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How Hospitals Are Reinventing Themselves

 |  By Philip Betbeze  
   June 06, 2014

Inpatient care is still a bedrock of almost all health systems, but its role in the care continuum is changing dramatically.

This article appears in the May 2014 issue of HealthLeaders magazine.

Trying to envision the hospital of the future in the context of the changing healthcare landscape is a bit like trying to envision the future of the internal combustion engine in the automobile industry: They won't go away, but they'll be a smaller and smaller piece of the whole as time goes on.

The successful healthcare entity of the future might include one inpatient hospital or several, but that modality of care—the most expensive—is also likely to decline in importance to the whole as the dust settles from the vast array of changes healthcare reform brings with it.

In many respects, the movement away from the inpatient setting for many organizations is long underway. Many describe this shift almost as an investment diversification strategy: You don't want the majority of the income for your organization coming from a declining business line.


The Hospital of the Future is Not a Hospital


But what was once a diversification strategy has morphed into much more. As health systems seek to influence all sites of care for populations of patients, developing and integrating lower-cost sites of care is perhaps the most critical piece of creating a financially successful health system for the world of 10 years from now and beyond.

But what does this mean for the future of inpatient care? Many organizations are expanding quickly into the outpatient arena, managing and coordinating care among a variety of settings, and even considering developing a completely vertically integrated organization that includes a health plan. Others are anticipating that, with drastic changes in reimbursement, they may be better off actually cutting services to focus on those they provide most efficiently.

Of course, there's no universal template that will create the appropriate mix of services, access locations, and clinical modalities for all systems any more than there ever was. But positioning the organization for survival—let alone growth—is critical, and determining the proper place for inpatient investment is vital.

Strategic positioning

Most experts and senior leaders seem to agree that the inpatient setting will decline and outpatient care modalities, which are cheaper and more convenient for patients generally, will ascend. In order to provide healthcare sustainably well into the future, that has to happen, but it doesn't mean that transition will be easy on healthcare organizations.

"It's fair to say that in any large urban market, you're going to see significant shifts in bed days per thousand over the next five to 10 years," says Keith Alexander, CEO at 426-licensed-bed Memorial Hermann Memorial City Medical Center, one of 12 hospitals in the Houston-based Memorial Hermann system.

In fact, Alexander possesses data that projects the decline. Bed days per capita are already falling, even in a market—greater Houston—that adds the equivalent of the city of Detroit (700,000) to its population every 10 years. Over the past five years, the number of admissions per thousand in Houston has dropped to "well below 100 per thousand," Alexander says. "Our projections have that going down to low 80s over the next 10 years. That's a function of shifting more and more toward outpatient, and from CMS moving inpatients more to observation status, among other things. It's a phenomenon all over the country."

The recent oil and gas boom, which is driving Houston's population growth, is to some degree masking the declines in admits per thousand, Alexander says. That affords Memorial Hermann an opportunity that can't necessarily be duplicated everywhere—right-sizing its inpatient facilities not necessarily by downsizing them, but by growing its market share.

"Even if the overall total inpatient population is falling, we'd like to grow our market share relative to our peers," he says.

At least at Memorial Hermann, filling inpatient beds, ironically, depends on the success of the outpatient and population health strategy. Three years ago, system CEO Dan Wolterman and Memorial Hermann's board decided to dramatically change the organization's business strategy from a fee-for-service–based structure to one based on a fixed payment, or population health strategy. That kind of work takes time for a $4 billion health system with 20,000 employees in 145 locations in southeast Texas.

Alexander says that the private sector will lead the change and that the federal agencies—the Centers for Medicare & Medicaid Services and the U.S. Department of Health and Human Services—will follow.

"We're seeing that here in Houston as some of the large employers wanted a shift toward more of a fixed payment," says Alexander.

Instead of getting a 10% rate hike from their insurance company each year, such employers are joining ACO structures—a partnership involving health systems, physicians, and insurers or third-party administrators. Critically, such structures feature financial risk-taking from healthcare organizations. Employers reason that by participating in an ACO, they can cap their health insurance costs for the next two to three years.

