How Much Should We Expect Healthcare to Mimic Other Industries?

One way people point out healthcare's dysfunction is by comparing it to other industries. Analogies about a hospital's pricing scheme compared to that of a restaurant, for example, suggest hospitals are deficient, even out of control. Diners know the price of their cheeseburgers, for instance, but few patients know the price of their echocardiograms.

These analogies hold weight, but only to a point. As maddening as it may be to frame healthcare as an industry unique from all others, there are some dynamics that make this valid. Healthcare is essentially the one service that, when withheld or denied, could potentially result in death. That may be the largest differentiator of any.

Yet despite such inherent idiosyncrasies, healthcare is not exempt from consumers' expectations, which are two-sided. Consumers either want healthcare to behave more like other industries or remain immune from other industrial norms and trends. In many ways, hospitals are being pulled in two different directions.

Like any retail experience, patients want to know the price tag of their treatments before they get a bill in the mail. They also want to eat tasty food and have a satisfactory hospital stay — something they may soon evaluate with star-ratings, just as they would hotels. But there are also norms from other industries that don't hold up in healthcare, such as the ease with which nonprofit hospitals can discuss profits.

Here are five ways healthcare differs from other industries and why, along with commentary from healthcare experts on how each distinction may take shape in the years to come.

"Profitability" is a dirty word in healthcare
There is a considerable amount of sensitivity surrounding business concepts in healthcare. Most physicians resist the idea of calling patients "consumers," where many other businesses pride themselves on mastering customer service. Although billing and collections is a business necessity, hospitals have been reluctant about their practices, as aggressive collections can result in public outcry and regulatory violations. Conversations grow especially contentious when profits come up, particularly those of nonprofit hospitals and health systems.

Nonprofit healthcare has long been centered around altruistic principles, such as charity care and charitable missions. These values are predominant in healthcare, as approximately 60 percent of U.S. hospitals are nonprofit and about 15 percent are for-profit, the remainder being government-owned or public. Due to this composition, there is considerable reluctance around the idea of nonprofit hospitals profiting from patients and tax exemptions. Healthcare is unique in this way, as qualms about discussing company costs, profits and revenue aren't prevalent in many other industries.  

"In general, most service-based industries are based on a solid business model where you are looking for a hefty return for your service," says J.V. Maganti, president and CEO of Guava Group, a management consulting firm in Chicago. "However, in healthcare, the majority of providers are nonprofit and have traditionally been dependent on tax breaks from federal, state and local governments, as well as other charitable contributions and grants."

Sensitivity around profitability isn't likely to change in the years to come, says Mr. Maganti. More cities, counties and states may exert more regulatory scrutiny toward nonprofit hospitals and even implement additional rules for tax-exemption in the face of growing federal deficits, shrinking tax revenues and shaky economic conditions.  

Such has been the case for healthcare giant University of Pittsburgh Medical Center. Earlier this year, the city of Pittsburgh and Mayor Luke Ravenstahl sued UPMC, claiming the system does not meet the conditions of a purely public charity and contesting the system's exemption from city payroll taxes.

It may be an antiquated mindset for the public to chastise nonprofit hospitals for their profitability, as this could hurt their financial sustainability in the long-run and affect access to and quality of care. This is especially true in a time when hospitals are having a harder time staying in the black — Moody's recently issued another negative annual outlook for nonprofit hospitals in 2013, just as it has each year since 2008.

Mr. Maganti says "profitability" needs to be integrated into healthcare's vocabulary — but without the negative stigma it carries today. "Hospitals might have hefty goals and aspirations to serve the community at large, but if they don't make enough profits, they cannot replace obsolete and aging infrastructure or equipment or provide new services," he says. "In healthcare we have this 'no margin, no mission' mantra, and I think it is much more true now than before."

In healthcare, pricing transparency is no easy task
A sandwich at a restaurant with three Michelin stars may cost $16, whereas a sandwich at the nearest fast food eatery would cost $4, but consumers are able to make sense of this price difference. They can look at the names of the places on a website — a fine-dining establishment and a casual chain restaurant — and expect some discrepancy in pricing. The $16 sandwich is justified for the refined dining experience that goes with it, along with the high-quality ingredients and remarkable culinary expertise from the kitchen.

