Stephen T. Parente, Ph.D. Carlson School of Management Department of Finance sparente@umn

1. University of MinnesotaThe Healthcare MarketplaceMedical Industry Leadership InstituteCourse: MILI 6990/5990Spring Semester A, 2017 Stephen T. Parente, Ph.D. Carlson School of Management Department of Finance sparente@umn.edu

2. Hospital Services Market: History and Overview • Evolution of the hospital • The “really” early years (1750s-1890s) • Early 20th century (1890s-1930s) • Mid 20th century (1940s-1960s) • Great society (1960s-1980s) • Managed care era (1980s-2000s) • Hospital Market Overview

3. “Really” early years (1750s-1890s) • Transformation of the hospital institution • Populations served • Purpose • “a place to die” vs. “a place to get well” • Architecture • Social structure • Communal relations • Associative relations • Critical role of philanthropy

4. “Really” early years (1750s-1890s) • Modern Hospital • Role of physicians • 4 different categories • What were some challenges with respect to doctor-hospital relations? • Role of nurses • Advances in clinical knowledge • “Antiseptic conscience” (Lister) • Diagnostic tools (e.g., X-rays) • Cost pressures • Construction and operating costs

5. “Particularistic” Hospitals • What does Starr mean by this term? • What factor(s) drove their development?

6. Decision-making and Power in the Modern Hospital Physicians Trustees Administrators

7. Consumerism: Marketing then and now “…it began with a telephone ringing urgently to summon an ambulance driver. The ambulance speeds off to pick up a child wounded in an automobile accident, then transports him to the hospital where he is treated by a white-coated doctor and nurses. Scenes follow in an X-ray room and laboratory, where workers are seen performing tests. After consultation between doctor and parents…the scene shifts to the operating room…”

8. 1930s: Effects of The Depression • Private hospitals faced serious under-utilization • AMA waged war on hospital-based group practice and other organized systems perceived as “socialized medicine” • Hospitals were big beneficiaries of New Deal legislation • Works Progress Administration (WPA) and Public Works Administration ($77 million)

9. Rapid Expansions (1940s-1960s) • Advances in technology • Sulfa drugs, penicillin, chemotherapy • Income increases • Economy growing rapidly post-WW2 • Proliferation of private health insurance • Collective bargaining during wage freezes • Revenue Act of 1954 made it advantageous to employers to offer health insurance as compensation • Public policy • Hill-Burton Act of 1946 • Federal aid to states for surveying hospitals and public health centers; planning construction of additional facilities; authorizing grants to assist in such construction

10. Great Society • Medicare and Medicaid (1965) • Income maintenance for the elderly and poor • Hospitals were given a “license to spend” • Fee-for-service, cost-based reimbursement • Capital expansions and quality competition • “Medical Arms Race” • Little evidence of the value of additional services • Patient-driven competition • Patients and doctors were responsible for shopping for care; government picked up most of the bill

11. The Need to Plan (1970s) • Recognition of spiraling costs • Certificate of Need • State-level regulations requiring that hospitals seek approval before pursuing major capital investments • Hospital rate setting by states • State and local health planning agencies and boards

12. Paradigm Shift: Prospective Payment • Medicare Prospective Payment System • Hospitals placed at financial risk for cost of inpatient services for the Medicare population. • Payment was based on Diagnosis Related Group (DRG) classification How do you think this changed hospitals’ behavior?

13. The 1990s • Payer-driven competition rather than patient-driven competition • Effects of selective contracting by managed care organizations • Advances in technology • Move from inpatient setting to outpatient setting • Changes in market structure • Economies of scale • Economies of scope • Strategic behavior

14. The Hospital Marketplace

15. Hospital Characteristics • Size • Ownership • Location • Teaching status • Scope of services • Integration

16. Industry Structure

19. Industry Structure

20. Variable AHC Hospitals (n=83) Other teaching hospitals (n=699) All hospitals (n=3552) Inpatient cost per case $8817 $5882 $4928 Teaching IRB ratio .61 .13 .04 Has PET scanner 40% 10% 5% Hospital offers AIDS/HIV services 90% 64% 34% Hospital offers psychiatric emergency care 82% 60% 33% Trauma Level 1 73% 12% 5% Koenig et al (2003)

21. Hospitals by Urban-Rural Status over time All hospitals Urban Rural

22. Rural Hospitals Version 2.0:Critical Access Hospitals

23. Critical Access HospitalsHub & Spoke (Kansas example)

24. Critical Access Hospitals - 2012

25. Scope and Scale of Services Provided

26. Scope • General vs. Specialty • Regions • Gillette Childrens • Short-term vs. Long-term • ALOS  30 days vs. > 30 days • Federal vs. non-federal • Veterans Administration; Bureau of Indian Affairs

