Empty threat

Boulder, Colo., may have more hospital capacity than it needs, but that did not stop construction of a replacement for Boulder Community Hospital with just as many beds as before.

That's despite the fact the hospital has seen considerable growth in outpatient services, in part thanks to a concerted effort to increase hiring of primary-care doctors.

Nonetheless, officials scrapped plans to build a hospital with 30 fewer beds on projections that a new location and growth strategy would make cuts unnecessary, said Ronald Secrist, president of the Boulder Community Hospital Foundation.

The project, which will cost $110 million and is scheduled to open in mid-2014, will consolidate 170-bed Boulder Community Hospital's campuses into one spot more central to local population growth, Secrist said. Meanwhile, executives will seek to capture more market share in the treatment of cancer and heart disease, he said.

And hospital officials project that population growth will catch up, eventually, with hospital capacity, he said.

Boulder Community Hospital's calculation underscores two competing trends that have raised questions about how many hospital beds the nation needs: demographics and the push to curb health spending by treating patients anywhere but costly hospitals.

The equation is complicated by policy changes under the Patient Protection and Affordable Care Act that will expand insurance coverage to millions, should the Supreme Court uphold the law (See related story on the court case). The law's coverage could give millions greater access to healthcare, but its financial incentives may leave some to seek care from emergency rooms rather than primary care.

Also confusing projections for future hospital capacity is the economic rebound. Hospitals across the nation reported little or no growth in admissions in recent years as some households lost insurance along with jobs. Estimates show the economic downturn had a significant effect on health spending and insurance coverage. U.S. health spending increased at historically slow rates in 2009 and 2010, the most recent federal figures show. And a recent Center for Studying Health System Change analysis found employer-sponsored health insurance coverage dropped 10 percentage points among children and adults younger than 65 between 2007 and 2010.

But some hospital executives say that trend is likely to continue, despite an economic rebound, an aging nation and potentially millions of newly insured under health reform.

That's because of incentives and efforts under way to treat patients and promote wellness to prevent expensive hospital visits, executives said.

“You'll need a lot fewer hospitals and hospital beds” because providers will do more to keep patients healthy enough not to need them, said Frank Trembulak, executive vice president and chief operating officer of Geisinger Health System, Danville, Pa.

As a result, hospital officials say they are looking closely at capacity and capital plans, and spending has shifted toward outpatient services.

Hospital admissions, which declined for several years starting in the early 1980s, have risen since the mid-1990s. But the average hospital stay declined during that period as did the total number of hospital beds, which dropped 13% between 1990 and 2010, though that appears to have plateaued in the past few years.

Meanwhile, outpatient services have grown steadily, with outpatient visits increasing 116% during the same period.

Ascension Health, the largest U.S. not-for-profit health system, has seen hospital admissions dip or remain flat during the past three years, said Robert Henkel, the system's president and CEO.

Henkel said that trend is expected to continue, with variation by market, through the end of the decade, despite population growth. Based in St. Louis, Ascension operates 76 hospitals in 14 states and the District of Columbia. Technology and incentives to treat patients outside the hospital will reduce hospital admissions, he said.

Ascension constantly analyzes capacity as trends change, he said.

The system will “continue to be cautious” about expanding its inpatient capacity, he said, and will look to invest more broadly in medical care outside the hospital.

That was the case with Ascension's January acquisition of Alexian Brothers Health System, based in Arlington Heights, Ill., he said (See related story on Ascension). Alexian operates more than just its three hospitals; the system also includes multiple ambulatory services for seniors including home care and independent living centers, he said.

Catholic Health Initiatives has seen similar changes to hospital admissions in recent years, with volume flat or slightly lower, said Michael Rowan, executive vice president and COO for the system.

He attributed the stagnant volume to the economic downturn, as households struggled during the recession or with health plans that shift more financial burden to patients with higher copayments and deductibles.

Projections for the health system, one of the nation's largest not-for-profit hospital operators, show a slight drop in hospital volume after 2016, after an influx of newly insured patients under health reform, he said.

That slowdown will occur as new payment models offer providers incentives to promote prevention and disease management to keep patients out of hospitals, he said.

Insurers will end the practice of paying hospitals by volume, he said. Under alternatives that pay for medical care with a lump sum for a bundle of services, providers instead have an incentive to lower costs by keeping patients out of expensive hospitals.

Catholic Health Initiatives' plans call for 65% of its revenue from patients to come from care provided outside the hospital by 2020. That figure was 48% in 2010.

Rowan said that shift will lower the health system's costs so that it can remain competitive.

The system has boosted its physician employment 53% to 2,300 doctors from 1,500 doctors a year ago. And in October 2010, the system made a $43 million acquisition of home-care company Consolidated Health Services with the goal of expanding the three-state company to all 19 states where Catholic Health Initiatives operates.

