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15 July, 2016 Posted by John G. Self Posted in Current Affairs, Healthcare
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Big Systems, Big Overhead, Lower Rates of Reimbursement

Posted July 15th, 2016 | Author: John G. Self

In the 1990s, consulting firms charged clients big bucks for the latest fad product:  it was called many things but the most common term was downsizing.

Hospital CEOs, believing the literature, rushed to refocus their organization on their “core business” (read: primarily inpatient care). Under the umbrella of focusing on the core business and a sense that there was a great need for performance improvement, hospitals responded aggressively, hiring consulting firms to be sure they were shutterstock_157537226not left behind.  The consultants, armed with carefully constructed project templates, zeroed in on expenses, particularly a client organization’s  head count and their salary cost.

In the end, the final verdict on this particular strategy was that there was a lot of dumb sizing, a great deal of wrong sizing, but very little right sizing, said a wise old former Texas hospital executive who was heavily involved in cleaning up that mess.

At the time it all seemed like a good idea, something that made perfect sense — cut costs, and improve productivity — focus on core priorities.   A lot of money was spent but very little lasting value was achieved.  It was as if America’s hospitals had gone on a crash diet to shed harmful waste but, after all the dust had settled, they ended up gaining more weight.  They realized they had cut too deeply and ended up hiring more people than they cut loose.

Today the driving force in the market, some old-timers call it the latest healthcare strategic fad, is industry consolidation — mergers, acquisitions and/or strategic affiliations.  Healthcare reform demands scale in order to successfully manage population health risks, the experts argue. 

We have seen this strategy before as well, but this time it is different, proponents argue.

It all makes perfect sense.

Yet some industry and market analysts are already issuing some early warning signals.

As this latest trend unfolds, there is enormous momentum forcing  the consolidation skeptics to pay attention.  The bigger systems are getting bigger and the pressures on solo regional systems and rural and community hospitals to join larger networks is intensifying primarily due to a public relations bubble: if some well-known CEOs are doing it (and news reports are amplifying the trend), then merging must be the right thing to do, according to conventional wisdom. 

If the constant stream of news reports weren’t enough, there is an ongoing drumbeat from consultants making presentations at educational conferences and writing articles extolling the importance of being part of a bigger system in order to survive.  That particular  seven-letter word has a lot of power in executive offices and board rooms.

To make all of this seem even more sensible, there are actually some “experts” who posit that the benefits of consolidation include capitalizing on “synergies”  — leveraging is a popular term being thrown around — to reduce costs and enhance quality. That, too, has great appeal.  Personally, I think this supposed benefit is more razzle dazzle for the federal and state regulators and local stakeholders since the vast majority of mergers never result in lower costs or enhanced quality, according numerous studies. In fact, costs generally increase.

There is leverage in play with mergers but it is all about holding the line against reimbursement reductions from the payers. The bigger you become, the more power you have to tell the insurance companies to rethink their position on rates or risk being dropped from the network, or so the theory goes.

This has the feel of a legitimate business case for growing the size of the network.  But there is an alternative point of view that must be considered.  Overhead. 

As big systems get bigger, so does the overhead. If we were only talking about commercial reimbursement, the overhead issue might be irrelevant in the world of health system consolidation.  But there is a big downside:  the certainty that Medicare will continue to reduce the amount of money they pay healthcare providers.   As healthcare costs continue to rise along with the corresponding explosion in the number of  Medicare beneficiaries joining the program each and every hour of each and every day, there is a massive financial train wreck in our immediate future. 

The Medicare trustees now estimate, based on our current escalating spend rates, that the program will be all but insolvent in 2028, in just 12 short years.  In the world of healthcare, where change is akin to turning around a large aircraft carrier in the narrow confines of the Houston ship channel, this crisis will arrive before we know it. 

What this means is that the Medicare math simply doesn’t work at current reimbursement levels.  There will have to be considerable reductions in what CMS pays to hospitals and other providers unless our highly effective, bi-partisan Congress passes a significant tax increase to cover the cost.  

With the exploding number of Medicare beneficiaries and lower rates of reimbursement, big overhead will not work either.

© 2017 John Gregory Self

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