27. Community hospital “non-federal, short-term, general, and other special hospitals. Special hospitals include OB/Gyn; eye, ear, nose, and throat; rehabilitation; orthopedic; academic medical centers and other teaching facilities.” (www.aha.org)

28. Hospital ALOS in Community Hospitals (1980-2001) Days

31. Use of Services

32. Source: Health Care Cost Institute, 2012

33. Hospital Finances

34. Hospital Finances

35. Hospital Finances

37. Integration • Concepts • System • Network • Alliance • Horizontal • Vertical

38. Horizontal Integration of Hospitals • Horizontal integration is the linking of organizations at the same stage of the production process; the merger or affiliation of hospitals within and/or across communities. • Hospitals are increasingly part of multi-hospital arrangements: • 30.8% were in systems in 1979 • 53.6% were in systems in 2001 with an additional 12.7% in looser health networks

39. Industry Structure

40. 1990 to 2001 Changes in Multi-Hospital Systems Source: Analysis of AHA Annual Survey, 1990-2001.

41. Vertical Integration • Vertical integration involves linking organizations at different stages of the production process to safeguard sources of supply and markets for services. Hospitals need a “supply” of patients to generate revenues. • Initial horizontal integration of hospitals thought to be a platform for vertical integration

42. Top 15 Non-profit Systems 2014-1 1. Ascension Health (St. Louis) — 73 2. CHE - Trinity Health (Livonia, Mich.) — 45 *Reflective of hospitals between recently merged Catholic Health East and Trinity Health 3. Adventist Health System (Winter Park, Fla.) — 36 3. Kaiser Permanente (Oakland, Calif.) — 36 4. Dignity Health (San Francisco) — 34 5. Catholic Health Initiatives (Denver) — 32 6. Sutter Health (Sacramento) — 26 6. Providence Health and Services (Seattle) — 26 7. CHRISTUS Health (Irving, Texas) — 22 8. UPMC (Pittsburgh) — 20 9. Catholic Healthcare Partners (Cincinnati) — 17 9. Intermountain Health Care (Salt Lake City) — 17 9. New York-Presbyterian Healthcare System (New York City) — 17 9. SSM Health Care (St. Louis) — 17 10. Banner Health (Phoenix) — 16 10. Mercy (Chesterfield, Mo.) — 16

43. Top 15 Non-profit Systems 2014-2 11. Adventist Health (Roseville, Calif.) — 15 12. Baptist Memorial Health Care (Memphis, Tenn.) — 14 12. Bon Secours Health System (Marriottsville, Md.) — 14 12. Carolinas HealthCare System (Charlotte, N.C.) — 14 12. Texas Health Resources (Arlington, Texas) — 14 12. UnityPoint Health (Des Moines, Iowa) — 14 13. Aurora Health Care (Milwaukee) — 13 13. Franciscan Alliance (Mishawaka, Ind.) — 13 13. North Shore-Long Island Jewish Health System (Great Neck, N.Y.) — 13 13. Saint Joseph Health (Orange, Calif.) — 13 14. Mayo Clinic Health System (Rochester, Minn.) — 12 14. Novant Health (Winston-Salem, N.C.) — 12 14. Sentara Healthcare (Norfolk, Va.) — 12 15. East Texas Medical Center Regional Healthcare System (Tyler, Texas) — 11 15. New York City Health and Hospitals Corporation — 11

44. Size Does not Always Max Net

45. Many Issues Hospitals Face Today • Quality and Patient Safety • Information technology • Capacity issues • Emergency Departments • Inpatient setting • Financing • Medicare payment for outpatient services • Uncompensated care • Competition • Specialty hospitals • Consumer-driven health care (aka return of “patient-driven” competition)?

46. Break

47. Hospitals: Where have we been? • Evolution of the modern hospital • Facts and figures • Trends • Organizational change • Integrated Health Networks • Factors driving formation and dissolution • Practitioner perspective • Active role for the consumer • The hospital is the Doctors’ workshop

48. Hospitals: Where are we going? • Capacity • Labor shortages • Nurses • Quality and Patient Safety • Initiatives • Costs of Poor Quality • Financing • Uncompensated care • Competition • Specialty hospitals and Ambulatory Surgery Centers

49. Capacity: Historical perspective • Capacity decisions traditionally made by government, planning agencies, and institutions • Beds to population ratio • 4/1,000 (historical) • ~2.9/1,000 (national average) • Occupancy • 85% average occupancy target • Average occupancy in 2001 was 64.4% • Regulations • CON and/or other state regulations regarding capacity • MN moratorium in place since 1984 • No new beds • Does permit movement across facilities within system

50. Capacity Consolidation Mergers Acquisitions Closures Regulatory environment Certificate of Need (CON) State regulations Occupancy Technology LOS Rates of inpatient admissions Reimbursement Medicare Managed Care Demographics Aging Influential factors