Although nearly all restaurants post menu prices, few hospitals are expected to do the same. In healthcare, prices do not necessary reflect the quality of the product or service, either. One hospital may have a higher price to treat a case of lung disease, but that does not necessarily reflect a more satisfactory hospital stay, higher-quality care or more proficient medical expertise.

This is why, despite a recent influx of information on hospital prices, critics have questioned whether journalists' exposés, CMS' data dumps, lawmakers' mandates and other resources on hospital costs are really helpful. Do these numbers add value to the public's understanding of healthcare costs? An especially pronounced fear is that chargemaster figures will confuse consumers, who may mistakenly believe hospitals are collecting the full price tag amount without factoring in payer reimbursement, charity care and uncompensated care.  

In February, investigative journalist Steven Brill wrote a 36-page piece for TIME that ultimately asked why hospital bills are so high. The article criticized hospitals' chargemasters, saying prices were not consistent with other hospitals and did not appear to be based on anything objective, such as cost.

In May, for the first time ever, CMS released hospital chargemaster data to the public for the 100 most common Medicare inpatient diagnostic-related groups. It did the same in June for outpatient DRGs, providing 2011 data on hospital-specific charges for the 30 most common ambulatory payment classifications under Medicare's outpatient prospective payment system.

Lawmakers are on the case for price transparency, too. In June, Arizona Gov. Jan Brewer (R) signed legislation that requires large hospitals to post prices for their 50 most common inpatient and outpatient services. And there are also a few hospitals that aren't waiting for a law to mandate price-sharing. Instead, they are forging ahead and using price transparency as a competitive advantage.

Some healthcare experts say hospitals operate in a context that makes pricing less methodized and more difficult to explain to consumers. There are even discrepancies within the healthcare industry, as pricing algorithms differ among settings. Urgent care centers have smaller overhead costs than hospitals, but consumers may not be cognizant of this when they look at data listing only a facility name and price.

Hospitals face a significant amount of government regulation, and there are also other idiosyncrasies — such as physicians delivering care in a hospital but not necessarily being employed by the organization, or third-party payers covering a portion of costs — that complicate pricing. Hospitals face a challenge in how they will communicate these variables to consumers and explain differences in one hospital price from another.

Within the hospital, financial teams and clinical teams are worlds apart
Healthcare is a business at heart, but finances have not been an integral part of medical training. Rather, just the opposite — there is a considerable amount of tension between finance and medicine. Physicians are not trained to consider how much it costs to take care of a patient. This is an oddity compared to other industries, in which finances and operations are explicitly linked. Providers of goods and services are aware of the prices, or at least the price range, for their product, services or labor.

Physicians take the Hippocratic Oath upon committing to medicine, promising to practice ethically and do no harm. This principle has been relevant for more than 2,500 years, but an emerging group of physicians and academics are voicing support for an addition to the oath: Do no financial harm.

"Finance and clinicians operate mostly in silos," says Mr. Maganti. "Clinicians provide medical care and finance bills for those services and collect from payers." This process worked in the fee-for-service world, but bundled payments, accountable care organizations and other reimbursement models are changing the traditional relationship between healthcare's clinical and financial components. There is less flexibility now. Physicians who provide unlimited care without factoring its cost or reimbursement will ultimately jeopardize the financial success of their organizations.

Many physicians may feel conflicted in this new environment, as they are expected to factor cost of care into clinical decision-making, but the bigger picture is much greater. "Healthcare cannot survive if providers deliver unlimited care irrespective of what it costs, because reimbursement will begin to be fixed," says Mr. Maganti. He says a balance needs to be struck between the best care a physician can provide and reimbursement from payers.

Like mom and pop shops, independent hospitals are becoming rarities
The days of independent bookstores seem to be numbered, and the same could be said for independent community hospitals. Consolidation has a different feel to it for hospitals, due to the personal nature of physician-patient relationships and hospitals' prominence in their communities as employers, and in the case of nonprofits, charitable organizations. Mergers between oil companies, like that of Exxon-Mobil, or radio providers, such as Sirius/XM, are inherently different from those between hospitals.

