Expert Q&A The Road Ahead for U.S. Hospitals

The U.S. hospital sector is experiencing the most pronounced change seen in decades. The Economist Intelligence Unit discussed the main issues facing hospitals with two leading experts: Leemore Dafny of the Kellogg School of Management and Charles ‘Chip’ Kahn III of the Federation of American Hospitals–to provide insight into these challenges facing industry professionals.

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On Industry Challenges What do you see as the biggest challenges facing the US hospital industry today?

Kahn: If you look at the near future, hospitals are facing problems both coming and going. On the revenue side there are likely to be tremendous pressures. A growing proportion of patients will have some kind of public-sector or subsidised coverage that places significant restraints on payment, while private payers will also be exerting substantial pressure to keep prices down.

On inputs, meanwhile, labor and other supply costs are going up faster than inflation. A hospital is a complex institution that has to be ready to provide so many services at any given time that, despite improvements in operating efficiency, it is hard to keep a lid on costs.

Besides these constraints, you have a tremendous imperative from the federal government, certain state governments and the private sector to reform how care is delivered.

The big threat for hospitals is that they might go the way of the dinosaur.

Leemore Dafny

Finally, the use of inpatient services—the historic bread and butter of hospitals—is decreasing and outpatient services increasing, so that even the nature of the competition hospitals face is changing.

Dafny: The big threat for hospitals is that they might go the way of the dinosaur. Admissions are down despite the ageing population. Experts continue to find ways to take care of people outside of the hospital because inpatient care is expensive, uncomfortable for patients, and puts the sickest and most vulnerable at risk of acquiring difficult-to-treat infections.

Despite these trends, in too many markets hospitals are fighting to remain at the top of the value chain. They need to recognise that the heart of the system is the patient, not the hospital or any other healthcare provider. Hospitals continue to face tough competition for patients—not just from other hospitals but from other care settings. The industry will need to reorient itself around patients’ needs.

On Business Model Changes What sort of business model changes are we seeing as a result of today’s challenges?

Dafny: There are various shifts. Hospitals are concerned about being left out of narrow networks, so we are seeing a greater focus on patient satisfaction. One result of this is the effort to provide care in convenient, low-cost settings outside hospitals, that is, to put the patient at the centre of how care is organised. Providing such care in the community could be an important competitive differentiator.

Hospitals are also looking at various ways to benefit financially from optimising care. We are seeing more integration with physicians to ensure referrals. For older patients, some hospital systems have even introduced their own comprehensive insurance plans (so-called Medicare Advantage plans). These provide financial incentives to obtain care within the sponsoring hospital system and its affiliates. The hope is that minimising “leakage” to providers outside the sponsors’ control will result in better—and in the long run cheaper—care. Driving this strategy is also a growing recognition that if your piece of the pie is shrinking (e.g. inpatient services), it is better to get in on the entire pie.

There are different views on what the next reality for hospitals is.

Charles Kahn III

Kahn: Hospitals are responding to the demands of payors and policymakers for greater efficiency through clinical and financial integration of healthcare stakeholders that have traditionally been free to operate in separate silos. The community hospital is a natural centre of gravity to build the systems—through consolidation and other means—needed for that effort to succeed.

Then, there are different views on what the next reality is for hospitals. Coming out of the ACA is the notion that integration is an important theme and that hospitals should therefore be teaming with physicians and the post-acute care sector. There are different forms of this. Some hospital executives are saying, “we have to get on board and join with people to integrate.” Others are purchasing medical practices and ambulatory centres in order to expand the outpatient footprint. Medicare’s bundling of payments around continuity of care will drive this trend further.

These changes are not happening with all systems, though. You need to be careful about making generalisations. All healthcare is local. There is great variability in the structure of the hospital system, the insurance structure, or even the make-up of the medical community in New York or Chicago compared with, say, Houston or Denver.

On Innovation In the first half of 2015, there were 46 hospital M&A deals in the US, worth over $2.5 billion.* Will the widespread consolidation under way in the hospital sector drive or hinder innovation?

Kahn: It is partly driven by the need for change and allows it to take place. A lot is being tried, but the risk factors associated with those initiatives increase the possibility of problems down the line for many hospitals. Consolidation makes you part of a bigger body that can take more risks in order to do all the things being demanded of you.

Dafny: I think we can expect more consolidation, partly because it is the easy way out. If you want to optimise care, it is easier to think about a command-and-control approach than having to negotiate with component organisations you will otherwise rely upon. But while command and control sounds easy, the intended result may not pan out. If you own everything, you don’t have to compete to serve the patient. Owning a big enough share of the market enables you to be lazy and not have to engage in tough trade-offs, like saying to a physician, “you have to go take care of patients in the suburbs twice a week.”

On Facing Challenges The healthcare sector has a reputation of being slow to innovate. How prepared are hospitals to meet the challenges they currently face?

Dafny: In the past, there has not been a lack of life-prolonging innovation, but of cost-saving innovation. Until we really focus on containing costs, hospitals will not generate that innovation because the system doesn’t reward it. Something needs to create an imperative to change and improve. I do think that is now starting to happen. As we see more consumers in the driver’s seat, in terms of making more choices – both about procedures and health plans – we will see them and their budget constraints taking over. That will create the market imperative that has been too weak to encourage true value maximization in the past.

Kahn: I think that the hospital sector, and its leadership, are different than in previous years. They are very open to trying new things and changing, partly because trends are forcing them to do that. The inertia is gone. A lot is changing, because standing still can’t maintain the enterprise: hospitals that don’t adjust may not be here 10 years from now.

This article was written by The Economist Intelligence Unit and sponsored by Prudential.



This article was written by The Economist Intelligence Unit and sponsored by Prudential. For more information call Prudential Retirement® at 800-353-2847 or visit

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