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The Single Greatest Hospital Success Indicator

Analysis  |  By Philip Betbeze  
   November 09, 2017

Is your hospital part of a health system? A turnaround and consulting firm's data suggest much of your organization's success can depend on just that one factor.

But it's rapidly becoming less so. Since I wrote this column years ago, the pressures on standalones have only increased.

Hospitals that are part of a system do far better financially than their counterparts.

"Over the past two years, we've noticed that the single greatest indicator of success for hospitals is whether or not they're part of a multi-hospital system," says Scott Phillips, managing director of Healthcare Management Partners, a Nashville-based turnaround and consulting firm that focuses on hospitals that are experiencing financial challenges and is led by experienced former C-level
executives such as Phillips.

"Just that one factor provides a bottom-line advantage of four to nine percentage points [in profitability], which is almost insurmountable."

Means to an End

Not that financial success is the overarching goal of healthcare—especially in nonprofit or government-owned healthcare, which still makes up 78.7% of hospital systems, according to Kaiser Family Foundation. But as I've heard countless CEOs say, "no margin, no mission."

As a standalone hospital, you're distressed almost by definition, Phillips says.

The firm's data, based on Healthcare Cost Report Information System (HCRIS) data from more than 200,000 Medicare Cost Reports filed by hospitals, nursing homes, home health agencies, and other providers since 1994, supports this contention overwhelmingly. Standalone hospitals still represent roughly a third of hospitals and 30% of the beds, but they tend to be small, and are disproportionately government- or health district–owned.

When you look at standalones closely, Phillips says, usually they're not in a position to choose their own market in any way, and single-market nonprofit systems haven't wanted them as acquisitions for those reasons. This dynamic creates an increasing canyon between the so-called "haves" and "have nots."

"For the have-nots, life is getting increasingly difficult," he says. "Will many, or even most of those hospitals continue to operate inpatient beds?"

Maybe they shouldn't. And maybe they should instead switch to providing ambulatory health services.

Many standalones have such an increasing disadvantage, he says, that they, and healthcare costs generally, would be better off if they could convert. But many can't afford the investment to do so in either dollar terms—access to capital—or in political will.

"If they can convert to diagnostic and ambulatory centers, they would be very busy," Phillips says.

To convert into an attractive ambulatory center is a $6 million to $10 million investment, he says, and most of them don't have that money.

Better Management

Phillips says HMP's data shows that every year in the system hospitals, particularly the larger hospitals, management keeps getting better. Hospitals in the top two quartiles keep getting more profitable in spite of the uncertainty around the changes in healthcare's business model from volume to value, he says. They're getting that principally through greater economies of scale but they are extracting more profitability at the expense of their competitors.

One of the bigger differentiators in terms of profitability is in labor efficiency, he says, the biggest element of cost.

"There's a pretty dramatic difference in labor costs between hospitals that are in systems than are not in systems," he says.  

Government-owned hospitals are further challenged in this regard in the form of pension costs.

Declining Populations

Secondly, standalone hospitals are in 90% of the counties in the U.S., many, if not most, of which are experiencing loss of population, he says. People are moving into cities, not into the hinterlands.

"Healthcare, whether you're talking nursing homes or hospitals, is essentially a fixed-cost business," Phillips says. "If your population is declining, your demand for services will decline. So the best you can hope for is an increasing share in a declining market."

That leads to declines in inpatient utilization, and for a few years, there's been a dramatic shift from inpatient to outpatient. Another distinguishing trend is that standalones are well behind the curve in reinvestment, particularly in new clinical technologies and information technology.

Phillips says rural areas could be better served by investing in remaking many hospitals into outpatient centers and taking advantage of telemedicine, where state laws and regulations have not made that impossible or impractical.

"It's insane that state policymakers have not opened that whole market to telemedicine," he says. "It could be a tremendous antidote to many of the problems these hospitals have."

Philip Betbeze is the senior leadership editor at HealthLeaders.

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