900 over the same period.
• Supposing that NPs and PAs provide the same mix of services in 2020 they provided in 2010, the combined demand for NPs and PAs would increase by 17%. If NPs and PAs are used to provide a greater proportion of primary care services, their projected demand will be higher.
• If NP and PA supply is “effectively integrated,” the shortage of 20,400 physicians in 2020 could be reduced to 6,400 PCPs. If fully utilized, the percentage of primary care services provided by NPs and PAs will grow from 23% in 2010 to 28% in 2020.
• The benefits of using mid-level providers is recognized by states led by both Republicans and Democrats. There has been an increase in legislative actions and regulatory efforts to ease scope-of-practice laws making it easier to access nurse practitioners and physician assistants. And, NP and PA interest groups are stepping-up lobbying efforts so patient demand is met.^{12, 13}