Suicide: The Hospital Business Model

I prefer to talk about events before they take place, not after. I don’t know if that makes me a futurist or merely someone not bright enough to understand them as they now are.  I like to have a think about things that don’t seem right.  This helps me understand what I may be missing, or if I may be on to something.

I got one of my “ah-ha” moments while driving to the airport yesterday; something I have done a few hundred times.  I could drive the route in my sleep.  I know of two ways to get there, so I really never thought about needing a third.  My bad.  One of the roads I take was flooded—the rain was so hard it appeared to be raining up.  After being stuck in traffic for twenty minutes I opted for route number two.  Five minutes later, the drenched man by the side of the road told me the bridge was out.

I found myself out of choices, poor planning on my part.  I came to a fork in the road and took it.  I still had a reasonable amount of time to make my flight.  I then found myself driving behind a nun who was driving a Rambler.  Really.  We never hit thirty on the speedometer.  I would have missed the flight had it not been delayed.

It occurred to me as I was stopped that I had failed to heed my own advice.  I was guilty of having no plan for what to do if things changed, guilty of having no options because, “I have always done things this way.”

I am speaking this afternoon about innovation and transformation for the large healthcare provider model (hospitals)—could take five minutes, could take an hour—we will have to see how many people brought tomatoes to throw.

The large provider business model is dying.  Play along with me for a minute.  How many different services and procedures are offered by the “average” hospital?   A couple thousand.  Some are performed hundreds of times each day, some on a somewhat regular basis, and some rarely.  Let’s focus on those done rarely.

The funny thing about having the ability to do something is you have to pay for the resources and technology whether you do it once or hundreds of times.  The less you do it, the larger the negative ROI.  Most large providers offer many services with negative ROIs.  How does one alter the business model to compensate for that?  Charge for parking; charge $7 for each Tylenol, outsource less profitable services.

It might be important to recognize that the reason many services—the ones most patients need—are marginally profitable is because those services are helping to fund the unprofitable services.

Sooner or later, hospitals cut loose the low-end services.  Others gobble them up, and make tremendous profits from offering them under a new business model.

I started thinking about other industries that operate under a similar business model.  The two I came up with are movie theaters and the large airlines—both which offer a service albeit not often a friendly service.  One of my early clients was the CFO of one of the country’s largest movie theater chains.  They knew their costs down to the penny.  They lose money on every movie they show.  That is why they charge eight dollars for popcorn.  Their model is broken.  Are they changing it?  No.  Others changed it.  Blockbuster did.  Then their model broke.  Now we have NetFlix.  Netflix are making lots of money and they do not even offer popcorn or JuJuBes.

Continental and United merged.  Did that make things better?  Did they stop charging for bags?  Did they offer free meals?  More seat room?  Of course not.  Combined, they are losing even more money.  Their model is broken.  Are they changing it?  No.  What are they doing—buying even bigger planes.

You know who owns fifty-five percent of the flying market?  The pesky, disruptive regional carriers.  They make lots of money.  They have a different model, and they know their costs.

Disrupting the business model and changing the way you do something are not the same.  At some point there will be nothing left to change except for what you do.  Building a need for every sub-specialty offered by EPIC is not disruptive, it is dysfunctional.  Offering the same services as every other hospital within your coverage area is not disruptive, it is duplicative.  It simply divides the revenue pie for any given procedure into smaller slices.

Hospitals know their charges, not their costs.  They can’t pull a P&L per patient, or per procedure.  How can one price an Accountable Care model without knowing the costs?  An executive at a large children’s hospital told me they have to markup the costs of little things, like pills, two-hundred and fifty percent.  Unless hospitals are prepared to disrupt their business model, they had better buy a lot more pills or start offering JuJuBes.


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