Most hospitals fall well behind the rest
[J.D. Kleinke is participating in this month's Quality Talk. While with HCIA in Englewood, CA, Kleinke and the company established themselves as leaders in the development of clinical measurement systems. Kleinke joined HCIA in 1992 as vice president of Corporate Development.
He was a principal architect of the company's growth from a niche health care data analysis firm to a $90 million per year, publicly traded, international provider of information products to health care systems, managed care organizations, and pharmaceutical companies.
Before coming to HCIA, Kleinke worked in health care directing corporate programs at Sheppard Pratt Health System, the country's largest private psychiatric hospital. There he developed and managed the first provider-based, for-profit, managed behavioral health care delivery system.
In addition to his current position at HCIA, Kleinke frequently contributes editorial columns on health care policy and business issues for The Wall Street Journal and lectures widely. His book, Bleeding Edge: The Business of Health Care in the Next Century (Aspen, Gaithersburg, MD), will be published this summer.
This is the first of two interviews with Kleinke. In June, QI/TQM will feature his views on the implications of the Joint Commission's new ORYX project.]
Question: HCIA's Top 100 Hospitals report indicates that hospitals in the southern states dominate the benchmark facilities, occupying 50% of the slots. What do you see as the reasons for this?
Answer: We know that hospitals in the southern states are in much better shape financially, and that's for a number of reasons. They tend to have larger Medicare volumes than the rest of the country, and Medicare patients have proven to be more profitable than private pay patients under managed care - which leads to the second explanation. There's much lower penetration of managed care in the South, generally. So they're making more money in two ways: Having more Medicare patients as well as having fewer managed care companies eroding the profit margins. Given that the Top 100 study does factor in a significant number of financial variables, that would explain the disproportionately good showing by that region.
Question: Is that going to change?
Answer: It certainly will. The people at HCFA (Health Care Financing Administration) have recognized that Medicare patients have become very profitable for hospitals and, for all the hospitals' good efforts to manage costs for Medicare patients, they're being rewarded with payment freezes.
Also, managed care is an inevitability in health care and the South has been fortunate enough to have been protected from it for as long as it has. There are a couple reasons for this.
The South tends to be more rural than the rest of the country. Culturally, it also tends not to have a big history of managed care organizations located in the region. And managed care organizations tend to market most heavily in areas closest to their corporate headquarters. The corporate headquarters of most managed care companies are in the Northeast or in California.
But change is inevitable. Managed care companies are scrambling more than ever for growth and for new market opportunities because they've saturated regions where they've been traditionally. So the South represents very fertile ground.
Question: This year's Top 100 analysis notes a relatively flat improvement in the benchmark hospitals' performance over the previous year. Since we're obviously not at peak performance in patient care, what do you see as the cause for the slowdown?
Answer: It slowed down only because you're looking at how much can the best improve marginally? It's not unlike the Olympics. The fastest people in the world can only break records by hundredths of a second. It's really the hospitals in the middle that have the largest room for improvement. By the time you get into the rarified company of the Top 100 hospitals, marginal improvements are just that much harder to win.
There are certain medical facts about complications and mortality - facts that all the greatest re-engineering and state-of-the art protocols with regard to drug prophylaxis and postoperative care - that will generate just so much benefit before we reach a point of diminishing returns. And when you get into the rare air breathed by these 100 top hospitals, they certainly have hit a point of diminishing returns in terms of how much more they can improve clinically.
I think the most interesting thing about this study every year isn't the marginal improvement year after year for the 100 top hospitals. It's the huge, yawning difference between the performance of those hospitals and the rest of the industry. That's the big story.
No one who really understands health care is surprised by this, but what's shocking to the rest of the world is the disparity of performance in the industry - the utter heterogeneity or divergence between the best and the worst. Medical care is supposed to have a scientific basis. To have results so skewed for a discipline that's grounded in the principles of science - it's alarming!
Question: As for hospitals in the "yawning" middle, which measures should they start working on to get the best rapid-cycle results in upgrading their quality?
Answer: The specific measures we examine that probably have the biggest gaping holes between the performance of the best and the performance of the rest are the complications rates. Mortality really isn't as significant a difference as complications. Complications affect more patients because they live and go home. But it takes longer to get well because they had a post-op wound infection, a venous line infection, or something like that. Typical mortality rates are in the single digits but complication rates across institutions can get into double digits very quickly. And like anything affected by the law of numbers, the larger the number the greater the variability in that number.
Tremendous progress is yet to be made in doing things like preventing post-op wound infections, endocarditis associated with open heart surgery, and drug reactions and interactions - there's a lot of latitude for improvement.
