For hospital providers across the country, the year 2022 was a big mess. A Kaufman Hall report prepared for the American Hospital Association predicts that 55% of hospitals will lose money from operations in 2022. And hospital margins have fallen by 31% from 2019 pre-pandemic levels. A very common question from hospital executives and board members alike is, “What happened? How and why did we fall from financial grace?”
The most obvious answer is that the critical relationship between revenue and expenses is unexpectedly broken. Inpatient revenue is flat, leading to year-over-year increase of net operating revenue of only 3%. Expenses, on the other hand, have increased by 8% in the past year, with labor expenses up, since 2019, by a remarkable 23%.
As usual, statistics tell the story, but they don’t tell the entire story. The hospital industry is, for sure, bedeviled by a revenue-statement problem, but the range of operating and strategic problems within hospitals is much more nuanced.
One particular problem worth focusing on is what I call the “productization” of healthcare.
Historically hospitals offered what was loosely referred to as “healthcare,” which meant a series of diagnostic and treatment services for which there was sufficient patient demand from an associated market area. Those services could be occasionally connected into a “center” concept, with mammograms, breast surgery, and oncology being one example. In other situations, hospital services could be discrete and disconnected, and often developed from a particular physician’s unique expertise. But in no case were these connected or disconnected services referred to as products or operated as products.
Fast forward to now, and pretty much everything in healthcare has been organized into what is commercially known as products. The healthcare product list is long and comprehensive. Some services that are now products include urgent care, mammography, dermatology, ambulatory surgery, imaging centers, Walmart primary care, Walgreens primary care, and CVS primary care. That list is off the top of my head, but I am sure my reading audience can add many others to the “product” list.
Given the unsettled hospital environment, both financially and clinically, it is abundantly clear that hospitals struggle in a “productized” marketplace. Products require careful construction, and they require sophisticated and very close management. Products tend to operate as their own brand or under the aegis of a larger brand. Products tend to have close and individual financial management, because they tend to financially succeed or fail on their own.
All of this is counter-intuitive to many hospitals. Hospitals lean toward managing a patient population, and then selected services are enlisted for the benefit of those patients. Hospitals have “brands,” but their services generally don’t. Management is very sophisticated within the hospital ecosystem, but that management approach is generally operated with the entire enterprise in mind.
And finally, while more and more hospitals have capable cost accounting systems in place, hospital financial management tends to operate as a complex web of cross-subsidies based on profitable and unprofitable services, all operating on top of an ever changing payer mix. Such a financial structure was never designed to compete within a corporate or entrepreneurial product-centered market.
Hospitals are suffering in a “productized” world. As more and more so-called services are segregated into discrete products by larger corporations, by start-ups, and by private equity and venture capital, it seems inevitable that hospitals are losing traditional utilization and the financial rewards of that utilization. The statistics are not yet available to definitively prove this point, but the financial chaos of 2022 certainly suggests that hospitals find themselves at a significant competitive disadvantage in our fast changing “productized” healthcare world