Are hospitals causing themselves to go broke?

In our prior home we built a magnificent 1,600 bottle mahogany wine cellar with an in-laid brick floor, a nine-foot high antique door, a cigar humidor, and a tasting table. We discovered that hexagonally shaped ceramic chimney flue pipes were the perfect building material. They stacked like honeycomb and helped keep the wine chilled.

Our idea was to enjoy the wines we had collected over time. There is a trick to being a successful wine collector—one must collect more wines than one consumes. The principle of buying three and drinking four made our cellar always look brand new—empty.

The same principle applies to business strategy. One must ensure that inputs exceed outputs, that cash in exceeds cash out. Wax on—wax off.

If service “A” sells for a hundred dollars and it costs eighty dollars to deliver, that is a sustainable model. You get to pocket twenty dollars.

If service “B” costs a million dollars a year to be able to offer the service and you can only charge eighty thousand dollars per patient, and fewer than twelve patients require the service, that model is not sustainable.

What happens next? You have to start borrowing money from somewhere. Often it comes from those twenty dollars you pocketed from the other services. Then what happens? Each time you take the profits away from service “A” to underwrite service “B” you have made both services unsustainable.

Cross-pollinate this concept across a five hundred bed hospital, a hospital whose model already requires it to offer “loss leader” services like caring for the indigent and ER and you can see the model has problems. It may be possible to keep the model on life support by charging eight dollars for each Tylenol, but sooner or later that model will fail.

While we are at it, let’s look at what happens to service “A”. The hospital stops performing “A” because they no longer find it profitable. Then what? Service “A” gets picked up by a clinic who can deliver it at a cost of forty dollars instead of the eighty it cost the hospital.

It is never the service that is the problem, it is the business model behind the service.

Paul M. Roemer
Chief Imaginist, Healthcare IT Strategy