To many consumers, oil and radio waves weren't necessarily localized to begin with. Patients may be more concerned when a hospital that has been in the community for 50-plus years yields its independence and merges under a larger chain, in which decision-makers hundreds of miles away begin to influence hospital operations. But for some independent community hospitals, there is no other choice.

Data by Irving Levin & Associates shows that 2012 brought 92 hospital merger or acquisition deals, and more major blockbusters are slated to close by the end of 2013. A few years ago, the typical hospital transaction may have involved a larger system acquiring a single hospital or smaller chains of community hospitals. There is a new brand of hospital merger today, however, as large, established health systems consolidate to form new statewide or regional networks. Many community hospitals are poised to join these networks for their economies of scale and bargaining power with payers.

But how big is too big? That's the million-dollar question. There are regulatory and antitrust mechanisms in place to ensure these mega-systems do not stifle competition or fix prices, but there are conflicting reports on whether these mergers are helping or harming the healthcare market. A report from the Robert Wood Johnson Foundation found hospital mergers in already concentrated markets can dramatically boost prices for consumers in the form of higher premiums and lower benefits. Costs can increase by as much as 20 percent.

On the other hand, a report from the Center for Healthcare Economics and Policy, commissioned by the American Hospital Association, examined mergers and acquisitions from 2007 through 2012 and suggested there is still ample competition. "Of all those [551] hospitals that have been involved in a transaction, all but 20 have occurred in areas where there were more than five independent hospitals," according to the report.

Robert Minkin, senior vice president with The Camden Group and former hospital CEO, says the rapid and tremendous amount of hospital M&A is the key behavior healthcare is starting to mimic from other industries, like manufacturing and airlines. "The whole notion of an independent freestanding hospital is truly becoming a rarity," he says.

"There are still 5,200 acute-care hospitals in the country, but the majority are in organized systems," says Mr. Minkin. "We're starting to see those systems execute direct and much more aggressive strategies to expand their size and scale even more so. Hospitals are fearful their revenues will continue to decline and costs will continue to rise."

Facing these circumstances, access to care may be overridden by economics. "There are many communities that operate two hospitals that can't support both of them," says Mr. Minkin. "They will have to combine and close one, just so the other can survive at all. When you analyze the economics of how hospitals operate, we've gone past the economics of hospitals being everything to everybody all the time."

300-thread count sheets and 20-page food menus
Hospitals are increasingly mimicking hotels in an effort to boost patient satisfaction scores, which have growing financial implications. Some hospitals are offering room service and menus as extensive as those found in mainstream restaurants. But unlike hotels and resorts, expectations for a top-notch stay at a hospital may place undue pressure on hospitals to deliver on things they aren't necessarily responsible for and distract hospitals from what they are responsible for: high-quality medicine and personalized care delivery.

Under CMS' final rule for the inpatient prospective payment system for fiscal year 2014, hospitals would have 1.25 percent of their Medicare payments withheld under the VBP program. The resulting $1.1 billion in incentive payments will be doled out to hospitals that have the best total performance scores for quality of care (70 percent of the performance score) and patient satisfaction (30 percent of the performance score).

The financial incentives have spurred many hospitals and health systems to revamp their amenities. At UNC Health Care in Chapel Hill, N.C., for example, patient menus are approximately 20 pages long. Other hospitals are incorporating distinctive perks into patient stays, such as private rooms with scenic views, massages, high-thread count sheets and more plush towels.

Satisfaction scores may have a place in America's restaurants and hotels, but is this metric really telling of a hospital's care? Some studies have suggested no. In February 2012, a study led by researchers at UC Davis Health System found people who are most satisfied with their physicians are more likely to be hospitalized, accumulate more healthcare and drug expenditures and have higher mortality rates than patients who are less satisfied with their care.

There's also a very obvious and simple difference between satisfaction scores in hotels, restaurants and hospitals: One of the three is not associated with leisure. Hotel stays are often planned and booked out of choice, whereas few patients visit a hospital for enjoyment.

Some hospital leaders believe a positive patient experience boils down to hospitals having the right employees. Managers may encourage clinicians and staff to be attuned to patients' key indicators and those events most likely to make or break a patient relationship. These indicators include questions from the patient point-of-view, like: Did staff greet me? Did each point of contact throughout the care experience refer to me by my name? Did they make my stay feel personalized? Was registration properly performed, or did I have to sit and wait? Did staff thank me for choosing their facilities and explain the financial procedures that will occur?

