The New Payment Paradigm: What It Means for America’s Hospitals

Barbara Victor , MD

Regional Director

Published July 12, 2013

Collectively, if American hospitals were a country, they would represent the world’s 16th-largest economy according to The Economist. Hospitals accounted for $851 billion — or 31 percent of healthcare spending — in the United States in 2011. It is no wonder that lawmakers are mandating reforms focused on cutting medical costs and driving patients from expensive hospitals to cheaper outpatient services.

In 2014, our system will welcome millions of new patients as the Affordable Care Act, also known as “ObamaCare,” provides government-subsidized insurance to the poor. More people with insurance will surely lead to more patients seeking treatment. So healthcare reform would seem to portent a new golden era for hospitals, right?

Not likely. Hospitals do anticipate that ObamaCare will mean increased revenue from the newly insured patients, which is good news. But healthcare reform will also cut government rates and reimbursements for Medicare. Thus, the bad news is that by 2019, the two insurances are expected to cancel each other out. The outcome will be more patients seeking medical attention — but at lower payments for hospital and physician services. This will likely create a new paradigm in which much of the acute care currently delivered by hospitals shifts to the outpatient setting.

American hospitals face mounting pressures to change. The business model of selling as many services as possible at the highest price the market will bear is unsustainable. ObamaCare includes radical new incentives that lead hospitals to provide quality care rather than the quantity of care. Penalties, such as fines for 30-day readmissions, are also motivating hospitals to reexamine their business practices.

Medicine needs to move away from the fee-for-service model. How can a hospital profit from delivering fewer services when it is organized to deliver more? Many believe that aspirations to be the “best” hospital with the most expensive specialty services may be a desire of the past. Offering good, convenient and reasonably priced care with agreements to transfer the most complex cases to large medical centers may be the model for the community hospital of our future.

Many hospitals are looking critically at Accountable Care Organizations (ACOs) and partnering with groups that receive incentives for keeping the cost of Medicare treatments below a certain level. Aligning with organizations whose aims are focused on health maintenance and cost-effective care is becoming more commonplace. More and more hospitals are accepting episode-based pricing and launching efficiency campaigns to decrease hospital length of stay. Also, further expansion of outpatient services will lead to fewer hospitalizations and prevent costly relapses.

The new paradigm for hospitals affects physician behavior and practice. Hospital-based physician activities have changed significantly, with focus on length of stay, discharge planning and close monitoring of a recently discharged patient’s follow-up. Physician groups that were previously dependent on hospitals for their patient care are looking for ways to expand their purview into the realm of the medical home.

Due to these major changes in healthcare, I believe hospitals will soon be for the critically ill only. In the near future, patients should expect to be convalescing at home or in a location that provides a short-stay product.

The lessons of reform are simple. Hospital and physician groups who want to remain relevant in the Acute Care Continuum need to innovate and invest in processes that alter how and where we see our patients.

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