Hospital operators and Obamacare Prescription for change

America’s hospital industry prepares for upheaval
AMERICA’S hospitals are the most ex
pensive part of the world‘s most ex— pensive health system. They accounted for $851 billion, or 31%, of American health spending in 2011. If they were a country, they would be the world’s 16th-1argest economy. And they are in the midst of dramatic change, much of it due to the “Oba— macare” health reforms.
The most visible change so far is that big hospital companies are getting bigger. In the latest of a string of recent mergers and takeovers, on June 24th Tenet Healthcare said it would buy Vanguard Health Systems for $4.3 billion including debt. The combined group will have 79 hospitals and 157 outpatient clinics.
Others are going further, turning the industry’s business model on its head. In Massachusetts, Steward Health Care Systems is trying to drive patients out of its hospitals and into cheaper clinics. The pace of change varies from one hospital group to the next. But beneath the shift is an argument—by politicians, insurers, patients and some investors—that the old business ways of hospitals are untenable.
America has more than 5,700 hospitals, with non—profits outnumbering for—profits by nearly three to one. Most of these share a familiar business model: sell as many services as possible at the highest price. This bodes ill for those who pay, Whether
employers, the government or patients themselves. Doctors receive a fee for each treatment, so there are few financial incen— tives to keep patients well. And since the health market has the transparency of a concrete bunker—patients usually do not know the price of treatment until after they have received it—Arnerican hospital stays are unusually expensive (see chart,

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next page). It is little wonder that health spending overall accounts for nearly a fifth of GDP.
This dysfunctional system Will welcome millions of new patients next year. Obamacare requires everyone to have some form of health insurance from 2014. To that end it expands Medicaid, the governrnent’s insurance scheme for the poor, and subsidises private insurance policies which Will be offered via new exchanges to be set up in each American state. More people With insurance should mean more patients seeking treatment, so the reforms would seem to herald a golden era for hospitals. Indeed, hospital shares have soared since the Supreme Court upheld the health law’s constitutionality a year ago.
Nevertheless, hospitals face mounting pressure to change. In recent years the volume of patients at most hospitals has been flat at best. The recession is partly to blame, since sacked workers lose their insurance. The shifting of some treatments to outpatient clinics has undercut some hospital revenues. And employers have increasingly required their workers to make out—ofpocket contributions towards the cost of their health care, which makes them a bit less likely to seek treatments.
Obamacare itself is not all good news for hospitals. It will bring revenue from newly insured patients. But it will also cut the rates the government pays for Medicare, the health scheme for the old. By 2019 these Will cancel each other out, reckon an— alysts at Bank of America Merrill Lynch. And the Medicare cuts already announced may not be the last. The reforms may create fewer new patients than expected: some people may ignore Obamacare’s
“‘man’date” to buy insurance, since the pen—
alties are small. State and federal officials are scrambling to get the exchanges ready in time. Some Republican governors are re—
Patients are now more transparent than their hospital costs.

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