Counterpoint

Hal Andrews | March 30, 2020

Healthcare’s “Too Big To Fail” Moment 

Every health system executive remembers how the Federal government effectively determined the fate of large banks in the 2008-2009 recession. While certain firms like AIG were deemed “too big to fail”, others like Lehman Brothers were doomed to immediate demise. A few health system executives remember the savings and loan crisis that resulted in the Federal government’s closure or “resolution” of 1,043 of the 3,234 savings and loans associations throughout the United States between January 1, 1986 and December 31, 1995.[1]

Suddenly, hospitals and health systems face the imminent threat of both a “bulge bracket” crisis and a “savings and loan” crisis, and the $117B allocated from the CARES Act is a pittance for the largest sector of the largest industry in the largest economy on the planet.

The health system “bulge bracket” is comprised of academic medical centers, large regional and national health systems, and marquee brands such as Cedars-Sinai, Mayo Clinic and Cleveland Clinic. Like Bank of America, JP Morgan Chase and Wells Fargo, these health systems are “too big to fail”. The health system “savings and loans” are the 3,544 hospitals with fewer than 200 beds[2], many of which operate in communities where savings and loan associations thrived in the early 1980s.

Jeff Goldsmith, Ph.D., the widely respected healthcare futurist, once wrote these words:

“Except for major regional institutions, the acute-care hospital as we know it will probably not survive…In the future, acute care will be concentrated in a small number of high-tech regional centers treating traumatic and chronically ill patients. Community hospitals will continue to provide some acute care, like obstetrical services and surgery for victims of illness. Still, most of this care will be ambulatory and often located off campus.” [3]


Dr. Goldsmith wrote these words in 1989, but they have never resonated so starkly.

As we have noted elsewhere, hospitals are the lifeblood of America’s communities, and hospitals are the only institution capable of providing the clinical treatment necessary to treat the most acute patients in this pandemic. For good reason, the Centers for Disease Control recently recommended that hospitals postpone elective surgeries in order to provide “surge” capacity for a flood of individuals infected with Covid-19. At the same time, this CDC guidance imperils thousands of hospitals throughout the United States.

The community hospital – rural, urban, suburban – has proven to be incredibly resilient for decades, despite the relentless challenges of increased competition, expensive technology, regulatory constraints, increasing labor costs, and reimbursement compression. Congress will likely pass a fourth stimulus package that would almost certainly provide additional assistance for hospitals and health systems. It is certain that any additional stimulus will be less than what health systems want or need. As a result, the current crisis could be the final blow for many community hospitals that have hung on by a thread for the past twenty years.

As in the financial crisis, those health systems that are “too big to fail” will receive support that not only ensures their future but accelerates further market consolidation and expansion. Some “savings and loan” hospitals have already been “resolved” by joining a larger and/or stronger health system. Some independent hospitals will find a similar “resolution”, but it will definitely be a buyer’s market for community hospitals. Tragically, some independent hospitals will inevitably be closed.

Whether you are part of a system that is “too big to fail” or a “savings and loan” hospital, you should prepare now for this new world order, starting with shredding all of your strategic plans and demand forecast models. The new world order will include even thinner margins, short-term balance sheet losses, and less access to capital; the health systems that ultimately survive and thrive will be those that immediately develop new, data-driven strategic plans.

As you develop new plans, keep in mind that there is no “free lunch”: government assistance is always conditional, and health systems should expect that some things they oppose – such as price transparency – may become a requirement of participation in the stimulus. At a minimum, hospitals should expect a new level of governance and operational oversight as a condition of receiving stimulus funds. The fact that caring for patients in a pandemic is a noble calling will not excuse poor judgment.

Being ruthlessly strategic may feel unseemly in the moment, but it is critically important for the communities whose post-pandemic suffering will be even worse than it is today. This is no time for relying on state data, historic demand forecast models or anecdotes about physician loyalty. No hospital or health system has the luxury of waiting for the “all clear” signal. As Dr. King reminds us:

“We are now faced with the fact that tomorrow is today. We are confronted with the fierce urgency of now. In this unfolding conundrum of life and history, there "is" such a thing as being too late. This is no time for apathy or complacency. This is a time for vigorous and positive action.”


[1] The Cost of the Savings and Loan Crisis: Truth and Consequences, by Timothy Curry and Lynn Shibut, cited from http://www.workingre.com/wp-content/uploads/2013/08/cost-of-SL.pdf

[2] https://www.cdc.gov/nchs/data/hus/2017/089.pdf

[3] “A Radical Prescription for Hospitals”, by Jeff Goldsmith, Ph.D., Harvard Business Review, May-June 1989

 

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