Burdened with sunk investments, hospitals about to hit the wall

Physician Owned Hospitals | Truth in Health CareWe are two-thirds of the way through an excellent three-part Forbes series by Dr. Robert Pearl on what’s wrong with U.S. health care. The latest installment argues that hospital behavior has escalated health care costs and hospital administrators are more likely to aggravate than fix the problem.

Pearl is well-known in health care circles as the author, earlier this year, of Mistreated: Why We Think We’re Getting Good Health Care—And Why We’re Usually Wrong, and former CEO of The Permanente Medical Group.

Bigger hospitals for fewer inpatients?

Broadly speaking, Pearl believes that a focus on consolidation, expanded facilities and redundant medical equipment purchases at the expense of simpler solutions like emphasizing prevention and correcting common medical errors is responsible for the out-of-control costs in our system. Hospitals, he says, are the biggest purveyors of these trends and now, according to the Harvard Business Review, some of the biggest hospitals in the business are losing money.

Why? Because of a mismatch between their strategy and market demand, as well as a lack of operational discipline. The examples of both are numerous. As inpatient volumes decline, hospitals have built bigger and fancier facilities. As evidence pours in that consolidation causes rising prices, hospitals continue merging with one another. You name a health care problem, and you will find that large, urban hospital systems are exacerbating them.

How best to address a hospital’s many challenges

This is not to minimize the challenges facing hospitals today: flat Medicare reimbursements, escalating numbers of lower-pay Medicaid patients, competition from free-standing outpatient surgical and laboratory facilities, rising drug prices, all-consuming and expensive transition to electronic records. All exert pressure on a hospital’s revenue stream.

But, in the face of such pressure, shouldn’t a hospital administrator be more cautious about expenditures?  Here’s Dr. Pearl:

Although nearly every hospital talks about becoming leaner and more efficient, few are fulfilling that vision. Given the opportunity to start over, our nation would build fewer hospitals, eliminate the redundancy of high-priced machines, and consolidate operating volume to achieve superior quality and lower costs.


Instead, hospitals are pursuing strategies of market concentration. As part of that approach, they’re purchasing physician practices at record rates, hoping to ensure continued referral volume, regardless of the cost.

With their sunk investments, hospitals are about to hit the wall. But they are positioned poorly to do anything about it. Dr. Pearl believes the solutions will come from outside the traditional health care system. What is he talking about? We’ll have to wait for Part 3 of his Forbes series.

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