Hospitals’ capital plans stymied by healthcare gridlock

Uncertainty in an industry or field usually breeds panic and paralysis because of the lack of specific information upon which to act.

When that happens, some leaders hunker down and make only the smallest of incremental decisions in hopes that the landscape will become clearer in the not-too-distant future.

In the case of healthcare reform, things are obviously very much up in the air, creating uncertainty for hospitals, who need to plan investments years, or even decades, ahead.

Americans spend more than $3.2 trillion annually on healthcare, an amount that's equal to 17.8 percent of the US economy. Like any business, healthcare systems need to commit budgets for capital spending projects and to plan for such things as hiring additional doctors, nurses and support staff.

Nothing kills business growth more than a foggy outlook. Denver Health has said it will cut $73.7 million from its budgeted projects over the next five years because of the uncertainty surrounding the federal healthcare system. About 70 percent of the hospital's revenue depends on federal funding.

We can expect many similar announcements from across the country in the coming weeks and months as hospital administrators try to figure out something other than a watch-and-wait approach.

It's hard to know for sure what hospital leaders will do in this environment, but I believe they will favor capital projects with a narrow focus on reducing fixed overhead costs. For example:

  • The construction of buildings that must be replaced because existing facilities no longer serve patient needs, projects that are essential to the ongoing viability of the health system.
  • Projects that reduce overhead, either by consolidating services, decreasing facility size to more accurately serve future demand or by changing the relative size of hospital departments to reflect the needs of patients today.
  • Moving a facility to another location to serve a greater number of patients and thereby improve profit margins.

Administrators will also invest in projects that advance the goal of becoming the de facto health director for patients, meeting all their health needs over a lifetime, such as:

Consolidation: Healthcare systems will continue buying up smaller practices to gain a more significant competitive advantage — adding everything from physician practices to laboratory services and diagnostic imaging operations — in order to become the dominant provider of care in a geographic area.

Specialized Centers of Excellence: Systems will continue investing in tertiary and quaternary facilities — specialized, advanced diagnosis, treatment and surgical facilities for everything from heart surgery to renal care — because demand for these highly profitable services remains exceptionally high.

Cost reduction: Health systems will invest in programs that shift more procedures to outpatient facilities and toward more preventative programs that reduce overall use of services.

In the end, a growing number of healthcare systems may find that the best way to gain greater economic confidence is by merging with a health insurance company — a trend being led by entities such as Kaiser Permanente — or forming their own insurance companies to become the health manager for patients in a community. Under that model, capital decisions become much easier to make — as patient numbers rise or fall, spending is adjusted accordingly.

The big unknown is just what healthcare reform will ultimately look like. The first cut by the Republicans was said to raise insurance premiums by 15 to 20 percent in 2018 and 2019 while leaving 24 million Americans without insurance coverage. A change like that would have a chilling impact on hospitals, leaving them at risk of $1.1 trillion of extra uncompensated costs over 10 years, according to the Urban Institute..

No one knows for sure what the second cut at healthcare reform will look like or when it will come, but inspired leadership will search for ways to best position their institutions even without a clear sense of the field ahead.

(Tony Colarossi leads Plante Moran's acute healthcare consulting services.)

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