Why American Healthcare is Screwed

The health of America’s healthcare system is in decline. Costs continue to rise, the availability of care is diminishing, and the quality of care is problematic. The capacity for providing healthcare in America is simply not keeping pace with the aging population and their growing healthcare needs. Healthcare providers need to adapt to the changing business environment to survive. 

Providing Care

Like many businesses, the business of providing healthcare is about controlling the flow of referrals. Telehealth, clinics, urgent care, the emergency room, and networks of primary care physicians are all top-of-the-funnel marketing activities that produce little revenue but are necessary to channel high-margin inpatient and outpatient procedures. Hospital systems and independent hospital networks called Affordable Care Organizations seek to connect the different healthcare nodes, mentioned above, into a cohesive network so that a patient experiences continuity of care between the ER, their primary care physician, and necessary specialists. For Medicare, the expectation is that better communication between providers will drive down healthcare costs while improving outcomes through better access to information and not duplicating efforts. For healthcare providers keeping referrals inside their system is essential for survival. 

If your care requires a hospital stay, you’ll likely end up with half a dozen bills. As the ambulance, ER physician, specialist physician, anesthesiologist, and hospital are all independent entities working under one roof. Due to Stark Laws which prohibit physician self-referral, hospitals aren’t able to compensate physicians for procedures they perform at the hospital. So the hospital has no guarantee that a patient treated in their ER, who gets referred to a specialist for a necessary procedure, will ever return to that facility. Physicians are credentialed at multiple hospitals or Ambulatory Surgery Centers (ASC), an ASC is an outpatient-only procedure center and tends to be an office park building with minimal overhead. For follow-up care, physicians will direct patients based on their insurance coverage and what’s convenient for them.

Because of this dynamic, a hospital operates in a two-market economy. Working diligently to attract patients to enter their ER while also creating physician alignment so they’ll perform procedures at their facility. Hospitals can create physician alignment through joint venture opportunities related to hospital assets like medical equipment leases, accounts receivable lending, etc…, yet the sophistication required to deploy those strategies makes it difficult for small, rural, or independent providers to keep up with larger systems.

Getting Paid

One of the many reasons American healthcare is so expensive is the war being waged between insurance companies (the Payors) and healthcare providers. Getting paid in the healthcare industry, known as revenue cycle management, is just as labor-intensive as providing the care itself.

The Payors believe the way to maximize their margin is by hiring a small army to scrutinize every claim and denying any procedure they deem unnecessary through pre-authorization requirements or after the fact ever-changing claim requirements. Healthcare providers respond in kind. Hiring their own small army to navigate the payor’s convoluted rules to get paid for the healthcare provided. The result is the costs incurred to pay for that war get passed along to the consumer in higher insurance premiums. This dynamic has only gotten worse in recent years as AI-enabled technologies are now being deployed. 

Smaller systems and independent providers who lack the resources to fund these armies have difficulty keeping up. Additionally, because of their smaller patient bases, they have less bargaining power with Payors and end up with worse contracts and lower reimbursement rates for the same procedures. Ultimately, the Payors become victims of their success. Between lower reimbursement rates, larger amounts of denied claims, difficulty competing in the physician talent market, and rising operational costs, small, rural, and independent facilities are being driven out of the market causing significant consolidation by medical providers. 

The Growing Cost of Healthcare

Labor Shortages

Nurses are the backbone of the medical industry and make up the largest proportion of all healthcare workers, outnumbering physicians by 4:1. Yet, there is currently a 1.1M shortage of nurses, and all healthcare openings have climbed to 1.5M, one of the highest of all professions.

Of all occupations, nursing has one of the highest burnout rates, with insufficient staffing as the number one cause. Nursing schools graduate 188K new nurses per year, but 33% leave the profession by their second year due to burnout. At the same time, 22% of all nurses plan to leave direct patient care in the next year due to retirement or burnout. Industry turnover of nurses who enter and then leave the profession ranges from 8.8% to 37%, depending on specialty and geographic location. 

It’s a vicious cycle in this critical profession. Staffing shortages cause employee dissatisfaction, higher turnover, greater desire to leave the profession, increased errors, worse patient satisfaction, higher morbidity, and higher mortality, and, in turn, more staffing shortages.

In 2022, the nurse RaDonda Vaught was convicted of negligent homicide, the first time a medical mistake has resulted in criminal charges. The verdict has sent shockwaves through the industry. If a nurse makes a mistake due to unsafe staffing levels, they could end up in jail. Some nurses have already left the profession due to the decision, which presents a new challenge to struggling hospitals. If staffing levels drop below a certain threshold, the remaining nurses may decide it isn’t worth the liability and leave the facility with no choice but to shut down.

To prevent that from happening, California is the only state to enact an RN-to-Patient ratio staffing requirement at 1:5 and proposals are underway to adopt the same ratios nationwide. 

Source

Hospitals that have failed to manage labor shortages are already feeling this pain. Labor expenses, on average, account for half of a hospital’s budget, and labor costs have increased 21% since 2019. It costs $45-67K to replace a nurse, while relying on temporary travel nurses can cost as much as 3.4x that of a permanent employee. While burnout is the number one reason nurses leave the profession, insufficient pay is the number one reason nurses leave for a different job.

Besides increasing benefits, medical providers can try to relieve staffing shortages through automation. Some of these include billing and scheduling software, electronic health records, and AI analysis of diagnostic scans. Even one robot named RoomieBot can triage patients by taking their temperature, blood oxygen, and medical history. Yet, most tasks performed by doctors and nurses aren’t prone to automation for the foreseeable future.

