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Hospitals face closures as 'a new day in healthcare' dawns

As hospitals increasingly lose patients to medical care delivered in clinics and home settings, hospital operators are escalating their efforts to shrink capacity.

Hospitals are operating with fewer beds or closing outright, in some cases to make way for new ambulatory-care centers. In Lakewood, Ohio, where chronic conditions such as heart disease and diabetes are just as prevalent as in the rest of the country, the city is about to close its only hospital, whose 200 beds are typically half empty.

With three other hospitals within seven miles, the low occupancy rate makes city-owned Lakewood Hospital the high-cost provider in the area. “That's not sustainable or competitive,” said Lakewood Mayor Mike Summers, a hospital trustee.

Last month, the city announced it will replace the hospital with a $34 million ambulatory health center and emergency department. The proposal is a lower-cost, more accessible alternative. The new center will bring another 16 primary-care doctors to a community grappling with diabetes, obesity, heart disease and mental illness. “None of those would you lay in a bed to fix,” Summers said.

Behind closures like Lakewood's are the boom in high deductibles, better technology, more case management and shrinking reimbursement. While hospital admissions and lengths of stay have been falling for years, decline in U.S. hospital capacity has not kept pace. And overall hospital employment has been rising.

But that could change over the next few years. New public policy and marketplace incentives are encouraging health systems to promote prevention and keep patients with chronic diseases out of the hospital. The shift to outpatient care, underway for decades, is accelerating.

New technology and better drugs also are allowing more patients to receive treatment outside of hospitals. Meanwhile, discretionary surgeries and other procedures are still being postponed since household finances remain stressed, partly because of poor wage growth in the wake of the Great Recession, and partly because more workers are being shifted to high-deductible health insurance plans, which increase household medical bills.

hospital bed supply and demand

Admissions to the nation's hospitals have slumped in the wake of the Great Recession and Affordable Care Act. The federal government's two-midnight rule no longer recognizes admissions for patients with very short hospital visits. The rule is fueling the drop in U.S. hospital occupancy rates, which fell to 60% in 2013 from 64% five years earlier and 77% in 1980.

Numerous markets across the country now have more hospital beds than they need. Given the intense pressure on hospitals to reduce costs, many healthcare organizations are driven to participate in narrow-network health plans as a way of outflanking the growing competition. Overcapacity is also feeding the ongoing merger-and-acquisition wave, which shows no signs of abating. Prime Healthcare Services' looming takeover of the six hospitals in the failing Daughters of Charity Health System in California will inevitably lead to reduced bed counts in those communities as Prime applies its own cost controls to the acquired facilities.

MH Takeaways Expect stepped-up hospital closures and bed-count reductions over the next few years as better coordinated care drives more patients to outpatient settings and consumers remain under financial constraints.
Others are moving in that direction. Pittsburgh giant UPMC eliminated 410 beds, or roughly 8.5% of its capacity, last year. And Baxter Regional Medical Center in Mountain Home, Ark., shut units with little demand in 2014. The Medicare Payment Advisory Commission reports 27 hospitals closed last year.

Favorable demographics won't reverse the trend, consultants and health system executives say. Weak admissions are projected to last for years despite the millions of newly insured Americans, the aging of the baby boom generation and the steady upward creep of the overall population. “This flat or declining volume for inpatient is not a blip on the radar screen,” said Karin Henderson, executive director of strategic management for six-hospital Cone Health in Greensboro, N.C.

Small, independent hospitals and academic medical centers may be the most vulnerable to financial stress as occupancy rates decline. Small hospitals lack the capital to invest in primary- and ambulatory-care facilities to attract patients seeking prevention and wellness services or whose insurers are pushing them to seek care in outpatient settings.

Keandra Griffin of Belhaven, N.C., attends a rally at the end of Mayor Andy O’Neal’s 273-mile walk to D.C. to call attention to rural hospital closings. Keandra Griffin of Belhaven, N.C., attends a rally at the end of Mayor Andy O’Neal’s 273-mile walk to D.C. to call attention to rural hospital closings.
Small hospitals also lack consolidation options, leaving them with expensive, empty space that narrows margins and erodes viability. About half the hospitals that closed last year operated an average of roughly 60 beds, according to MedPAC data. “It's not enough to be just breaking even or getting a very small return to be a sustainable force in a marketplace,” said Margaret Guerin-Calvert, president of the Center for Healthcare Economics and Policy at FTI Consulting.

For academic medical centers, the high cost of their education, research and specialty services makes them less competitive as occupancy rates fall, consultants say. Many major AMCs are acquiring community hospitals to handle less-complex patients in lower-cost settings and reserving beds in the flagship academic hospital for only the sickest and most complicated patients.

Hospital executives say patients with high-deductible insurance policies, which now represent roughly 20% of all employer-provided health plans, are encouraged to seek care in lower-cost settings to hold down medical bills. That choice is adding to an already-growing demand for ambulatory care. “Patients are shopping,” said Henderson of Cone Health. “It is a new day in healthcare.”

That system has pegged its excess capacity at 200 beds. Cone Health is closing its Women's Hospital, and shifting the average daily census of about 100 women and infants to its flagship Moses H. Cone Memorial Hospital. It also plans to move more surgeries to the system's outpatient centers. “We will definitely go down some beds,” Henderson said. “And that's the point.”

UPMC also is replacing beds formerly used in its medical-surgical, psychiatric and skilled-nursing units with outpatient services. “Hospitals don't want to staff more beds than they have to,” said Moody's Investors Service senior analyst Daniel Steingart. “Hospitals, by and large, are constantly looking at their census and will close units as is possible.”

Hospitals with fewer staffed beds are looking for new ways to generate revenue from their excess physical space, including signing leases with hospice providers or even hotel operators, said Mark Grube, a managing director with Kaufman Hall. But there are limits to how far a hospital can take that strategy.

Many hospitals across the country are reaching a crossroads. The median age of U.S. hospital buildings is rising, and new construction has dropped sharply, with capital going toward ambulatory-care facilities, physician hiring, information technology and telehealth. Mobile-health apps will become more prevalent over the next few years as hospitals, patients and insurers look for new ways to improve care and reduce costs.

“Why would it happen in all other parts of our personal life and our economy and not happen in healthcare?” asked Kenneth Kaufman, managing director and chair of Kaufman Hall.

Follow Melanie Evans on Twitter: @MHmevans



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