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No issue occupied more of my time during my eight years in the New York State Health portfolio than the challenges of financially distressed hospitals. As we note in the Policy Brief we are publishing today, The Challenge of Financially Distressed Hospitals in New York, hospitals are often the largest employer and the most important institution in their communities, and as such, they command a disproportionate share of attention from stakeholders, elected officials, and policymakers.
The word “hospitals” in the context used in policy discussions is something of a misnomer in 2023. Even many standalone hospitals own some outpatient facilities and a large and growing number of hospitals are organized into “health systems,” in some of which outpatient revenue is almost as large as inpatient revenue. Nevertheless, the inpatient hospital is still the hub of the wheel for even the largest health systems and is by far the largest part of the operations of financially distressed hospitals.
Hospitals and their related outpatient facilities in New York had total revenue in 2022 of more than $100 billion. One of the theses of our paper is that the financial plight of hospitals can best be understood as a classic example of disruptive innovation. New technologies that enable more services to be delivered outside of an inpatient setting have led to new business models that can offer the same or better service at a lower cost in an outpatient setting, or even a home setting. Unlike hospitals, which by statute in New York must be not-for-profit organizations, most of these new business models are for-profit enterprises with access to lower-cost capital and the entrepreneurial energy that characterizes for-profit businesses.
Unlike many other industries, however, government cannot afford to let market forces alone reshape the hospital industry. As a result, State government has led the way in searching for a strategy that will enable financially distressed hospitals to evolve in a manner that supports the sometimes-competing goals of access, equity, quality, and financial sustainability.
The Policy Brief we are publishing today is longer than usual, but barely scratches the surface of this complicated issue. We think it’s important to understand the background of the increasing numbers of financially distressed hospitals in New York and the growing depth of their operating deficits. We then attempt a diagnosis of a number of the underlying causes of this financial distress. The paper concludes with what I would call working hypotheses for a policy prescription the State should pursue. We hope the paper will contribute to an important and dynamic debate about the future of hospitals and their role in the healthcare delivery system in New York.
All the best wishes for the New Year from me, Sally, and Adrienne.
Paul Francis
December 29, 2023
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