The Challenge of Financially Distressed Hospitals in New York
Financially Distressed Hospitals Series #1
By Paul Francis with Sally Dreslin and Adrienne Anderson
This Substack post includes the Table of Contents and the Introduction; the complete Policy Brief (PDF), is available on our website here in the “Full Content Library” section.
Table of Contents
Introduction
A Note on Data
Part I: Background
The Decline of Hospital Profitability
The Growth and Changing Nature of State Operating Subsidies
Different Categories of Financially Distressed Hospitals
Severely Financially Distressed Hospitals
What Constitutes a “State Operating Subsidy?”
Part II: Diagnosis
Disruptive Innovation and Hospital Business Models
Technological Advances Have Led to Declining Hospital Admissions
Loss of Market Share to Larger Health Systems
Higher Labor Costs Driven by Workforce Shortages and Regulatory Requirements
Long-standing Structural Inefficiencies of Financially Distressed Hospitals
Lack of Economies of Scale
Aging Physical Plant and Inefficient Infrastructure
Lack of Market Power with Payers
Limited Management and Governance Capacity
The Impact of Negative Operating Leverage
The Question of Rate Adequacy
Medicaid Rate Reimbursement Methodology Disadvantages Financially Distressed Hospitals
Inability to Fully Implement the State’s Financially Distressed Hospital Strategy
Communities Want Full-Service Hospitals Even When the Economics Do Not Support Them
Part III: Prescription
The Emergence of a New Hospital Prototype
Overcoming Resistance to Change
Investing in Technology
Revenue Cycle Management
Compliance and Audit Management
Appointment Management and Adherence
Improved Imaging
Remote Patient Monitoring
Hospital at Home
Specific Recommendations
Conclusion
Introduction
Perhaps the dominant economic theme of the 21st century has been the disruption of entire industries by technological innovation and related changes in producer and consumer behavior. For example, e-commerce platforms like Amazon have transformed retail, reducing foot traffic in brick-and-mortar stores and leading to the closure of thousands of shopping malls. The rise of streaming platforms such as Netflix disrupted traditional television networks, cable television, and movie theaters. Ride-sharing platforms such as Uber and Lyft have upended traditional taxi services, while electric vehicles are disrupting the traditional auto industry.
Technology and medical progress are similarly disrupting the hospital industry, enabling more procedures to be performed outside of the hospital, leading to profound changes in providers’ business models and healthcare consumers’ preferences. These changes have led to a long-term decline in inpatient hospital admissions and a dramatic shift in market share to outpatient settings such as ambulatory surgery centers and specialty centers, most of which are not owned by hospitals. Because of their business model, physician-owned outpatient specialty practices can deliver services at a lower cost than their hospital competitors while better serving the economic interests of physician providers and patients’ desire for convenience. These trends that shifted care away from hospital-based care settings accelerated sharply during the COVID-19 pandemic and continue unabated.
Although the hospital industry is being disrupted as surely as the industries described above, it is more problematic for society and government to allow market forces to entirely reshape the hospital sector than it is to watch shopping malls close, for example. This is the case both because of the vital role hospitals play from a clinical and community health perspective and because of the economic impact and sense of identity that hospitals represent to their local communities. Hospitals are often the largest employer and the most important institution in their communities, and as such, they command a disproportionate share of attention from stakeholders, elected officials, and policymakers.
The word “hospitals” in the context that is used in policy discussions is something of a misnomer in 2023. Even many standalone hospitals own some outpatient facilities and a large and growing number of hospitals organized into “health systems,” in some of which outpatient revenue is almost as large as inpatient revenue. Nevertheless, the inpatient hospital is still the hub of the wheel for even the largest health systems and are by far the largest part of the operations of financially distressed hospitals.
The primary policy response of the State over the last decade to the growing number of financially distressed hospitals in New York was, first, the introduction, and then the steady expansion, of financial operating subsidies sufficient to enable financially distressed hospitals to continue operations. The State intended for these subsidies to serve as a bridge to a restructuring or “transformation” that would improve the financial sustainability of the hospitals receiving them. Unfortunately, the actual experience has not lived up to that vision.
At best, these operating subsidies have been cushioning the transition to meaningful restructuring by giving financially distressed hospitals time to achieve incremental progress – albeit more slowly than was envisioned before the pandemic – toward a restructured system that advances the related goals of access, equity, quality, and financial sustainability. At worst, these subsidies have proven to be just enough to keep the doors open, but not enough to enable substantial progress towards a transformation that maintains access to the quality services communities need but at a more financially sustainable cost in terms of State operating support. In the latter cases, operating subsidies have simply preserved an unsustainable status quo without serving as a bridge to a financially sustainable future.
State operating support for financially distressed hospitals is not a screaming financial crisis: the State share of hospital operating subsidies is barely more than 10% of what the State spends on home care and personal care in the Medicaid program. But after years of thinking hard about this problem, it is clear to me that the existing business model of most safety net hospitals and community hospitals that comprise the universe of financially distressed hospitals will likely continue to deteriorate in the years ahead. As the saying goes, something that is unsustainable ultimately cannot be sustained. Sooner or later, the State's approach to managing the issue of financially distressed hospitals needs to change.
The Policy Brief is longer than usual, but barely scratches the surface of this complicated issue. We think it’s important to understand the background of the increasing numbers of financially distressed hospitals in New York and the growing depth of their operating deficits. We then attempt a diagnosis of a number of the underlying causes of this financial distress. The paper concludes with what I would call working hypotheses for a policy prescription the State should pursue.
I would be the first to say that the prescription to address this problem is not obvious. It is difficult to reconcile the sometimes-competing goals of access, equity, quality, and financial sustainability. Considerably more work is necessary to convert the vision of the prescription section of this paper into an actionable plan. Nevertheless, the recommendations of this paper suggest some important options the State should consider to meet the challenges of financially distressed hospitals.
Governor Hochul recently announced a New York State Commission on the Future of Health Care with a mandate to develop recommendations for the healthcare delivery system in New York over a 5-10 year time horizon. The Commission can make an important contribution by thinking about the long-term role of hospitals in the healthcare delivery system and suggesting ways to facilitate a lasting transition. Improving the future of the healthcare delivery system in New York goes well beyond hospitals, of course, including strengthening public health and the whole continuum of clinical care from primary care to long-term care. But it’s hard to see that effort being successful without significant reforms affecting hospitals. This paper concludes with ten recommendations that would, if adopted, begin to address the structural disadvantages of financially distressed hospitals and generate the substantial operating and capital resources that likely will be needed to make viable a long-term vision suggested by the Commission.
To read the rest of the Brief, the PDF is available on our website here in the “Full Content Library” section.