Counterpoint

For many years, experts have predicted the demise of hospitals in the United States. In 1981, Alan Sanger, Ph.D., wrote this in an analysis of the factors impacting the closure of urban public hospitals: 

“Hospitals may be forced to close because of overly restrictive regulation of reimbursement, because they are unable to attract physicians to serve patients needing care, or because they serve patients who lack either adequate insurance coverage or the means to pay for hospital care out-of-pocket.”¹ 

Later in that same article, Sanger noted this: 

“An adequate supply of physicians on the hospital staff is essential. Should private physicians using a teaching hospital retire or begin admitting patients elsewhere and few physicians come to replace them, occupancy rates will fall and bankruptcy will be inevitable.”² 

In 1989, Jeff Goldsmith, Ph.D., wrote this: 

“Except for major regional institutions, the acute-care hospital as we know it will probably not survive…In the future, acute care will be concentrated in a small number of high-tech regional centers treating traumatic and chronically ill patients. Community hospitals will continue to provide some acute care, like obstetrical services and surgery for victims of illness. Still, most of this care will be ambulatory and often located off campus.”³ 

Four decades later, 39% of hospitals reported a negative operating margin in 2023.

Many readers of a certain age will recall the scene in "Fletch" in which Chevy Chase’s character Irwin M. Fletcher, a private investigator, undergoes a routine, if invasive, physical examination with Dr. Dolan, played by the inimitable M. Emmet Walsh. What you probably remember most is Chevy Chase singing “Moon River” during a prostate exam. What I remember is this dialogue: 

Dr. Dolan: You know, it's a shame about Ed. 

Fletch: It was. That was really a shame. To go so suddenly. 

Dr. Dolan: He was dying for years. 

Fletch: But the end was very sudden. 

Dr. Dolan: He was in intensive care for eight weeks. 

Fletch: But the very end, when he actually died... 

The convergence of numerous events in the past few weeks has made me wonder whether the U.S. hospital industry is suddenly in intensive care: 

• After being discussed for years, Beltway politicians seem to have regained their conviction that the Federal government should not, and can no longer afford to, acquiesce to what the British would call the reimbursement scheme of “Medicaid provider taxes.”
• The House Budget Committee is focused on fully implementing site-neutral payment, which has been the law since 2015.
• Federal and state policymakers are united in their scrutiny of 340B and other drug programs, most recently evidenced by the Trump Administration’s April 15 Executive Order that seeks to impact pharmaceutical pricing throughout the health economy.
• The Indiana General Assembly has taken to heart the 2022 CBO report suggesting that price caps are the only way to bend the healthcare cost curve, and HB 1004 was signed into law by Governor Braun yesterday.
• Effective January 1, 2026, 743 hospitals will be mandatory participants in CMS’s TEAM model, which effectively requires more clinical personnel to be paid out of a DRG-like bundled payment.^4,5 
  

This is the modern-day hospital version of the rack:

Almost everyone knows these words from Sir Winston Churchill after the Battle of Egypt:

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” 

Few are as familiar with this passage later in the speech: 

“There was a time, not long ago, when for a whole year we stood all alone. Those days, thank God, have gone. We now move forward in a great and gallant company. For our record we have nothing to fear, we have no need to make excuses or apologies. Our record pleads for us, and will gain gratitude in the breasts of free men and women in every part of the world.”⁷ 

It is precisely because hospitals now stand all alone – openly opposed by payers and policymakers and billionaire energy traders-cum-health policy experts, facing the unique challenges of treating any emergent patient without respect to that patient’s ability to pay, anchored by aging, or ancient, infrastructure while competing with ambulatory providers on every side – that I wonder whether it is the beginning of the end for the hospital industry. 

I can and frequently do note the flaws that are common to many hospitals, including poor governance, “directionally correct” strategic planning, suboptimal resource allocation, inconsistent quality and inscrutable billing processes, among others. Those flaws represent the “tools” that hospitals refuse to drop, “the way we’ve always done it,” even if they cannot articulate why they use or benefit from those tools. Of course, I could level most of the same criticisms at every other health economy stakeholder. 

In medieval times, people often died from the physical trauma of being placed on the rack. In modern times, hospitals, which Peter Drucker called “altogether the most complex human organization ever devised,” eventually close from the financial trauma of being stretched too thin from the combination of high capital costs, high labor costs and high regulatory burden.⁸ 

The Internet has dozens of stories about hospital closures, but there no “happily ever after” stories of hospitals that rose like a phoenix from the ashes. 

Accepting the premise that America’s hospitals and health systems face a crisis, the question is how to survive it. One way to answer that question is to review case studies of businesses that have faced and survived crisis; another is to learn from people whose career is singularly focused on facing crisis, like firefighters. 

In 1995, the U.S. Forest Service published Findings from the Wildland Firefighters Human Factors Workshop, with the subtitle “Improving Wildland Firefighter Performance Under Stressful, Risky Conditions: Toward Better Decisions on the Fireline and More Resilient Organizations.” 

