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“I feel like I am running in circles,” a successful Hospital CEO recently joked.  “As we develop strategies to reshape our organization for the Affordable Care Act, I feel like I am revisiting some places I have been before.”

Actually, if he had substituted the word “cycles” for “circles” he would have been more accurate.

Those working in healthcare services, as I was, in the early 1980s will remember the shift from their addiction to cost-based reimbursement—with its cash flow enhancing PIP (permanent interim payments) and depth of knowledge on how to maximize payments under it—to a prospective payment plan based on Diagnostic Related Groupings (DRGs) that essentially capped payments to hospitals.  It is important to remember that physicians got a pass from the program.  This created new conflicts between hospital executives and doctors.

This change in reimbursement fueled an expansion in outpatient services and an era where virtually anything that included the term “outpatient” was in vogue.  Hospitals which were looking for ways to shift costs, created their own home care agencies, among other things.  Capital allocation frequently focused on outpatient services.

In the 1980s, hospitals also began to acquire or manage smaller regional hospitals in hopes of controlling the flow of patient referrals until malpractice cases originating in those smaller hospitals, and the realization that the cost of maintaining those hospital networks often exceeded any benefit. 

The investor-owned hospital management industry exploded, acquiring, for the most part, smaller community hospitals whose boards saw an opportunity to improve their facilities through access to lower-cost capital and to guarantee the long-term viability of their hospital.

Then, we began to move in a different direction, and a new cycle began.  As commercial reimbursement began to change, and managed care became a part of our reimbursement lexicon, hospital executives started to think in terms of vertical integration—owning or controlling medical practices, delivery of care, and payment systems. 

The number of hospitals that lost money in acquiring physician practices and in trying to master the complexities of being a payer were numerous.  Some lost so much they were forced to merge to survive their disastrous strategies.

In the late 1980s and early 1990s, the industry recycled yet again.  To reduce expenses and erase losses from a decade of diversification, hospital CEOs began shedding assets to focus on core business lines—inpatient and outpatient care.  

Investor-owned hospital systems which, for the most part, avoided some of these mistakes, consolidated and acquired even more hospitals.

The 1990s also saw a return to focusing on traditional care settings.  Some hospitals, facing demand for inpatient beds to care for sicker patients, began to shift capital into new or renovated critical care beds, state-of-the art inpatient rooms and support facilities.  But when an effort to reform healthcare failed, managed care—a market-driven solution to reduce escalating costs—emerged, creating no end of frustrations for hospitals, physicians and other providers.  Over time, consumers joined the outcry and this, too, receded. 

Now, in 2013, we are beginning a new cycle. 

For the older leaders who took their licks in earlier decades, there is a sense that we are repeating history.  Hospitals are again acquiring physicians.  Clinicians are trying to improve quality of care and patient safety while facing pressures to reduce inpatient stays or shift care to new less costly venues.

Meanwhile, insurance companies are looking at the strategic advantages and feasibility of acquiring hospitals.  Hospitals are shedding costs as reimbursement shrinks as well as to create or affiliate with accountable care organizations, the modern-day “at risk” payment structure, build medical home networks through which primary care providers will, theoretically, be able to improve access and control costs, making it today’s version of the managed care “gatekeepers” in the 1990s.

EMS and home care agencies are emerging as important players to eliminate or reduce costly readmissions, unnecessary hospitalizations and care of chronically ill patients. 

As this cycle evolves, there will be other changes and evolutions, some familiar, some revolutionary, but whether it’s a circle or a cycle, it still manages to come around. 

© 2012 John Gregory Self