Additionally, immigration has long been a source of nurses to the US, with 16% of the healthcare workforce being filled by immigrants. Since the pandemic began, demand for international nurses has grown 300-400%, yet immigration is severely limited due to annual green card caps and bureaucratic backlogs. Midway through 2024 and we’ve already hit the cap.

As the baby boomer generation ages, healthcare needs will continue to increase as the working-age population declines, leaving no end in sight to the worker shortage.

Cybersecurity 

The healthcare industry is the number one target for cybersecurity breaches. The average cost of a healthcare provider breach is $11M, about double any other industry due to HIPPA regulations governing healthcare information. Healthcare providers are now spending 6-10% of their IT budgets on Cybersecurity prevention, backups, and incident response protocols. Defending and preventing attacks are critical. During an attack on a healthcare provider, patient volume drops 17-25% while patient mortality increases by a shocking 21%. 

Change Healthcare was breached at the start of this year and is projected to lose $1.6B in costs for the initial ransom, the cost to clean and re-establish systems, lost revenue, fines and penalties, and litigation. In 2023, the hack on St. Margaret’s Hospital caused the facility to shut down permanently. Cybersecurity poses an existential risk to providers, which only adds additional costs to the industry.

The Medical Supply Chain

Group Purchasing Organizations (GPOs) are found in many industries. In the medical industry, these include medical supply chain brokers, who purchase medicines, devices, and medical supplies from producers and deliver them to hospitals. From their inception in 1910 to 1991, GPOs were a means for hospitals to cut expenses by obtaining supplies with volume discounts. In 1991, congress loosened the anti-kickback laws that allowed GPOs to receive rebates from their suppliers while offering rebates to hospital executives. Thus, GPOs primary source of income switched from hospitals to suppliers, and the greatest rewards came from those who paid the highest kickback, rather than from offering the most cost-effective product to the hospital. 

Since then, the industry has consolidated around four major players – Vizient, Premier, HealthTrust, and Intaler, who control 90% of the industry. With industry consolidation of the GPOs came sole-source contracts and consolidation among suppliers and distributors, with McKesson, AmerisourceBergen, and Cardinal Health controlling most of the market.  

By 2002, the Government Accountability Office concluded that GPOs inflate healthcare costs by 30% or more. Hospitals that are able to utilize GPOs that pass through the rebates or opt-out entirely by going directly to suppliers can realize considerable savings.

Closures and Consolidation of Healthcare

Since 2010, 120 rural hospitals have shut down, with 800 more on the verge of closing. This means that 40% of all rural hospitals are at risk of shutting down. 62% percent of those hospitals that are at risk are in states that didn’t expand Medicaid coverage through the Affordable Care Act – Texas, Tennessee, Oklahoma, Georgia, Alabama, and Missouri. 

Furthermore, a hospital cannot discharge patients until they are stable enough to leave the facility. An uninsured patient who is too rich for Medicaid coverage, but too poor for private insurance, falls into the Medicaid coverage gap. The expected collection on such self-pay patients is 1% of gross charges, with the hospital eating the other 99% of the expense. The impact of this inequity results in hospital closures and insufficient care across an entire geography, even for well-insured patients.

Texas leads the nation in rural hospital closures, shutting down 26 hospitals due to declining rural populations and Medicaid cuts. Last April, Pandemic-era Medicaid protection ended which led to two million Texans losing coverage. This loss of coverage, will further contribute to hospital closures going forward. Fewer than half of those that remain open have surgery, specialty, or ICU capabilities. The remaining hospitals rely on stabilizing and transferring patients to larger facilities that are potentially 100s of miles away. To amortize underinsured expenses across a larger population, many hospitals are forced to consolidate into larger systems to simply remain viable.

As of 2022, 68% of all hospitals are part of a larger system, which has increased costs by 11-54% based on geographical market, as less competition and near-perfect bargaining power allow these major systems to drive up reimbursement rates. The leaders in the space, HCA Healthcare, Kaiser Permanente, Ascension, and Tenet Health, have all been known to pursue aggressive M&A activity while pushing out many local providers whenever they move into a market. There are two options in Austin: HCA (branded as Saint Davids) or Ascension. 

What Can Companies Do To Thrive During Disruption

Healthcare is highly regulated with government policy having the most significant effect on the business environment. Yet, there are actions that healthcare providers can take to manage their current situation better and remain viable in the future.

• Voluntarily enforce safe staffing ratios. Medical providers can either predictably pay labor costs upfront or face burnout, turnover, medical errors, liability, and pay more for travel nurses. At this point, the strategy of train and retain is much cheaper and more effective than churn and burn through critical staff.
• Ensure you have sufficient security to keep staff safe and consider protocols that have security personnel accompany medical professionals when delivering difficult news.  
• Reevaluate GPOs relationships. Find a non-profit GPO that will pass through all rebates from supplies or hire a procurement officer who negotiates prices directly with suppliers. This investment can make a significant difference overall.
• Assess your turnover rate. An elevated turnover rate is the number one indicator of not paying employees market-rate salaries. Stay educated on current market compensation rates and implement a compensation strategy to ensure competitive rates are achieved and sustained to minimize costly turnover and understaffing.

Following these suggestions will help ensure healthcare providers are as secure as possible in this critical and demanding industry.