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For most people, work starts to slow down the week before Christmas. But for senior policymakers in New York State government, the two weeks before the end of the year are among the busiest times of the year, as final decisions get made about what will make it into the Governor’s State of the State address on the second Tuesday of the New Year. Sally, Adrienne, and I have been trying to channel that energy as we work to complete a long Policy Brief on financially distressed hospitals before year-end. Our hope is that when we release the paper next week, it will at least be worth more than a lump of coal in the bottom of the Christmas stocking.
When trying to take on a complicated subject – a term which by any standard applies to financially distressed hospitals – it helps to begin with a theory of the case. Here is a preview of our theory of the case, which we will set forth in a fair amount of depth next week.
The paper’s thesis is that the hospital industry is being disrupted by technology and other forces that undermine the traditional business model on which most of New York's hospital infrastructure was built. These disruptive trends accelerated between 2019 and 2022, in part due to the changes in business practices that became more prevalent during the pandemic. Because 2019 was the last full year before the pandemic and 2022 was the first full year after the end of the Public Health Emergency in New York, comparisons between these two time periods are particularly instructive.
Economic “disruption” over the last 25 years has turned industry after industry upside down, from Amazon disrupting brick-and-mortar retail to Zoom creating the work from home economy. However, government and society – for programmatic and political reasons – have chosen to buffer the impact of economic disruption on New York’s hospital sector by providing financially distressed hospitals with operating subsidies to enable them to continue operations.
One measure of the growing financial distress of hospitals in New York is the dramatic increase in State operating subsidies over time. Between FY 16 (the State’s fiscal year ended March 31, 2016) and FY 20 (the State’s fiscal year ended March 31, 2020), gross State operating subsidies grew from $333 million going to 26 hospitals to $745 million going to 22 hospitals. By FY 23, gross State operating subsidies had grown to approximately $2.5 billion going to more than 50 hospitals.
Although full year data is not available, it is likely that the amount of operating subsidies and the number of recipients will increase again in the current fiscal year. The same disruptive forces, including continued advances in technology and medicine over the next 5-10 years, as well as payer and governmental policies that encourage more care being provided in lower-cost settings in the community, are expected to further destabilize the traditional business model of hospitals.
As the saying goes, something that is unsustainable ultimately cannot be sustained. Sooner or later, the State's approach to managing the issue of financially distressed hospitals needs to change. Coming up with the right prescription requires a greater depth of understanding of the diagnosis of the problem. Our paper seeks to illuminate some of the underlying causes of growing financial distress as part of that diagnosis. These causes include the revenue and expense headwinds that are more obvious since the pandemic; structural inefficiencies of standalone hospitals and small health systems that lack economies of scale and cannot afford to make investments in technology that would improve both efficiency and the quality of care; and the role of reimbursement levels and rate methodologies in contributing to growing financial distress.
The challenge of financial sustainability extends beyond New York and is a national – indeed an international – problem. There are no silver bullet prescriptions that are guaranteed to solve the competing goals of access, equity, quality, and financial sustainability. We do, however, have some strong working hypotheses about the work that needs to be done to define the best prescription available to meet this challenge. This includes finding ways to replicate the benefits of economies of scale including the ability to invest in technology, ensuring that reimbursement levels and rate methodologies address economic externalities, and new prototypes for hospital operating models as well as innovative government funding mechanisms (such as all-payer global budgeting) that create the right financial incentives for transitioning to less hospital-centric models of care.
We hope that you will find the paper worthwhile and that it will give State policymakers some ideas for New Year’s resolutions.
All the best wishes for the holidays from me, Sally, and Adrienne.
Paul Francis
December 21, 2023
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