Hospital shakeout good for hospitals?

Staggering study from Thomson Reuters revealing frightening realities facing the nation’s hospitals in 2008’s third quarter (via the Los Angeles Times):

  • approximately 50 percent had negative margins
  • the median total margin was zero
  • reimbursement rates shrinking
  • cash on hand hit historic lows

The study indicates that no hospital is doing particularly well; the economic effect spans the spectrum: from rural hospitals to academic medical centers.  Hospitals have long depended upon additional income from investments to sustain operations; a dependency that is proving difficult at the moment.  Improving financial performance through operations is an equally difficult task as Americans cut back on health care services during this recessionary time. From United Press International (via @jenmccabegorman):

Kaiser Family Foundation’s healthcare tracking poll found 53 percent of Americans say their household cut back on healthcare due to cost concerns in the past 12 months.

Twenty-seven percent report putting off healthcare they needed, 21 percent say they have not filled a prescription and 15 percent say they cut pills in half or skipped doses to make a prescription last longer.

Sixteen percent report putting off care for a more serious problem, either postponing a doctor’s visit related to a chronic illness such as diabetes or delaying major or minor surgery.

The reality is that it is a tough time to be in business of any form, even traditionally recession resistant health care.  Hospitals have been diligently working to reduce costs and continue to do so according to Fierce Healthcare, “Given these projected losses, 47 percent of hospitals expect to make staff cuts, and 69 percent plan to cancel or delay equipment purchases, according to a survey by Novation.”

Chris Ellington, chief financial officer of University of North Carolina Hospitals, told Marketplace that a hospital shakeout is probable, “There will be some winners and losers over the next year in health care, for sure.”

A shakeout may be exactly what the hospital industry needs.  It may provided the needed impetus to spur business model innovation in health care delivery.

Clayton Christensen, Jerome Grossman, and Jason Hwang provide the explanation in their (somewhat) recently released book, “The Innovator’s Prescription: A Disruptive Solution for Health Care,” (it’s the health care release in Christensen’s disruptive innovation series) writing that the value proposition of doing everything for everybody has never been a successful business model.  General hospitals currently exist to provide all services; the author’s claim that is not efficient or cost conscious.

Its not that we don’t need hospitals.  “We will always need hospitals.  We will just need fewer of them, as scientific progress continues to move more diseases along the spectrum from intuitive medicine toward precision medicine.”

One of their arguments is that hospitals need to deconstruct their operations into two business models: solution shops and value-adding process activities.  Read Scott Shreeve’s review for a break down on the theory and terminology part one, part two.

Solution shops should be focused on optimizing the delivery of accurate diagnosis and recommend the most effective therapy (think the institute model at Cleveland Clinic, “specialists, equipment, and procedures are knitted together across each of the potentially relevant organ system specialties;” as opposed to dysfunctional silos).

Value-adding process clinics take a patient with a definitive diagnosis and treat their condition “effectively, conveniently, and economically” (think Shouldice in Canada or Cancer Treatment Centers of America; organizations with a distinct focus on specific treatments).

The book explains:

The solution to the cost problem in hospitals, in other words, is not efficiency within that business model.  Rather significant improvement will come only through the creation of fundamentally focused business models that in the end are highly disruptive to the present profit formulas of general hospitals.

Health care people should at least read the book; it’s difficult to do their arguments justice without reproducing the entire chapter (+ there is lots more).  Admittedly there are skeptics; what potential solution doesn’t?  Regardless, the examples of success the authors use hold sway.  Health care has tried controlling costs with little past success.  Trying something completely revolutionary may be exactly what health care delivery needs.

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