"That's enormously appealing to a large employer," says Alexander.

John Haupert, president and CEO of 953-licensed-bed Grady Health System, the safety-net health system in Atlanta, says the same thing is going on in his market, but that the ways systems are approaching a changing business model are widely different even in the same market. For example, he mentions WellStar Health System, a Marietta, Ga.–based organization that includes five hospitals and more than 12,000 employees.

"There's a great example of that occurring here, in that WellStar Health is building a whole network of medical malls—multipurpose broad-based clinic-type places," he says. "Those are based on wellness, prevention, and primary care—dealing with the front end. And they're minimizing the investment they're making on the hospital side. These are beautiful, aesthetically pleasing medical malls—all so we can avoid needing that hospital bed. They're doing the best job in the local area here."

But Grady, in large part because it serves a population that consists of a larger share of uninsured patients and patients covered by Medicare or Medicaid, is molding the way it delivers care slightly differently. For example, Haupert says inpatient admissions are growing at Grady as people who previously had been uninsured obtain coverage through the health insurance exchanges. That means significant inpatient bed expansion into "shell space," but that requires no new inpatient construction. The bulk of investment, even at Grady, is going into partnerships that expand its presence outside the inpatient setting.

"We're building more primary care medical homes with help from the federally qualified health centers, but it's the same premise [as WellStar's strategy]: The more we can be out in the community, be preventive, and get in front of chronic disease, the better."

Playing the other side

Memorial Hermann's heavy investment in an outpatient-based effort is only a part of its strategic plan to control more of the continuum. It's actually purchased an insurance company, obtained a state license, and hired a former Cigna executive as CEO for that unit.

"We've had to purchase claims processing software and significant information systems," says Alexander, in order to effectively partner with private insurers such as Aetna and Blue Cross Blue Shield of Texas. Those partnerships help all entities better analyze and respond to real-time claims data so that they can more effectively intervene with patients and tailor their care. The ultimate goal being to obtain lower-cost and higher-quality outcomes.

"We can see utilization rates of members because of these systems, so our ACO can more effectively be positioned for fixed payment," he says.

It's growing quickly. The ACO launched in January 2012 with fewer than 40,000 lives. Now, it has more than 300,000, which makes it the fourth largest ACO in the country, Alexander says. Even so, "we're just starting to turn the ship toward fixed payment," he says. "A high majority of patients are still fee-for-service, but we're building and investing substantial sums in our internal infrastructure to manage a per-member, per-month premium."

Alexander says the turn toward fixed payment is slow but inexorable.

"Our measures of success or market share for the past 50 years have always been things like admissions or births or surgeries or ER visits, but our mind-set is shifting now. Over time, our number of covered lives will become our most commonly used measure of market share."

And Memorial Hermann's goals are nothing if not ambitious there. The current market share leader in admissions, at 25%–28% of the Houston market, wants the equivalent of that in covered lives. "Houston is about 6 million people so you can quickly translate that to about 1.5 million covered lives," Alexander says, but ultimately being successful at managing that many people means Memorial Hermann's focus will shift dramatically to keeping those patients out of its own hospitals.

Cutting services?

Among other things, it will mean that Memorial Hermann will likely have to consolidate tertiary services. So, for example, hypothetically speaking, rather than having five or six cardio programs spread among 12 hospitals, it may eventually consolidate to two or three. The same consolidation would apply to other specialist services like neonatal intensive care units, he says.

"Inpatient volumes may shrink, but the notion of consolidating them to a smaller number of centers with high volumes will maintain patient safety," he says. Where Alexander sees extraordinary growth will be in home health, and Memorial Hermann is well-positioned there. The organization is the current market leader in home health, but it controls only 4% of the 750-agency Houston market, which, like the home health industry in general, is very fragmented.

"Home health will be transformed more than anything over the next 10 years; we'll see dramatic M&A and venture capital will flood that space," he says, predicting rapid consolidation.

