Future of the Hospital

A co-founder of a comprehensive outpatient center in Michigan told Crain’s Detroit Business: “[Patients] can come here and get everything they need in an outpatient setting, with the exception of major surgeries.” As of 2008, Americans could also go to one of at least 179 stand-alone emergency departments owned by hospitals or doctors. Growth in the number of freestanding EDs in the US (up 23 percent in 2006) is largely the result of overcrowding in hospital ERs and competition among hospitals in fast-growing suburbs. The centers can handle just about any emergency except trauma and critically ill patients with strokes or heart attacks. The other main difference with hospitals is that they offer greater convenience to patients.

The growth in freestanding EDs is in line with the trends to the out-migration of care from inpatient to outpatient and from hospital outpatient clinic to freestanding outpatient clinic. As a result of these trends and others (notably the trend from complex open surgeries to minimally-to non- invasive procedures or medical interventions), hospital facilities seem destined to become dedicated almost solely to trauma and critical care. If that is so, it would seem logical for hospitals to downsize, yet the US is in the midst of a hospital building boom.

The logical result of hospitals building more central facilities at a time of growing competition from freestanding facilities is a decline in profitability, and that is not the only pressure on profits. Another HealthLeaders analyst adds:

• The growing cost of medical technology, IT infrastructure, and patient safety/quality improvement measures;
• Labor shortages;
• A large and growing population of uninsured (and, we would add, under-insured) patients unable to pay their bills;
• Challenges to hospitals’ not-for-profit status;
• Pressures on Medicare and Medicaid reimbursements; and
• The cost of maintaining or upgrading aging facilities.

The decline in profitability leaves hospitals “increasingly … forced to get more creative in their efforts to maintain previous levels of profitability,” to quote from a study published in HealthLeaders magazine. To CFOs and controllers, that tends to mean looking for new ways to cut or contain operating costs. But what is a hospital CEO to do when s/he has no control over the core revenue source – reimbursement – and has already wrung the last bean out of costs?

One way, if you are a Cleveland Clinic, is by going global.

Globalization of the Cleveland Clinic

After 9/11 the Cleveland Clinic saw a big drop in the 5,000 overseas patients a year it had been seeing. It therefore decided to “meet global patients halfway” by means of long-term engagements to share the Clinic’s operational model — facilities, technology, and support — with overseas institutions.

The results so far are a 15-year, fixed-fee contract to build and select the staff and manage a hospital in Abu Dhabi, a similar arrangement with a hospital outside of Vienna for heart surgery, a “limited” facility in Toronto, and relationships with hospitals in Saudi Arabia and Egypt. Most recently, following two years of discussion and a dozen or so trips to China, early this year the Clinic began final deliberations of whether to build a US$80-100 million, 200-bed heart hospital in Shanghai. As with its existing partnership in Abu Dhabi, the Clinic would manage the hospital but not own it, and US and local physicians would staff it. The new hospital would serve China’s affluent and growing middle class.

Late last year Duke University Health Systems also signed a seven-year agreement to help Peking University establish systems and services to improve efficiency and competitiveness. The deal involves a joint cardiovascular training center, management training, joint research, clinical-care programs in specialties such as cardiology, cancer and geriatrics, and the establishment of clinical trials guidelines.

Sooner or later, CEO Toby Cosgrove told a McKinsey & Co. interviewer, “every country is going to want to develop its own expertise, and so the flow of patients coming to the United States to visit the Cleveland Clinic is probably not going to increase.”

Medical Tourism

The fact is, enough countries have already developed sufficient expertise to pose a real threat to US hospital profitability. For example…

“What I wanted was the best,” an American liver transplant patient told the Chicago Tribune, adding: “That doesn’t have to be in America.” The US hospital he had first approached couldn’t schedule his transplant procedure for months and would have charged him US$450,000. He had the surgery in New Delhi for $58,000, which included a 10-week hospital stay for him and his wife. In India, a heart bypass goes for $10,000 and a hip replacement for $9,000, compared with $130,000 and $43,000 respectively in the United States, the AMA told the Tribune. No wonder, as the AMA noted, the number of Americans heading abroad for medical procedures is surging, and no wonder health plans are paying more than attention.

BasicPlus Health Insurance is offering its plan members the option of receiving care at JCI-accredited hospitals overseas. It gives the customer “greater value without increasing premiums” and is “a way to entice employers that have more than 100 employees but cannot afford comprehensive plans,” and “a way of stretching the benefits to cover certain surgeries and other services” including the cost of travel, a spokesman told HealthLeaders’ Rick Johnson. People would be “surprised how many employers are not only aware of medical travel as an option, but also open to the concept.”

McKinsey & Co. says that while globally there are currently only 60-85,000 inpatient medical travelers a year, the potential for growth is very high because 500,000 to 700,000 Americans meet the criteria to become international patients – that is to say, they are uninsured but could afford to travel abroad for medical services they cannot afford in the US.

McKinsey also predicts a decrease in the number of medical travelers from the Middle East, which makes up 35 percent of the world’s current medical travelers but is itself investing heavily to develop state-of-the-art hospitals. For some American hospitals, there is thus a double whammy of local patients going elsewhere and distant patients staying home.

A senior executive of a company that builds and operates hospitals overseas to cater to medical tourists is confident of growth. His company’s main concern is to ensure continuity of care, which is “going to take teamwork between U.S.-based providers and overseas providers.”

Surrogate Mothering

Hospitals whose ob-gyn and birthing services provide the bulk of profits might feel a slight shiver over a bizarre example of medical tourism: a hospital clinic in India that offers outsourced pregnancies to couples from the United States, Taiwan, Britain, and elsewhere who want their own child but not the bother of pregnancy. Local Indian women are hired as surrogate mothers and are cared for at the clinic during pregnancy and delivery. As of December last year, more than 50 surrogate mothers were being cared for at the clinic. This seems bizarre and morally questionable if done for convenience rather than medical necessity. At the end of the day, we suspect society will squeeze such technology-enabled practices into its moral code, because its members will indulge themselves anyway.

The bottom line, it seems to us, is that hospitals only need to lose a small percentage of procedures — those that provide the bulk of their profits, which often equates to those that are offered less expensively overseas — to go and remain in the red.