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This chapter is from the book

1.5. The Time Is Now; The Tools Are Known

People have voiced the need for health care reform in the United States for years, but no significant changes have been able to get past the political and organizational hurdles to implementation. However, there is evidence that we are finally in a critical transition phase where inaction is not an option. The economic surpluses that historically masked our inefficiencies are disappearing, and the various binders that hold the entire system together are straining to the point of failure.

1.5.1. The Unraveling

The surpluses masking our inefficiency are no longer affordable.

One advantage of surplus resources that accrue in a rich economy is that they can mask inefficiencies. Excess resources can, in general, cover for inefficient management and organization. For example, a firm with a substantial excess capacity can continue to serve customers well even if it uses that capacity inefficiently. In a rich economy, patients can happily enjoy continuity of care even with inefficient health care processes. However, when surpluses dwindle, those excesses are no longer affordable and must be removed, exposing the inefficiencies in the underlying process.

The United States has emerged from a post-war era in which it was the dominant economy on earth, and it has entered an era in which competition is fierce from multiple continents. The natural surpluses that characterized the United States over the past 50 years are no longer automatic. The retirement of post-war baby boomers will soon place an increasing load on the nation’s health care system, which already consumes too much of the country’s GDP. In short, we can no longer afford to ignore our inefficiencies. Our economic future, and indeed our very lives, are at stake.

Our reliance on values is at risk.

Health care policy debates in the United States tend to oscillate around the proper role of personal responsibility for one’s own fate and the obligation of society to care for those who cannot care for themselves. Sometimes this debate devolves into a “markets” versus “socialism” caricature, which remains unresolved because neither works in pure form. Markets will visit the highest costs on the sickest people, who will therefore die if they are poor. This is socially unacceptable. Yet, universal coverage without individual incentives leads to overuse of expensive resources and produces high levels of avoidable waste. This is unaffordable.

These natural and unresolved tensions have resulted in a complex potpourri of reimbursement structures for hospitals and physicians. To serve patients in this bewildering environment, the industry has relied more than most people realize on its people being guided by principles that transcend the sometimes perverse incentives they face. This is, after all, a profession that deals with life and death, and therefore ethics. Before the government assumed responsibility for health care, charities provided care, or doctors charged based on ability to pay. That is, society expressed its values in organic rather than formally legal ways. This continues today through free clinics, volunteerism, and hospitals incurring (on average in the United States) 6% of their total expenditures providing care for people who cannot pay for it.

Further, the professional code of doctors is one that puts the patient first, and patients put some faith in this code when seeking medical care. Indeed, overt pursuit of profits in the medical arena arouses suspicion and antagonism on the part of patients when choosing physicians, or referring physicians when choosing hospitals. As Arrow (1963) observed, “The social obligation for best practice is part of the commodity the physician sells, even if it is a part that is not subject to thorough inspection by the buyer.”

Not surprisingly, trust plays a more critical role in health care interactions than in other business transactions. We expect our doctors to act in our best interests, more than we expect the sellers of other services to do so. Insurance companies can ask patients to get physical exams to reduce the information asymmetry between themselves and patients, trusting an honest report from the physician. Given the convoluted and often opaque reimbursement jumble that hospitals face from multiple insurers and Medicare/Medicaid, hospital administrators could slavishly maximize profits by exploiting accounting confusions at the expense of patients and society at large. Yet we trust them not to. This system does not work perfectly, but trust and professional conduct that transcend the profit motive are central features of current health care markets. To date, values-based behaviors in medicine have been sufficient to keep the wheels from falling off this wagon.

This values-based glue is now coming under increased stress as economic surpluses disappear. Uninsured patients who cannot pay for their care are still cared for in hospital emergency rooms, but the cost of their care has to come out of a buffer of resources somewhere in the hospital-insurance-customer system. As buffers become unaffordable, the mere presence (or not) of an emergency room can become a matter of fiscal survival for hospitals. A 2011 report by the American Medical Association (Hsia et al. 2011) noted that urban and suburban areas have lost more than a quarter of their ED capacity over the past 20 years. EDs are more likely to close if they provide a lot of uncompensated care, are in for-profit hospitals, or are in competitive markets where margins are thin.

“Safety net” hospitals, which provide care for people who cannot access it anywhere else, are increasingly at risk. The travails of one such hospital, Grady Memorial Hospital in Atlanta, are not unique. Grady almost closed its doors in 2007, and since that time it has continually struggled to balance its social mission with financial realities. Grady remains dependent on outside funding (for example, federal funding for indigent care) that is increasingly at risk (Williams and Schneider 2011).

