Adapting to Change: The Evolution of Hospital Economics in the Era of Outpatient Care

By Mark A. Johnston, VP Healthcare Innovation & Strategy

The traditional business model of hospitals in the United States is undergoing a seismic shift, driven by a combination of demographic changes, technological advancements, and evolving healthcare policies. As the population ages and more people move from employer-sponsored health plans to government-funded programs like Medicare, hospitals are facing the daunting challenge of maintaining financial viability while providing essential services to their communities.

?One of the most significant factors upending the hospital business model is the increasing availability of outpatient care options. Patients now have a multitude of choices for receiving medical services outside of the hospital setting, including ambulatory surgery centers (ASCs), urgent care clinics, and telemedicine platforms. This shift towards outpatient care is being accelerated by changes in Medicare reimbursement policies, particularly the removal of certain procedures from the Inpatient Only List.

?The Inpatient Only List, maintained by the Centers for Medicare and Medicaid Services (CMS), historically contained approximately 1,800 procedure codes that Medicare would only pay for when performed in an inpatient hospital setting. However, starting in 2021, CMS began removing procedures from this list, allowing them to be reimbursed when performed in an outpatient setting, such as an ASC. This change has significant implications for hospital revenue streams, as many of the procedures being removed from the list, such as total knee and hip replacements, are among the most profitable for hospitals.

?As a result of these changes, hospitals are witnessing a substantial portion of their revenue shifting from inpatient to outpatient services. In response, many hospital systems are investing heavily in the development of their own ASCs to prevent competing facilities from siphoning away their patient volume. HCA Healthcare, the largest hospital system in the United States, currently operates 126 ASCs, with outpatient procedures accounting for 37.4% of their total revenue. Similarly, Tenet Healthcare, the second-largest hospital system, has seen its ASC revenue grow to over 20% of its total revenue, with a 17% year-over-year increase.

?To further capitalize on the outpatient care trend, hospitals are employing various strategies, such as hiring orthopedic surgeons and other specialists or entering joint ventures with physicians to share in ASC revenue. The Stark Law, which previously prohibited hospitals from sharing revenue with doctors for inpatient surgeries, includes a safe harbor provision for procedures performed in ASCs. This allows physicians to earn more money by sharing in the profits generated by the ASCs they practice in, a financial arrangement that was not possible when the surgeries were subject to the "2 Midnight Rule" for inpatient procedures.

?While the shift towards outpatient care is often touted as a cost-saving measure, it is important to note that receiving treatment at an ASC does not necessarily guarantee lower costs for patients. Hospital-owned ASCs can still charge high prices, particularly for patients with employer-sponsored insurance plans. In fact, independent ASCs that are not affiliated with major hospital systems often offer more competitive rates.

?As hospitals grapple with the financial challenges posed by the changing healthcare landscape, policymakers and economists have raised concerns about the impact of hospital consolidation on healthcare costs and competition. In an effort to maintain market share and negotiate higher reimbursement rates, many hospitals have engaged in mergers and acquisitions, leading to increased market concentration. While hospitals argue that these consolidation efforts are necessary to ensure their financial stability and ability to provide essential services, critics contend that they contribute to rising healthcare costs and reduced competition.

Hospitals currently account for 30% of the nation's healthcare spending, making them a crucial target for cost containment efforts. As the shift towards outpatient care continues, hospitals will need to adapt their business models to remain financially viable while still serving as anchors for their communities. This may involve a combination of strategies, such as investing in outpatient facilities, renegotiating reimbursement rates with insurers, and implementing cost-cutting measures to improve operational efficiency.

?The changing economics of healthcare delivery also have significant implications for healthcare policy. Policymakers must strike a delicate balance between promoting competition and ensuring the financial stability of hospitals, particularly those serving vulnerable populations. This may involve reevaluating reimbursement structures, implementing price transparency measures, and providing targeted support for safety-net hospitals.

?In conclusion, the rise of outpatient care and the removal of procedures from Medicare's Inpatient Only List are fundamentally transforming the hospital business model. As hospitals navigate this shifting landscape, they must adapt their strategies to maintain financial viability while continuing to provide essential services to their communities.

?Policymakers, in turn, must carefully consider the impact of these changes on healthcare costs, competition, and access to care, and develop policies that promote a sustainable and equitable healthcare system. By understanding and addressing the complex economic forces shaping the hospital industry, we can work towards a future in which high-quality, affordable healthcare is accessible to all.