Rowan said he cannot yet say whether the system operates more hospital beds than needed, but capital spending has shifted significantly away from hospital construction and renovation and toward information technology.

This year, construction and renovation accounts for 22% of the system's capital budget, compared with roughly half of spending during the last five years. Meanwhile, information technology, which makes up 21% of this year's capital budget, will absorb from 40% to 50% of next year's capital investments.

Not all hospital construction will cease. Some continue to invest in new construction to gain a competitive advantage despite anemic admissions.

Stamford (Conn.) Hospital has seen its inpatient admissions stall as its outpatient services thrive, said Scott Orstad, a hospital spokesman. “There is no question for us that the growth has been outpatient,” he said.

Still, executives continue to plan for a replacement hospital and one with the same capacity. Orstad said the 305-bed hospital operates in a competitive market with two nearby hospitals and enough commuters to New York City that medical care there siphons away local patients. The new hospital will gain a competitive advantage with all private rooms; patients can share rooms in the existing hospital, he said.

Hospital officials decided seasonal swings in hospital admissions justified the decision not to eliminate any beds, he said.

But hospitals' strategy to win more patients can falter. Eisenhower Medical Center has invested heavily in the past two years to expand the reach of its clinics and in so doing, executives believed its hospital would benefit. New clinics and more doctors would increase the medical center's market share and yield new referrals to the hospital, management told credit analysts.

Instead, the hospital in Rancho Mirage, Calif., lost $26 million when it closed its books for fiscal 2011 last June. The medical center saw fewer patients than projected. During the six months after that, business at the medical center remained sluggish by almost any measure when compared to the same time the prior year, financial records show. The unexpected loss came just months after the hospital opened its $212 million, 248-bed addition.

A spokeswoman for Eisenhower Medical Center said executives were unavailable for an interview.

Demographics will drive demand for hospital care in coming years, as will the newly insured under health reform, should the Supreme Court uphold the law, health policy experts said.

Changes to payment polices promoted by the health reform law will reduce some hospital volume, but demand from the newly insured will outpace those gains, said Gloria Bazzoli, an economist and health administration professor with Virginia Commonwealth University.

“It's helpful,” she said of new financial incentives to reduce hospital care “but it's not going to be a complete wash.”

Bazzoli and colleagues found sicker patients and a shortage of nurses contributed to strain on hospital capacity in a study of markets in 2003.

Demand for hospital care and supply of hospital beds dropped during the 1980s and 1990s as patients received more ambulatory care, a trend enabled by technology and encouraged by new payment policies, the researchers wrote in the journal Health Affairs.

Overcrowded hospital emergency rooms at the time raised concerns that hospitals may not have enough capacity to meet the demands of aging baby boomers, the researchers said. She said that led hospital officials to push for greater efficiency and some hospitals in some markets sought to expand.

Whether hospitals have too many or too few beds now depends largely on the local market, she said.

Dr. Saumya Sutaria, a senior partner for consultants McKinsey & Co., said population growth and consolidation in markets with too much capacity will drive growth for some hospitals. Overall, demand for hospital care will be subject to competing forces, he said.

Hospitals can expect to see growth among Medicare patients, but that will be tempered by expansion of Medicare Advantage and continued technology gains that push care into the outpatient setting.

He questioned whether accountable care and medical homes could deliver sustained reductions to spending and hospital admissions for the privately insured.

Meanwhile, patients expected to gain Medicaid coverage under health reform may struggle to find primary-care clinics willing to accept the insurance. Those patients may continue to seek care from hospital emergency rooms, he said.

Geisinger's Trembulak said it can be difficult to estimate how many beds hospitals will need. Hospital volume at Geisinger has grown as the system has gained market share, he said. But those gains have softened, he said, perhaps as a result of the weak economy and Geisinger's efforts to better manage care of chronic diseases and patient transfers. He does not believe the trend has hit bottom. “We expect that it will go down,” he said.

Still, he said he expects consolidation in Scranton, Pa., where Geisinger acquired one of three hospitals in February. That market shift could affect demand.

Sutter Health executives expect a drop in demand for hospital beds but have not yet planned to reduce capacity, said Dr. Gordon Hunt, chief medical officer for the 23-hospital system based in Sacramento, Calif.

The decline in hospital volume has been gradual and some factors are hard to predict, he said, such as the viability of struggling stand-alone hospitals in the California and Hawaii markets where Sutter operates.

Should those hospitals struggle to maintain services, marketplace capacity could decline. Sutter officials expect significantly fewer hospital admissions, shorter hospital stays, and fewer hospital admissions, but cannot say where those bed reductions will come from, he said.