These questions reflect needs more basic than those for luxury amenities, suggesting hospitals can reinforce a positive patient experience without mimicking a Ritz-Carlton.

Healthcare's odd relationship with HIT
Healthcare has been slow to rely on HIT over the last few years, largely due to its cost and the time it takes to install electronic health records and redesign workflows. HIT adoption and use is on the rise by clinicians, but healthcare is still slow to integrate HIT into the broader spectrum of hospital operations and business development. Most hospitals haven't extended their technology to certain functions that are a norm for major utility companies, for instance, such as the ability to pay a bill online. And while banking customers can look up their balance on their mobile devices and tablets, even deposit checks from their smartphones, hospitals are still debating whether to allow patients access to their own EHRs.

In a March 2009 study, researchers from Boston-based Harvard School of Public Health, Massachusetts General Hospital and George Washington University in Washington, D.C., found "no reliable estimate of the prevalence of EHR use among U.S. hospitals," as fewer than 2 percent of hospitals surveyed had an EHR in place. PPACA and CMS' EHR Incentive Programs have driven change since that study. As of April 2013, approximately 80 percent of all eligible hospitals and critical access hospitals in the United States had received an incentive payment for adopting, implementing, upgrading or meaningfully using an EHR. Other recent surveys suggest providers' familiarity with HIT for clinical processes is growing.

In a survey from Accenture, 91 percent of physicians across eight countries reported that they are active users of electronic medical records in their practice or clinic. There were also significant increases in the number of physicians in the United States who use HIT for various clinical tasks compared with last year. These include electronically entering patient notes either during or after consultations, electronically sending order requests to labs and e-prescribing.

Taking a step back from hospitals, the relationship between EMRs and the broader healthcare industry is fascinating in itself. In a dynamic unfamiliar to most other industries, healthcare providers are incentivized by the government to use EMRs due to the cost of the technology and its ability to improve healthcare quality. This schema, when applied to banks and ATMs, just doesn't hold. What if the government had paid bonuses to banks for installing ATMs, which were a competitive advantage?

Forbes has esimated that EMR vendor Epic and its digital records contain medical information for roughly 40 percent of the U.S. population. Paul Levy, former hospital CEO of Beth Israel Deaconess Medical Center in Boston, wrote a blog post about Epic and the ramifications of a vendor garnering such dominance. "As a country, we get nervous when any company in any sector has a market share in the range of 40 percent because we know that companies will use their market dominance to limit consumer options and hold back technological advancement," he wrote.  

Despite physicians' acceptance of EMRs in their workflow and hospitals meeting MU, HIT is still somewhat isolated from the rest of the hospital business. Even with federal incentives, healthcare is leaving a vast portion of its operations untouched by HIT. In short, providers will do what they must for meaningful use payments and no more.

"HIT systems are old and antiquated," says Mr. Maganti. "On one side, healthcare boasts the most advanced technology in diagnostic and procedural equipment. But they also have the most outdated information technology solutions when it comes to finance, human resources and supply chain solutions. Most of the recent adoption of HIT solutions in EMRs is primarily driven by meaningful use incentives, but no [HIT] investments are made in these other areas to mitigate costs," says Mr. Maganti.

There are some significant differences between hospitals' culture and thought processes compared to other sectors. Moving forward, it will be interesting to note how hospitals adjust to trends from other industries or resist them. Patients may expect more clear prices from hospitals, as well as more financial acumen from their physicians. Star-ratings and other patient satisfaction surveys may place more pressure on hospitals to mimic hotels, which could muddle the broader understanding of healthcare quality. Facing shrinking reimbursements and the regulatory burdens of healthcare reform, smaller hospitals may continue to join health systems that span several states, and consolidation's effect on prices is still disputed. And finally, as more hospitals integrate HIT into workflows and clinical tasks, they have yet to systematically use HIT to reduce costs for other hospital operations.

More Articles on Healthcare and Other Industries:

What Can Healthcare Learn From Other Industries? 5 Lessons
Is Bigger Always Better? Exploring the Risks of Health System Mega-Mergers
The Quiet Takeover: Insurers Buying Physicians and Hospitals


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