One of the keynote presentations included in the appendices was titled “South Canyon Revisited: Lessons from High Reliability Organizations,” a comparison of the South Canyon Fire on July 6, 1994, with the Mann Gulch fire on August 5, 1949. Several findings seem germane to status-quo driven health economy stakeholders:

“Tools.  A small, but powerful similarity between Mann Gulch and South Canyon is that, in both cases, when people were fleeing the blowup and were told to drop their tools so they could move faster, some resisted. Several calculations suggest that this resistance may have cost them their lives (Report, 1994, p. A3-5). They would have been able to move 15-20% faster (Putnam, 1994) without their packs and tools. Firefighters are not the only people who are reluctant to drop their tools. Naval seamen on ships are trained to wear steel-toed shoes at all times and often refuse to take them off when they are ordered to abandon a sinking ship. Fighter pilots report being reluctant to eject from the "warm womb" and "cocoon" of oxygen in a cockpit that is out of control into a far more harsh environment. It is just as hard to drop shoes or an aircraft as it is to drop a pulaski and a pack. 

At Mann Gulch, Dodge told his crew to "drop all heavy tools" 200 yards after they turned upslope. According to Sallee (1949, pp. 75-76) and Rumsey (1949, p. 103) people either threw away everything or nothing… 

This same pattern was repeated at South Canyon. Some of the smokejumpers who deployed their shelters above the lunch spot, did drop their tools. But in doing so, they were struck by the enormous symbolic significance of what they were doing. One observed that putting down a saw was like running up a white flag (Rhoades statement); another (Petrilli), that the "Pucker factor" went up a notch (Report, 1994, p. A5-69). 

What about those who didn't drop their tools? If dropping your tools signifies you're in deep trouble, keeping them may help you feel you're safe. To hold onto your tools is to stay in control, to remain a firefighter rather than a victim, to appear calm. I'm still in it…People have no idea what it feels like to run and discard tools or even how to do it…To discard one's tools may signify more than giving up control, it may also be an admission of failure which, in a "can do" culture, is a devastating thing to admit… 

What hasn't changed in 45 years is the power of symbols. Packs and saws may be heavy and slow one's pace. But that may be one of their less important qualities. More significant may be their ability to reduce one's sense of danger. If throwing tools is a sign of surrender, keeping them may be a sign of a standoff or victory. It may be important for trainers to emphasize, "Look people, you're going to want to hang onto this stuff. Don't! It could cost you your life… 

Wise organizations know what they don't know. They know two things: first, they know that they have not experienced all possible failure modes and second, they know that their technology is still capable of generating surprises (Schulman, 1993). Thus, when they act on the basis of their past experience, wise organizations act as if that experience is both credible and limited. They simultaneously believe and doubt they know what is up. Consider the case of a near miss or a close call. The fascinating thing about a near miss is that, "Every time a pilot avoids a collision, the event provides evidence both for the threat and for its irrelevance. It is not clear whether the learning should emphasize how close the organization came to disaster, thus the reality of danger in the guise of safety, or the fact that disaster was avoided, thus the reality of safety in the guise of danger" (March, Sproull, and Tamuz, 1991, p. 10).”⁹

(Emphasis added)  

What lessons from the Mann Gulch and South Canyon fires are relevant for health economy stakeholders?  

The most important thing is to realize that you are in a wildfire, a conflagration of your own creation, so you better start running. Hospitals are on the rack now but, in the words of Jeffrey Steele, “your tears are coming.” 

Employers will begin to demand value for money because price transparency reveals that employers have failed to uphold their fiduciary duties under ERISA and Delaware law. The first step for employers is to stop paying for supplemental programs that employees do not want or rarely use, like wellness and…telehealth for medical care. The second step is to have the courage of their convictions to fire their benefits broker, who pretends to be a fiduciary of the employer or the consumer while often doing whatever the payer tells them. 

Strategically, providers must realize that they are not the salve for all of society’s woes and cannot be all things to all people. Additionally, providers must drop the tool of having a “center of excellence” for every service line ever invented and adopt Regina Herzlinger’s “focused factory” mindset. Operationally, providers must realize that measuring market share is not the same as competing for it, that tracking network integrity is not the same as addressing network gaps and that promoting health care consumerism is not the same as offering convenient and timely access.  

Life sciences companies should realize that their most important tool – patent protection – belongs not to them but to Congress, under Article I, Section 8, Clause 8. Life sciences companies might also contemplate the math that 100% of zero is zero, and their intense lobbying to eliminate 340B discount pricing might result in providers ordering a lot fewer of those “discounted” 340B drugs. 

Health insurers should be certain that price transparency exposes them, in the words of a famous sage, as either stupid or crooked with respect to the 4-8X difference in negotiated rates in the same product for the same service in the same market. 

Value for money has been the winner in the U.S. economy for 250 years, and the only two industries that don’t deliver it – higher education and healthcare – are now under tremendous scrutiny. The winners of healthcare’s negative-sum game will eventually be those who exemplify the words of John Houseman: “They make money the old-fashioned way. They earn it.”