It’s time to disrupt the existing hospital business model

Hospital sign in San Diego
Editor's note:

This article originally appeared on Real Clear Markets on June 20, 2017.

Business models often change quite dramatically over time in the American economy. Think of booksellers; Amazon changed the concept of a bookseller and its book retailing vision led to the radical diversification of its product line.

Some business models are more resistant to change, with firms concentrating on specialization rather than engaging in organizational innovation and diversification. Take the example of hospitals. Within our health system, hospitals carry out a “repair shop” function, and, despite new technologies and advancing professional skills, that function and business model has changed little for over a century.

True, there has been some alteration at the margin. Walk-in clinics and many physician offices now provide some services that used to require a trip to the hospital emergency room or a hospital admission; but that has not done much so to reshape the basic concept of a hospital. It is also true that hospital administrators have become much more businesslike in managing cost and improving quality. But hospitals have altered little in an institutional or functional sense.

Things could change, however. One school of thought sees hospitals radically improving efficiency by becoming highly specialized “focused factories.” Like the placekicker on a football team, the argument goes, hospitals will reduce the range of services they provide and concentrate on providing a small number of services as efficiently as possible, with patients going to different hospitals for different procedures. According to this view, hospitals should cease thinking of themselves as a one-stop shop offering a wide range of services, thus going in the opposite direction of Amazon.

However, another school of thought would encourage hospitals to evolve in a different direction. According to this view, hospitals would become far more involved as “hubs” in communities, orchestrating a wide range of non-medical social services—even such things as housing—that contribute in some way to health.

Hospitals should be “hubs” that emphasize social services over medical repair

There is a good reason to advance this second model and turn hospitals into hubs that provide a range of social services. In America, we have overmedicalized health; we assemble impressive—and very expensive—medical technology to fix people when they are sick or injured. However, we spend proportionately far less than other countries for social services that address so-called determinants of health that contribute to better health and reduce the need for medical care.

We spend proportionately far less than other countries for social services that address so-called determinants of health that contribute to better health and reduce the need for medical care.

If one combines medical spending and social service spending for the advanced industrialized countries, as a proportion of GDP, the United States ranks just a little above the average. But looking at medical care as a percentage of that combination, the US is the outlier. We spend about 64 percent of the combination on medical care, while the average for those countries is 37 percent—and yet our health outcomes for many conditions are often much worse. Countries with more balanced social service and medical spending generally have better health outcomes, and we see a similar pattern among US states. So we would likely see a significant improvement in health if we spent less on hospital care and more on social services to address such things as poor nutrition, stress in low-income households, and unsafe conditions in elderly housing that increase the probability of falls.

Barriers to disruption

Switching funds from medical care to social services and housing, however, is not exactly a welcome idea to the typical chief financial officer of a hospital. It is true that many hospital administrators recognize that the health of their patients would improve if there were more integration of hospital-provided services with social services, such as making sure discharged patients received support services in their community. Most administrators also agree that offering hospital staff to train individuals and community institutions in prevention techniques would improve community health. However, in the manner of “no good deed goes unpunished,” administrators point out that they have no financial incentive to spend hospital money to reduce the need for hospital services and hence reduce revenue. Indeed, their financial incentive is NOT to reduce the demand for hospital care. This is often referred to as a “wrong pockets” problem; a situation in which we would have better outcomes if one institution or sector invested money, but because the primary benefit accrues to another institution or sector there is no incentive to make that investment.

Some hospital systems with a broader social mission—such as some catholic hospitals—do develop partnerships with low-income housing groups and with social service organizations. But this is largely a philanthropic activity. To solve the wrong pockets problem, however, it has to be in the business interest of hospitals to diversify well beyond providing medical services.

How to get hospitals on board with reinvention

Getting such diversification to work financially requires encouragement in the form of both sticks and carrots. For a number of years, hospitals serving Medicare patients have faced a financial stick in the form of readmission penalties. If a hospital treats and discharges a Medicare patient with certain conditions, and the patient is readmitted to any hospital within 30 days with the same diagnosis, the first hospital is essentially fined by Medicare. That has caused many hospitals to explore a variety of ways to arrange community services and even housing to make it less likely the patient will return to hospital.

It is important, however, to look at positive steps to make it economically rational for hospitals to do less repairing and instead provide more non-medical services themselves, or partner with other institutions to improve health. That requires such things as changing the payment rules for Medicare and Medicaid to allow hospitals to be reimbursed for delivering or organizing a wide range of non-medical services that have been demonstrated to improve health, including supportive housing. Private health insurance plans also need to explore ways to reimburse non-medical services that improve health, and reduce medical costs, rather than just reimbursing medical services. If we take serious steps to pay for improved health in this way, rather than paying only for repairing people, we would begin to transform the business model of the American hospital.