What Hospitals Need to Do to Survive Under the Affordable Care Act

There is no secret that one of the main components of the Accountable Care Act is to reduce the cost of healthcare by reducing avoidable hospital admissions. These avoidable admissions include preventable re-hospitalizations for complications that should be able to be foreseen and mitigated, as well as for admissions for ambulatory sensitive conditions that could be managed as an outpatient. There can be no argument that this objective is getting us where we need to be as a country -- reduced healthcare costs and fewer complications of hospitalization.

The challenge is that hospitals are expensive entities to manage, and they come with tremendously high operating costs and debt structures as they have been keeping up with technology advances and information management infrastructure. These costs require the cash flow from inpatient activity with a healthy revenue margin-- a much healthier margin than the ambulatory care that is sought after under the Affordable Care Act. With an estimated 25 to 30% of admissions being avoidable, you can see the significant impact this initiative will have on the bottom line of hospitals.

What is the outlook for hospitals under this scenario? Hospitals need to consolidate their acute care platforms to what the population health data show is truly needed for the communities they serve. Excess inpatient capacity needs to be re-purposed for primary and ambulatory care. Let’s take a fictitious 300 bed community hospital where the population health data show the need for bed capacity 30% less than current. This facility might take the 100 excess beds off-line and convert that space into physician condominium offices for specialists, with shared back office resources for reception, call center, clinical assistants, billing, medical records, etc. These specialists can lease these condos and maintain independent practices and purchase the shared support services at lower costs than if they had to provide them individually. Since they are specialists who need access to the technology and resources of the inpatient environment, since they are right in the hospital itself, they are efficiently positioned.

This sample hospital could also develop community based facilities for easy access to primary and ambulatory care-- geographically distributed among the community it serves. These facilities could be joint ventures or very close affiliations with physician partners. The need for outright purchase of medical practices can be avoided by offering the support of close alignment with a Physician-Hospital Organization providing support for health insurance contracting, and a Management Service Organization offering shared services support to reduce operating costs as described earlier for the specialists.

All of this requires capital-- and as the margin of revenue opportunity becomes thinner this will be a increasing challenge. Some of this capital can be achieved by improved margins from reducing costs with efficiencies and consolidation, but I don’t believe all of it can be met this way. In the 1950’s, the Hill-Burton Act provided financing for hospitals to develop in-patient infrastructure. I believe Congress will need to provide a similar program to help hospitals finance the restructuring of their debt and the repurposing of their platforms for this new scenario. In the meantime, things will remain very stressful and very interesting.