Question: There's a 33% increase in the long-term equity growth among the benchmarks compared to the 1996 findings. How does that relate to the sluggish improvements in direct care measures?
Answer: That's easy to explain. Everyone's talking about consolidation and the purchasing of hospitals by national groups. And one of the most immediate of acquisition by Columbia or Tenet Healthcare or even the Daughters of Charity is the decrease in your cost of capital. If you're a stand-alone hospital, your cost of capital is very high.
Consolidation can boost profitabilityYou're much more of a shaky business or risky credit from the perspective of people who issue bonds or who trade on Wall Street. And what that means is when you consolidate or are purchased, you are joining an organization that has a much lower cost of capital.
Lower cost of capital means that suddenly your bonds get reissued at a much lower interest rate. It means you have a lot more equity that's released into the institution. So as a proportion, your equity almost certainly goes up: Your debt is going down, and you have access to capital and other things that make equity grow.
Beyond that, this increase in equity growth is a cumulative effect of hospitals being fairly profitable over the last four or five years. At the end of the day, equity is simply a measure of cumulative profitability. So both of those things are working very much in favor of hospitals generally. And that's the case with the whole industry, not just the 100 Top.
Question: And why have hospitals been much more profitable over the past four to five years?
Answer: They've started to function like real businesses. Hospitals used to function almost like blacksmith shops - places where artisans practiced a craft without any real rationalization of resources. Without any real performance measurement. Without any of the industrial-strength type methods that all other industries in this country have used to improve their performance for decades.
One of the things I like to talk about is the industrialization of health care. That's one of the inevitable outgrowths of both managed care and the shifting of financial risk, starting with DRGs for Medicare. When you start to put the provider at risk for the cost of care, you change all the rules.
Inefficiency no longer paysIn previous years, inefficiency paid. If the bill was higher, you made more money. Under the brave new world of DRG and other risk-based forms of payment, when payment becomes fixed, all you can manage is cost. And ironically, that's not only worked, but it's had a much greater effect than anyone ever anticipated. Hospitals have actually managed not only to lower their costs sufficiently to survive, but the very process itself has introduced such a revolution in the industry that it's also allowed the industry to be more profitable than ever - which is very paradoxical.
Question: Many skeptics have warned that investor-owned hospitals would bring down patient care, but the 100 Top reports are proving that clinical, operational, and financial quality are sustainable. In this emerging picture, what do you envision as the niches for investor-owned, compared to not-for-profit hospitals?
Answer: There is going to be a niche for both. I think this whole Columbia-HCA drama has pointed out that there is clearly sentiment for not-for-profit hospitals - that there is market segment for it, and the not-for-profits have been very good at positioning themselves for this sentiment.
The for-profits have, at the same time, been thriving and doing just as well, Columbia's troubles notwithstanding.
So it ultimately comes down to a question of consumer positioning. One system positions itself to consumers and payers as "we are more noble because we're not-for-profit." That position has a certain set of associations that appeal to a certain mindset.
The for-profits position themselves very differently by saying, "We are the lowest cost provider. You're going to get equivalent quality of care for less money here."
Whether any of this is true or not really doesn't matter. These are market perceptions. And of course, one of the ironies in the end is that both will exist to address different market segments.
For-profit hospitals seek new imageBecause of scandals like the one Columbia-HCA is facing right now at the hands of the government, the for-profits have had to start to soften some of the hard edges that they developed and honed over the years. They have had to become a bit less aggressive.
At the same time - and this is another paradox in health care that's quite interesting these days - the not-for-profits have adopted a lot of the for profits' types of tactics.
Daughters of Charity, Catholic Healthcare West, and Sisters of Mercy systems have be-come more similar to Tenet and Columbia in terms of how they acquire hospitals and run them, in terms of how they raise capital, how they re-engineer to generate profit. We are fast approaching a time when the not-for-profits and the for-profits will operate the same way, though they'll be marketed and packaged very differently. That's inevitable under competitive market dynamics.
[J.D. Kleinke is an economist, author and consultant based in Denver and formerly vice president of Corporate Development for HCIA Inc. If you would like to contact him, call (303) 355-3905. E-mail: [email protected]. For information about HCIA's products and services, contact 6300 S. Syracuse Way, Englewood, CO 80111. Telephone: (303) 740-7779. World Wide Web: http://www.hcia.com.]
You have reached your article limit for the month. Subscribe now to access this article plus other member-only content. TESTING
- Award-winning Medical Content
- Latest Advances & Development in Medicine
- Unbiased Content