It is a unique feature of the health care industry that hospitals often do not want a competitor to close. If a hospital providing a significant amount of uncompensated care closes, nonpaying patients will either get no care (and die) or show up in the EDs of other hospitals. Hospitals like Grady have been kept afloat by financial transfusions from the outside because everybody realizes the consequences if they close. But this is more reactive crisis management than proactive rational policy. The reliance in the United States on values and charity will come under increasing stress as financial realities become more pressing.

Further, as doctors’ salaries stagnate, the temptation to shade decisions, consciously or not, toward profit maximization becomes stronger. Nallamothu et al. (2007) studied the rates of various coronary procedures in specialty hospitals relative to general hospitals. Specialty hospitals provide care limited to specific medical conditions or procedures, and two-thirds of Medicare payments to specialty hospitals are related to heart conditions. There are arguments based on both physics and economics that can justify the spinning off of specialty hospitals from general hospitals, based on economies of scale and concepts of a “focused factory” (see Skinner 1974 and Chapter 6 of this book). However, critics claim that specialty hospitals focus primarily on low-risk patients and provide less uncompensated care than general hospitals.

Nallamothu et al. found that the frequency of three key coronary procedures was higher in regions after the opening of a specialty hospital when compared with the opening of new cardiac programs in general hospitals. The authors did not comment on the appropriateness of the procedures, but their findings raise the concern that procedure utilization in specialty hospitals was higher than one might expect based on medical need alone. The authors state in their conclusions that, “Among the potential mechanisms underlying our findings, the most concerning is physician ownership.” Physician ownership allows physicians to collect not just their professional fees, but a share of the facility fee as well, creating a potential conflict of interest between the physician’s financial incentives and a patient’s clinical needs. Estimates of physician ownership of cardiac specialty hospitals range from 21% to 49%, and hospitals are currently exempted from anti-kickback laws that prevent referral of patients to facilities in which physicians have a significant financial stake. Although we cannot say for certain that economics is trumping values in these instances, we can conclude that values will be increasingly stressed as the economic climate becomes more challenging.

A similar concern applies to the rise of ambulatory surgical centers (ASCs) in the United States. An ASC performs surgical procedures that do not require hospitalization (for example cataracts, some knee and ear surgeries, and colonoscopies). Between 2000 and 2007, the number of such facilities increased by nearly 50%. This growth was largely financed by physician-owners, who had a financial stake in 83% of them and complete ownership of 43%. Hollingsworth et al. (2010) found that physician-owners, on average, had higher caseloads and operated on healthier (fewer accompanying health conditions) and better insured (more private and Medicare, less Medicaid) patients. Further, physicians who started as nonowners and became owners during the study period increased their caseloads after ownership. As always in such complex territory, there could be reasons for these results unrelated to financial incentives. But results like these raise concerns that physician-owners may increase caseloads beyond what is clinically necessary and route the lowest risk and most well-insured patients to their own facility, leaving the rest to be treated in a general hospital. This, of course, will increase the financial stress on the general hospital, decreasing its ability to manage their higher risk, lesser insured patients.

It is difficult to overstate the consequences if profit-maximization comes to dominate historical values in medical practice. The rush away from the poor, sick, and uninsured will accelerate, like a game of hot potato in which each party tries desperately to pass the ball. The cracks in the system are already beginning to show and will only get worse as baby boomers age.

As policy makers argue, there is a crisis to be met. Fortunately, with or without coherent leadership at the federal and state levels, we can do more with our current resources within hospitals. As the economic surpluses that have masked high levels of inefficiency disappear, hospitals must begin an evolutionary process that we have seen in other industries. These prior experiences have revealed general principles that can serve as tools with which we can manage this process.

1.5.2. The Tools Are Known

There is a famous scene in the film Apollo 13 in which an engineer dumps a pile of spacecraft parts and materials onto a desk and demands that the team make a CO2 filter out of them. The situation they faced was new, and conditions under which the filter would have to operate were uncertain, but the basic building blocks they had to use were known. Hospitals face an analogous situation, in which the policy structure that society will adopt is uncertain, but there are known tools, the principles of management, available with which to craft a response. These principles and their application to management challenges are what this book is all about. We articulate and apply concepts that will stand the test of time so that hospitals can excel regardless of the policy regime to which they are subjected. We will say more about which tools apply in which environments in Chapter 6, after we lay the building blocks in the context of existing hospitals. Appendix A provides a standalone summary of the management principles that we employ. This can be read as a basic management primer or consulted as a reference for the problem-oriented chapters.

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