Home health is poised for growth because the best and often cheapest place to take care of chronic care patients is in the home, with telephonic case management technologies and iPad devices helping coordinate care, for a couple examples.

"The best place to care for people with chronic diseases—such as the obese, diabetic, or kidney patient—is at home," Alexander says.

Haupert agrees that hospitals and health systems will have to think about consolidating or even eliminating money-losing services.

"If the reimbursement is not there, hospitals will limit services to those that happen to be profitable. We had a discussion here in facing some governmental funding cuts that if they happened, we might cut mental health," he says. "It's a big cost and the reimbursement doesn't work. Ultimately, the cuts didn't come, and we were able to maintain a much needed service for the community."

As for care coordination, Grady isn't investing in coordination of care directly, but more often through partnerships.

"We've spent a lot of time building relationships with FQHCs to develop what we're calling a safety-net collaborative for care," he says, adding that Grady's care coordination model is built to cross traditional "silos" to help break them down and ensure that clinical staff understands that the responsibility to the patient's well-being doesn't end when he or she leaves a particular unit, or even when that patient may obtain healthcare outside Grady's system."

That model will manage the patients wherever they are within any modality of care. Grady is moving subspecialists into its outpatient clinics so that it becomes less likely such patients will require acute specialty care in the hospital. It's the beginning of engineering value-based healthcare and managing the health of populations.

Inpatient demand not dead

Palomar Health's president and CEO, Michael Covert, is still questioned about the wisdom of opening an entirely new hospital for the San Diego–based health system's 288-staffed-bed Escondido campus in 2012 despite concerns that inpatient care is on a downtrend.

The system has faced tough questions as the expected patient demand has so far failed to fully materialize, but Covert is convinced it was the right move. Besides, the system was trying to meet California's strict seismic standards for hospitals (compliance deadlines for which have since been extended).

"What we're seeing in the hospital today is continued emphasis on complex care as well as palliative and end-of-life care," Covert says. "That's still the big bulk of dollars spent on healthcare. Our success will hinge on our ability to manage that in the future, so I'm not envisioning less use of the hospital. I would define it as tighter, with lower length of stay, better throughput, and better management of care outside of the hospital."

Another big reason for building a new hospital was that the competing proposal, a renovation of the existing facility, would have meant removing a third of the hospital's staff from service during the renovation period. Also, the decision to build the new $956 million hospital was reached during San Diego County's economic boom years of the early to mid-2000s, when projected population growth was between 6% and 12% compared to the current 1%–2%.

Covert says volume will still grow due to population growth, just not as strongly as projected when the decision to build was made. The system initially experienced losses when the new facility opened in 2012, and some layoffs followed in 2013, but even amid high startup costs and disappointing volume projections, patient volume has grown.

Bond insurer Fitch affirmed Palomar Health's A+ bond rating in December 2013, citing as reasons to maintain the key rating the system's leading market share and management efforts to stabilize the system's finances following high expenses associated with the transition to the new facility. Despite the challenges since its conception, Covert says the new facility gave Palomar a one-shot opportunity to design with evidence-based principles in mind.

"We had been looking at evidence-based-design principles associated with The Pebble Project [a design collaborative of the Center for Health Design that includes healthcare organizations, architects, and other industry partners]. But no one had done this to the size and magnitude in one place. We created that fabled hospital."

The hospital incorporates solutions based on the latest evidence on the health effects of lighting, noise, and sustainability, Covert says, adding that it was done not only as a means to improve care but in anticipation of flexibility for the future.

"We knew this one shot would have to accommodate a lot of the citizens' needs for years to come," he says. "We'll see a lot of consolidation of services, greater connectivity among health systems, and some shrinking of services, yet the demands of communities will still be as great as they've been in the past."

Reprint HLR0514-4


This article appears in the May 2014 issue of HealthLeaders magazine.

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Philip Betbeze is the senior leadership editor at HealthLeaders.

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