Health Care Industry
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Sanjay Saxena, global leader of BCG’s health care payers, providers, systems, and services business, discusses the fate of US hospitals and health care systems in challenging economic times.
BCG: Could you compare the state of a typical US health care provider in February 2020, at the start of 2023, and 12 to 18 months from now?
Sanjay Saxena: Even before the pandemic, there were healthy provider organizations, ones that were getting by, and ones that were struggling. The pandemic exacerbated the issues that each of them faced. The healthy ones became less healthy, the ones that were okay started to flash yellow and even red, and then the ones that were struggling are looking at bankruptcy or other alternatives. Today, everyone is struggling to achieve favorable financial performance. Virtually all major providers will either have had very low margins or will have lost money in 2022.
The longer-term structural issue is that providers live off of models of cross subsidization. And those cross-subsidization models are broken in two ways. First, they rely on commercial or private payers to subsidize inadequate government reimbursement from Medicaid and Medicare. As Americans age and as more people enroll in Medicare and the expansion of Medicaid grows, the math just isn’t working anymore.
Second, investors and entrepreneurs are entering the highest-margin health care services. For example, they go after outpatient and elective procedures that can be performed in freestanding ambulatory surgical centers that are more conveniently located for patients and lower in cost for payers. As those services leave hospitals, providers are left with the emergency room and less profitable services.
How would a recession affect this picture?
On a positive side, health care tends to be countercyclical. We also have better safety nets in place so that people don’t necessarily go uninsured if they lose their job. They can go into Medicaid or the Affordable Care Act exchanges. But if people move from insurance provided by their employer to Medicaid or Obamacare, the hospital’s getting less money. And therein lies the challenge.
What have hospitals done in the past to become more resilient?
The typical playbook is they try to freeze spending. They cut administrative positions and try to get higher reimbursement rates from commercial payers. Today’s challenges are too big for that approach.
Historically, people rightfully have resisted making cuts in clinical care. But I think we will find ourselves in a place where some institutions are going to have to start examining whether they need to exit certain clinical programs and even certain geographies because they can’t make the cross subsidies work. Instead of having two cardiac programs in hospitals that are relatively close to one another, they might be forced to choose one cardiac center of excellence. Does a small hospital need to have its own cardiothoracic program and the latest MRI? Probably not.
The US health care workforce has already been through a tough three years. How can hospitals and other providers create better working conditions in order to retain nurses and other health care professionals?
Asking a group of people who are already burnt out to do more with less is recipe for accelerating departures. For example, technicians in New York City who are working in a big hospital can often get a better job in retail or from working at home.
Nursing is probably the single greatest shortage in health care. The practices of some staffing agencies risk making the problem worse. The CEOs of several health systems have told me the same story. A nurse who works for them on Friday quits and becomes a temp worker at a staffing agency. They pay that same nurse on Monday two and a half to four times the hourly rate they paid the week before. While part of the allure for nurses is higher pay, many nurses (especially younger ones) are attracted to the geographic flexibility and scheduling freedom that working for a staffing agency provides.
Labor costs are real and significant. About 70% of a hospital’s cost structure is labor. Nursing costs are a significant component of that cost structure, particularly intensive care nursing. There are mandated staffing ratios that you must adhere to in most states in the US. If you don’t have the nurses, you can’t get the revenue because you can’t staff the beds.
In response, providers are starting their own staffing agencies within their own systems. Big providers with a lot of hospitals are trying to smooth demand by transferring nurses between hospitals.
We also must reimagine the work that nurses and other health care professionals do. The less time they spend on administrative tasks, the more time they can spend on patient care and the more they can enjoy their jobs. But that’s going to take time. Across the board, health systems will need to rethink their talent value proposition to attract and retain their workforce.
What would happen to quality of care in an economic downturn?
Interestingly, I don’t think there’s any correlation between quality of care and economic downturns. I don’t think we’ve gotten to a place where provider organizations cut corners. Where quality arguably suffers is when people delayed getting care because they couldn’t afford the out-of-pocket or copays. If you must pay $500 for health care, that’s $500 you do not have to pay for heating or groceries.
If hospitals start cutting programs, we could see quality suffering. I don’t see that as a New York City risk, but it could be an exurban and rural risk.
Are we headed for a world in which the big cities have a few large relatively healthy systems and rural America is left with systems that provide only the most basic services?
You have already seen significant restructuring of what care looks like with three or four megasystems in big places like New York, Seattle, and San Francisco. I just had a call this morning about two providers exploring a merger. For many small and medium-sized health systems, senior management teams and increasingly their boards are saying that there’s no path forward without the benefits of greater size and scale. Organizations can’t just sit still. They still must make investments in their physical plants, equipment, and digital health technology. It’s harder for many systems to access the capital markets. But the bigger players still have no problem raising money because people see their size and the strength of their overall balance sheet.
In rural areas, I do think in the next three to five years we are going to need to subsidize or bail out a lot of hospitals, or we’re going to have to reimagine what rural health care looks like. The challenge is that in many of these communities the local hospital is the largest employer. If you take out costs to be resilient, you are harming the local economy.
How would hospital supply chains fare in a recession?
Along with all other organizations, hospitals have become hyperfocused on efficiency and just-in-time operations. We had these beautifully knit-together global supply chains, which yielded extraordinarily low costs. Then Covid arrived, and hospitals realized that they could not handle surges of that scale. The question then becomes, What’s the right level at which a hospital should operate? How much slack are we willing to fund in our health care delivery system? It’s not just about supply chains. Should I try to fill the beds? Should I fill the operating rooms, or should I leave capacity? How much resilience do we want to build into the system?
After September 11, we started paying security fees to fly. Maybe hospitals should have a pandemic preparedness fee that the government funds, or they charge payers.